14 December 2005 Internal T.I. 2005-0149181I7 - Indian employment income while suspended with pay

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: If a status Indian employee's salary is 100% exempt under the Guidelines, what is the tax treatment of his employment income received while suspended with pay?

Position: The Guidelines must be applied to the salary received during the period of suspension. If the requirements of one of the Guidelines are met with respect to the salary received during the period of suspension, then it will be exempt.

Reasons: Salary is income from employment and taxable under section 5. As we stated in Document 9705315, during a period of suspension, it cannot be said that 90% of employment duties (Guideline 1) or 50% of employment duties (Guideline 3) or some lesser percentage of employment duties (proration) are performed on a reserve. Accordingly, the employment income cannot be exempt under these Guidelines.

Although we look to the taxation of prior employment to determine the tax treatment of employment related benefits, such benefits are not salary or wages taxable under section 5.

December 14, 2005

OUTAOUAIS TAX SERVICES OFFICE HEADQUARTERS
Income Tax Rulings
Attention: Rollande Gravelle Directorate
Renée Shields
(613) 948-5273

2005-014918

Taxation of salary paid to a suspended status Indian employee

This is in response to your memorandum of August 29, 2005 regarding the proper tax treatment of salary paid to XXXXXXXXXX (the "Taxpayer"), an employee of XXXXXXXXXX (the "Employer"). The Taxpayer is a status Indian who resides on the XXXXXXXXXX reserve. During our telephone conversation on November 17, 2005 (Shields/Gravelle), you advised that the Taxpayer's salary has been 100% exempt since the year 2000 pursuant to Guideline 3 of the Indian Act Exemption for Employment Income Guidelines (the "Guidelines"). Specifically, during each year since 2000, the Taxpayer has resided on a reserve and has performed at least 50% of his employment duties on a reserve. On XXXXXXXXXX, the Taxpayer was suspended with pay pending an investigation into issues related to his conduct in carrying out his employment duties. The Employer is of the opinion that during the suspension period, since no employment duties are being performed on a reserve (or anywhere), there is no basis for exempting any portion of the Taxpayer's salary.

In Document 9705315 the Income Tax Rulings Directorate opined that in a situation in which a status Indian employee has been suspended with pay, unless one of the Guidelines is satisfied, the salary received during suspension is taxable. We have reviewed our position on this matter and are satisfied that this is the correct result.

It is true that the taxation of certain employment-related benefits received by a status Indian is determined with reference to the taxation of the employment income that generated the particular benefit. This position would apply to such things as disability benefits, pension benefits and employment insurance benefits. In those situations, we consider that the benefit is earned during employment and therefore the circumstances of the underlying employment determine the tax treatment of the related benefit. As such, it is not relevant that at the time of receiving the benefit, none of the Guidelines is met. However, it is also important to note that unlike salary or wages, these streams of income are brought into income by (for example) section 6 or 56 of the Income Tax Act (the "Act") and not directly by section 5 of the Act. In our view, salary must meet one of the Guidelines in order to be exempt.

We acknowledge that even though vacation pay is brought into income directly by section 5 of the Act, any exemption is determined by reference to the tax treatment of regular salary as opposed to performing a Guideline analysis. However, we believe it is reasonable to distinguish vacation because it is something that is earned or accrued while working. As such, although the Guidelines may not be met during vacation, the nature of the absence is such that the entitlement to be paid is tied to prior service and the related remuneration during that time. Salary received during a period of suspension has no such nexus.

For all of the above reasons, we believe that the salary received by the Taxpayer during his period of suspension from duties should be taxable.

We trust that these comments will be of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

John Oulton, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch