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: Taxation of First Nation people in Canada.
Position: General Comments given.
Reasons: Jurisprudence and the CRA Indian Act Exemption for Employment Income Guidelines.
I am writing in reply to your letter addressed to the Honourable Jim Prentice, Minister of Indian Affairs and Northern Development and Federal Interlocutor for Métis and Non-Status Indians, concerning the taxation of First Nation people in Canada. I received a copy of your letter from Minister Prentice's office on April 26, 2007.
Whether a Status Indian who does not live on a reserve and who works for a native organization or Band Council funded by Government would be exempt from income tax depends on the circumstances of the particular case. While the determination of any particular individual's tax status can only be made following a thorough review of all the relevant facts, the following principles apply in assessing whether or not the employment income of a Status Indian is subject to tax under the Income Tax Act.
A Status Indian's personal property is exempt from tax under paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act if the property is situated on a reserve. Although income is personal property, its intangible nature makes it difficult to determine its location. The Supreme Court of Canada has directed that "connecting factors" must be considered when making such a determination. This analysis requires that the factors that tend to tie the property to a location either on or off a reserve be identified, and that the significance of each of these factors be weighed. If the most significant factors connect the property to a location on a reserve, the income will be tax-exempt.
In consultation with other government departments as well as interested Indian groups and individuals, the Canada Revenue Agency (CRA) identified a number of connecting factors that can be used to determine whether a person's employment income is situated on a reserve. To that end, the Indian Act Exemption for Employment Income Guidelines were developed. You can view the four Guidelines on the CRA Web site at www.cra.gc.ca/aboriginals/guidelines-e.html, but the following is a general summary.
Guideline 1 exempts all of the employment income of a Status Indian if at least 90% of the employment duties are performed on a reserve. When less than 90%, but more than an incidental proportion, of the duties are performed on a reserve, and none of the other Guidelines apply, only the portion that is performed on a reserve is exempt from tax.
Guideline 2 exempts employment income of Status Indian employees who live on a reserve, provided that the employer is also resident on a reserve.
Guideline 3 exempts all of the income of a Status Indian if two conditions are met-more than 50% of the employment duties must be performed on a reserve and either the employer must be resident on a reserve or the Status Indian must live on a reserve.
Guideline 4 requires that the employer be resident on a reserve. It also requires that the employer be an Indian band that has a reserve, or a tribal council representing one or more Indian bands that have reserves, or 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 Status Indians who for the most part live on reserves. Further, the duties of the employment must be in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on a reserve. These elements must all be satisfied in order for Guideline 4 to apply.
It is important to note that the Guidelines were developed only as an administrative tool to assist taxpayers and CRA employees in working with the very broadly worded tax exemption provided by the Indian Act and the Income Tax Act. As such, they do not necessarily constitute a definitive test, since they were designed with only the most common employment situations in mind. In unusual or unique situations, the CRA may consider additional connecting factors and the impact of court decisions on the taxation of the employment income in question. Therefore, there may be situations where income may be taxable even though it appears to fall within one of the Guidelines.
I appreciate the opportunity to address your concerns and trust that the information provided will be helpful.
The Honourable Carol Skelton, P.C., M.P.
May 11, 2007
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