17 August 2005 External T.I. 2005-0121081E5 - Employment income earned by status Indians

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether guideline 4 of the The Indian Act Exemption for Employment Income Guidelines applies to income earned by status Indian employees where their duties are controlled by a Council made up of Indian bands/organizations which may or may not be the employer, i.e., it appear that another organization may in fact be the employer.

Position: Question of fact whether guideline 4 applies; however, guideline 4 will not apply unless the Council is determined to be the employer.

Reasons: While the Council may be a qualified organization under the second bullet in guideline 4, the other organization clearly isn't.

XXXXXXXXXX 2005-012108
J. Gibbons, CGA
August 17, 2005

Dear XXXXXXXXXX:

Re: Indian Act Exemption for Employment Income Guidelines

This is in response to your letter dated March 11, 2005, in which you requested our views about whether employment income earned by status Indians working in XXXXXXXXXX (the "Program") at XXXXXXXXXX (the "University") would be exempt from tax under section 81(1)(a) of the Income Tax Act (the "Act") and section 87 of the Indian Act. In our telephone conversation (Gibbons/XXXXXXXXXX) you indicated that your enquiry relates specifically to whether Guideline 4 of the The Indian Act Exemption for Employment Income Guidelines (the "Guidelines") would apply to exempt such employment income.

According to your letter, the Program has a staff of XXXXXXXXXX that services the needs of Native students who for the most part reside on reserves. The Program falls under the direction of the XXXXXXXXXX (the "Council"), which was established in XXXXXXXXXX pursuant XXXXXXXXXX. The members of the Council are comprised of Indian Bands/Organizations that are located on reserve.

Our comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency (the "CRA").

Paragraph 81(1)(a) of Act and section 87 of the Indian Act provide a tax exemption for an Indian's personal property situated on a reserve. The courts have previously determined that, for purposes of section 87 of the Indian Act, the reference to personal property includes income. Because income is intangible property, it can be difficult to determine whether it is situated on a reserve. In this regard, the Supreme Court of Canada established the general principle in the 1992 Williams decision that all of the factors connecting income to a reserve must be identified and analyzed to determine what weight they should be given in determining the location of the property. If the most significant factors connect the income to a location on a reserve, the income will be tax-exempt.

Based on the guidance provided by the Williams decision, and after receiving representations from interested government departments, as well as Indian groups and individuals, the CRA developed the Guidelines to assist status Indians in determining whether their employment income is situated on a reserve. Generally, the most common factors connecting employment income to a reserve are the place where employment duties are performed, the residence of the employee, and the residence of the employer. Although the Guidelines do not cover every employment situation, they are a useful administrative tool for status Indians and for CRA employees to be able to work with the very broadly worded tax exemption provided by the Indian Act and the Act.

Guideline 4 of the Guidelines applies to exempt the employment income of a status Indian if:

? the employer is resident on a reserve; and
? the employer is:

o an Indian band which has a reserve, or a tribal council representing one or more Indian bands which have reserves, or
o an Indian organization controlled by one or more such bands or tribal councils, if the organization is dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves; and

? the duties of the employment are in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on reserves.

Whether the employer is the Council, as you contended in our telephone conversation (Gibbons/XXXXXXXXXX), or the University is a question of fact and law. The Canada Revenue Agency (the "CRA") publishes a pamphlet entitled Employee or Self-Employed? which outlines the CRA's views on what it means to be an employee. It states that an employee-employer relationship:

"is a verbal or written agreement in which an employee agrees to work on a full-time or part-time basis for an employer for a specified or indeterminate period of time, in return for salary or wages. The employer has the right to decide where, when, and how the work will be done. In this type of relationship, a contract of services exists."

From the information you provided, it appears that the University is the employer of the Program employees. Therefore, on this basis, it is our view that the employment income of Program employees would not be exempt from tax pursuant to Guideline 4 because the University is not an Indian band, a tribal council or an Indian organization resident on a reserve as required by Guideline 4.

Even if the Council is in fact the employer and an Indian organization as described in the second bullet in Guideline 4, it would also have to be resident on a reserve in order for Guideline 4 to have application. In this regard, the Guidelines indicate that an organization is resident on a reserve if the reserve is the place where the central management and control over the organization is located. Further, the Guidelines state that generally management and control is exercised at the principal place of business but may be legitimately exercised in a place other than the principal administrative office of the organization. Thus, if the Council conducts its meetings off reserve on the grounds of the University, it would likely not be considered resident on a reserve and accordingly Guideline 4 would not apply to exempt the income of any status Indian employees working for it.

We trust that these comments will be of assistance.

Yours truly,

Roxane Brazeau-LeBlond, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate

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