18 January 2008 External T.I. 2007-0258231E5 - Indian Act Exemptions for Employment Income

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: How does the ITA tax a Status Indian earning employment income? How is an independent contractor who is a Status Indian taxed?

Position: Income earned by a Status Indian may be exempt from tax if the income is situated on a reserve. The connecting factors test is applied to the source of income in order to make this determination.

Reasons: Consistent with previous positions, the Guidelines and the connecting factors test.

XXXXXXXXXX 							2007-025823
L. Zannese
(613) 957-2747
January 18,  2008

Dear XXXXXXXXXX :

Re: Request for a Technical Interpretation of the Interaction of the Indian Act Exemption Guidelines and Publication RC4110 "Employee or Self-Employed?"

This is in response to your letter of November 2, 2007 inquiring about the interaction of Canada Revenue Agency's (CRA) 1994 "Indian Act Exemption for Employment Income Guidelines" (the "Guidelines") and document RC 4110 "Employee or Self-Employed?" Specifically, you ask if an Indian Band establishes a corporation on the reserve with all the buildings and assets on the reserve, and hires staff all resident on the reserve, will the tax treatment of the staff's income depend upon whether the individual is an employee of the corporation or an independent contractor?

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 advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other 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.

A Status Indian's personal property is exempt from tax pursuant to paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act if that property is situated on a reserve. Although income is personal property, its intangible nature makes it difficult to determine its location. In the case of Williams v. the Queen, the Supreme Court of Canada created the connecting factors test to assist in this determination. The test requires identification of various connecting factors that tie the property to a location either on or off a reserve and a weighing of the significance of each such factor.

Relevant connecting factors depend on the nature of the contract between the individual offering services and the party using the services. This relationship determines whether an individual is an employee or is an independent contractor. If you are unsure as to the different characteristics of an employment relationship as compared to that of an independent contractor we suggest that you review publication RC 4110 "Employee or Self Employed?"

In the event that a Status Indian is found to be an independent contractor the courts have held that the most significant connecting factor is the location where the business carries on its revenue-generating activities. If the actual income-earning activities take place on a reserve, the location of customers is also an important factor. Other connecting factors, which are less important include:

• Whether the independent contractors lives on a reserve
• Whether the independent contractor maintains an office on reserve or takes business orders from a location on a reserve
• Whether the books and records for the business are kept on reserve and
• Whether the administrative, clerical or accounting activities take place on the reserve.

Additional information with respect to CRA's views on business income earned by Status Indians can be found on our web site at www.cra-arc.gc.ca.

If the Status Indian is an employee, then again the connecting factors test is applied. Significant connecting factors for employees include the residence of the taxpayer, the location where the duties of employment are being carried out and the residence of the employer.

To simplify applying the connecting factors test to a Status Indian's employment income, the Canada Revenue Agency developed the Guidelines. However, because the Guidelines were developed as an administrative tool, they do not necessarily constitute a definitive test. There may still be unique situations in which additional connecting factors are relevant and may be given significant emphasis. The Guidelines, as well as additional information regarding employment income are available and can be reviewed on our web site at www.cra-arc.gc.ca.

It is a question of fact whether any particular Status Indian's income is situated on a reserve and therefore exempt from tax. If you have any questions with respect to a specific taxpayer, please contact your local Tax Services Office. The determination of whether a particular source of income qualifies for the exemption from tax is a question of fact that can only be determined by the relevant Tax Services Office.

We trust that these comments will be of assistance.

Yours truly,

Robin Maley
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch