13 August 2008 Internal T.I. 2008-0267061I7 - Application of Guideline 4

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: Would Guideline 4 apply to the staff of a Band Office, which is currently located on the reserve, if the office is moved to a location which is not a reserve?

Position: Based on the limited facts provided, it has not been established that the employees satisfy the requirements of Guideline 4.

Reasons: It is not clear from the facts provided that the employees of the Band Office will be completing duties in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on reserves. As well, it is not clear that the employer is resident on reserve. These criteria must be clearly satisfied if Guideline 4 is to apply.

 								August 13, 2008

	XXXXXXXXXX  Tax Service Office		HEADQUARTERS
								Income Tax Rulings
	Attention:  XXXXXXXXXX 			  	Directorate
L. Zannese
(613) 957-2747

								2008-026706

XXXXXXXXXX

This is in response to your memorandum of February 15, 2008, and our recent discussions (Maley and Zannese/XXXXXXXXXX ) respecting the proposed move of the XXXXXXXXXX ("the Band") Band office from its current location on a reserve to a location in XXXXXXXXXX . At issue is whether, after the move, employees reporting to the new Band office would be exempt from tax due to the application of Guideline 4 of the Indian Act Employment Income Guidelines (the "Guidelines") to their employment incomes. In our view, they would not. Our detailed comments on this issue are set out below.

Facts:

We understand that the Band wrote to your office asking for an opinion as to whether a proposed move of the Band's office from a location on reserve to a location in XXXXXXXXXX would affect the tax status of the Band office employees. The Band advised that a new office is being built in XXXXXXXXXX to house the Band's administrative offices. The Band will operate several programs from this new location including XXXXXXXXXX . Employees of the Band office will report to a manager, who in turn will report to the Chief and XXXXXXXXXX Band counsellors. Monthly meetings will be held with the Chief and counsellors but will also be open to all members of the Band.

XXXXXXXXXX You advise that according to XXXXXXXXXX statistics about the Band, the Band has XXXXXXXXXX members. Band members living on the reserve total XXXXXXXXXX ; Band members living off reserve total XXXXXXXXXX and XXXXXXXXXX Band members live on Crown land. You advise that XXXXXXXXXX has a population of XXXXXXXXXX persons, XXXXXXXXXX of which are aboriginal persons. You estimate that XXXXXXXXXX to XXXXXXXXXX % of aboriginal persons living in XXXXXXXXXX belong to the XXXXXXXXXX .

You have told us that, currently, the Band has XXXXXXXXXX offices: XXXXXXXXXX . We understand that staff employed at the office located on reserve are treating their employment income as exempt from tax. We do not have any information as to whether the staff of XXXXXXXXXX do the same.

With respect to your fact situation, we note that it is unclear who the employer is in this case. Is the employer the Band? The Band office? An Indian organization controlled by one or more bands having reserves? A corporation owned by the Band? The answer to this question could impact the determination as to whether the employer is resident on the reserve which is a criterion that must be met in order for Guidelines 2, 3 or 4 to apply. Our comments below are premised on the implication that the unincorporated Band is the employer.

Analysis:

You have suggested that the Band Office employees may be eligible for an exemption from income tax on their employment income under Guideline 4 of the Guidelines. Guideline 4 allows an exemption for the employment income earned by Status Indian individuals who are employed in the following situation:

• The employer is resident on a reserve;
• The employer is:

o an Indian band which has a reserve, or a tribal council representing one or more Indian bands which have reserves, or
o 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 Indians who for the most part live on reserves; and

• The duties of the employment are in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on reserves.

All three of these conditions must be met in order for the Guideline to apply.

As stated above, we are assuming for the purpose of our response that the employer is the Band. As the Band has a reserve, it is an organization whose employees may claim an exemption from tax on their employment income under Guideline 4 should the other two criteria of this Guideline be met.

Guideline 4 also requires that the duties of the employees be in connection with the employer's non-commercial activities. It is our understanding that the new Band Office in XXXXXXXXXX will be offering services to members of the Band and will operate its XXXXXXXXXX from this location. These functions are similar to those offered by a municipal government and would generally not be considered commercial in nature. Further, we understand that this location will also be involved in XXXXXXXXXX , which may involve commercial activities. In any event, it is not clear to us that all the employees of this new office will be completing their duties in connection with non-commercial activities. Depending on what services are offered, XXXXXXXXXX , some of the duties of employment may be with respect to commercial activities undertaken by the Band. We suggest that you may wish to obtain more facts surrounding the actual activities that the Band will be carrying out from this new office to determine if any activities to be undertaken will be commercial. Those employees completing duties in connection with the commercial operations of the Band Office would not be eligible for an exemption from income tax on their employment income under Guideline 4.

Guideline 4 also applies only to employees whose duties are in connection with activities of the employer that are carried on exclusively for the benefit of Indians who for the most part live on reserve. You have advised that XXXXXXXXXX is approximately a XXXXXXXXXX minute drive from the Band's reserve. You further advise that the Band intends to maintain only a small "satellite" office on the reserve. This suggests that many (or all) of the services of the Band Office located in XXXXXXXXXX are not intended to benefit, exclusively, Indians who for the most part live on the reserve. As such, we would expect that few (and perhaps, none) of the employees reporting to this Band Office would be able to satisfy this criterion of Guideline 4.

The final criterion of Guideline 4 is that the employer must be resident on reserve. It is not clear from the limited facts provided that the Band, as employer, resides on the reserve. Although the Band has a reserve, it also has XXXXXXXXXX offices, XXXXXXXXXX of which are not located on the reserve. It cannot be assumed that, because the employer is a Band with a reserve that the Band as employer necessarily resides on the reserve.

As explained in the definitions contained in the Guidelines, an employer is resident on reserve if the reserve is the place where the central management and control over an employer is actually located. The central management and control of an organization is usually considered to be exercised by the group that performs the function of a board of directors of the organization. However, it may be that the real management and control of an organization is exercised by some other person or group. Generally, management and control is exercised at the principal place of business but it is recognized that this function may be legitimately exercised in a place other than the principal administrative office of the organization. It is a question of fact where the central management and control is exercised.

In situations where an employer has only one location, and conducts all business from that location, the employer would normally be resident at that location. However, it could be, as in this situation, that an employer has multiple locations. In determining where the management and control of the employer (i.e. as a whole) is located, various factors may be considered. For example, who manages the employer and where are the majority of the decisions regarding the employer's operations being made? If there is a board of directors (or other managing group), where does the board meet, and what decisions are made at those meetings? Does the employer have a place of business? Where is it located? What are the employer's commercial and non-commercial activities and where are these activities carried out? As discussed in the Guidelines, the employer will be considered to reside in the location from which its central operational and management decisions are made. This is the key consideration, whether an organization has a formal board of directors, is managed by another group of persons, or is managed by one individual.

Based on the information provided, it is not clear to us who will be making the majority of decisions for the Band offices. For example, the Band may have a manager running each office, or the Band may choose to have the offices overseen by the Band Council. If the Band Council is in charge of overseeing the operations of the Band offices, the fact that Band Council meetings may be held on reserve may indicate that central management is exercised there, depending on the nature of decisions made at those meetings (as opposed to the decisions that are made locally, at the location of the respective Band offices). Again, at issue is whether a sufficient degree of control and management of the Band offices are exercised from the reserve to conclude that the Band resides there for purposes of applying the Guidelines to the employees of the Band offices.

Conclusion:

Based on the limited facts provided, we suspect that many (if not all) of the employees reporting to the Band office in XXXXXXXXXX would be unable to rely on Guideline 4 as a basis for exempting their employment incomes. As noted, this Guideline applies only to employees whose duties are in connection with non-commercial activities of the Band carried on exclusively for the benefit of Indians who, for the most part, live on reserve.

In the event that particular employees are able to demonstrate that their duties do meet these criteria, they must also be able to demonstrate that the Band is resident on the reserve. As discussed above, further information would be needed to support such a claim as the limited information provided to date suggests the contrary. For example, we note that the majority of the services of the Band offices are offered off reserve by persons who are working off reserve. There is no information provided to suggest that any major undertakings or administrative work will occur at the small "satellite" reserve office. As such, we would be assuming that the managing decisions regarding activities of each of the Band offices would likely be made at each particular location, by the persons responsible for overseeing those operations. The result would be that many or most of the management decisions would be made off reserve. We acknowledge that additional information may become available to you that would indicate the contrary, which in turn, could impact the ability of particular employees to rely on Guidelines 2, 3 or 4.

We would also note that the employees of the Band office in XXXXXXXXXX that reside on reserve may be able, on a case by case basis, to point to other factors that would connect their employment incomes to the reserve. (For example, the nature of their duties may be integral or provide a benefit to the reserve). We are doubtful that employees residing off reserve, whose duties of employment are carried out off reserve, will be able to point to sufficient connecting factors to sustain an exemption if none of the Guidelines are clearly applicable.

We trust that these comments will be of assistance. If you would like to discuss the foregoing now or at a later date, or should you become aware of additional facts during your review, please don't hesitate to contact us.

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.

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