11 January 2006 External T.I. 2005-0163311E5 - EI Part II benefits to status Indian

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: Are benefits received under Part II of the Employment Insurance Act taxable to a status Indian when part of the training takes place on a reserve, and part of the training takes place off the reserve?

How are the benefits reported?

Position: The benefits will be exempt under paragraph 81(1)(a) only if connected to a reserve. It would be reasonable to allocate the value of the benefit related to the on-reserve training, and such amount would be exempt.

Non-exempt amounts are included in income under paragraph 56(1)(r) but to the extent that the amount relates to tuition, there is an offsetting deduction provided by paragraph 110(1)(g).

The Part II EI benefit is reported on a T4E

2005-016331
XXXXXXXXXX Renée Shields
(613) 948-5273
January 11, 2006

Dear XXXXXXXXXX:

Re: Training Benefits Paid to a Status Indian

This is in response to your letter of December 13, 2005 inquiring about the taxation of benefits paid to a status Indian under Part II of the Employment Insurance (EI) Act.

The situation outlined in your letter appears to relate to a factual one, involving specific taxpayers. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

Under Part II of the EI Act, benefits are available to qualifying members of the public at large for various purposes, including help in starting a businesses, becoming self-employed, gaining work experience and obtaining skills for employment. You have described a scenario in which Part II EI benefits fund an eight-week program consisting of 2 weeks of classroom training occurring on a reserve, followed by 6 weeks of off-reserve practicum training. You have asked whether the benefits are taxable to status Indian recipients.

Section 87 of the Indian Act exempts from tax the personal property of an Indian provided that property is situated on a reserve. There are two ways in which income can be situated on a reserve:

1. by a connecting factors analysis under which the amount is determined to be so connected to a reserve that it should be considered to be situated there, or

2. if the amount has been paid pursuant to a treaty with Her Majesty, section 90 of the Indian Act will deem it to be situated on a reserve for purposes of the section 87 tax exemption.

Although Indian and Northern Affairs Canada is the government department with expertise in First Nation treaty issues, the CRA is unaware of a treaty under which Indians are entitled to the broad range of benefits such as those provided by Part II of the EI Act. In the absence of a treaty right, Part II benefits cannot simply be deemed to be situated on a reserve. Therefore, only by demonstrating that sufficient factors connect the amount to a reserve would the benefit be tax-exempt. The most likely way in which such a connection could be established would be where the benefits are used for training taking place on a reserve.

In a situation in which the EI benefits fund program segments taking place both on and off reserve, it is reasonable to allocate the value or cost of the respective components. Where the recipient is a status Indian, that portion of the benefit that represents the value of any on-reserve training would be exempt. The portion of the benefit representing the value of the off-reserve training would be taxable. It is important to note that for the Part II EI benefit included in income, paragraph 110(1)(g) of the Income Tax Act provides an offsetting deduction to the extent that the benefit can be considered to be tuition.

You have also asked about the proper reporting of Part II EI benefits. The T4E is the appropriate reporting slip. The total amount of the benefit is recorded in Box 14. Normally, the amount shown in Box 14 is reported at Line 119 of the individual's tax return. However, in the case of a status Indian, the portion (if any) of the total benefit determined to be tax-exempt because it is connected to a reserve, is recorded separately in the "Other Information" section of the T4E, referencing Box 18. This tax-exempt amount will not be reported by a status Indian recipient in his or her tax return. We refer you to the description of Line 119 in the General Income Tax and Benefit Guide (5000-G), which instructs the taxpayer to report only the difference between the total benefit recorded in Box 14 and the tax-exempt amount in Box 18.

As noted above, where only part of the training takes place on a reserve, a portion of the EI benefit will not be exempt under the Indian Act and must be included in income. However to the extent that this amount relates to tuition, such amount is recorded in Box 21 of the T4E slip in addition to being included in Box 14. Thus, although the amount will be included in income at Line 119 of the individual's return, the amount in Box 21 is then deducted from income at Line 256.

We trust that these comments will be of assistance.

Yours truly,

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