25 March 2008 External T.I. 2007-0260311E5 - Tax Exemption for Status Indian (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: Application of Indian Act tax exemption to particular situation.

Position: General comments given.

Reasons: Question of fact.

									2007-026031
XXXXXXXXXX 								M. Raffoul
									613-957-9226
March 25, 2008

Dear XXXXXXXXXX ,

Re: Tax Exemption for Employment Income of a Status Indian

We are writing in response to your letter dated November 9, 2007, in which you inquired whether certain employment income earned by a status Indian would be subject to tax.

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. Written confirmation of the tax implications inherent in a particular transaction involving a specific taxpayer is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office, a list of which is available on the "Contact Us" page of the Canada Revenue Agency ("CRA") website at www.cra-arc.gc.ca . 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. 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 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 we can provide you with an overview.

Guideline 1 exempts all of the employment income of a status Indian if at least 90 percent of the employment duties are performed on a reserve. When less than 90 percent, but more than 10 percent, 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 the employment income of a status Indian employee who lives on a reserve if his or her employer is also a resident on a reserve.

Guideline 3 exempts all of the employment income of a status Indian if more than 50 percent of the employment duties are performed on a reserve and either the employer is resident on a reserve or the status Indian lives 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 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. Therefore, 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.

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 your particular tax situation, please contact your local TSO.

We trust that these comments will be of assistance.

Yours truly,

Robin Maley
Manager
Non-Profit Organizations and Aboriginal Issues
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch