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: Will employment income of certain Indians be exempt from tax under 81(1)(a) once their place of employment is situated on a reserve?
Position: General comments only.
Reasons: Reserve is not yet created at the place of employment. Also, we will not provide a ruling based on the ongoing application of the Guidelines or section 87 of the Indian Act. These are questions of fact.
2008-029617
XXXXXXXXXX Pamela Burnley
(613) 957-3498
May 11, 2009
Dear XXXXXXXXXX :
Re: XXXXXXXXXX (the "FN")
This is in response to your letter of September 24, 2008, and your further submission of November 3, 2008, requesting our comments on the Indian Act Exemption for Employment Income Guidelines (the "Guidelines") as they relate to certain members of the FN who are employees.
As explained in Information Circular 70-6R5, "Advance Income Tax Rulings", advance income tax rulings are issued on proposed transactions only. Additionally, paragraph 15 of the Information Circular outlines various circumstances where rulings are generally not issued, including where a transaction is to be completed at some indefinite future time or when a matter on which a determination is requested is primarily one of fact and all of the pertinent facts cannot be established at the time of the request for the ruling. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca.
XXXXXXXXXX . Whether any particular income is situated on a reserve in any particular taxation year is a question of fact that must be determined each year. As we have discussed with you (Erskine/XXXXXXXXXX ), we are unable to provide an advance income tax ruling, however, we are able to provide the following general comments, which may be of assistance.
XXXXXXXXXX where members of the FN are employed (the "Employees"). You have indicated that the Employees are Indians, as that term is defined in the Indian Act, and that they do not, for the most part, live on a reserve. XXXXXXXXXX . You would like our comments on whether the income of the Employees will be situated on a reserve and therefore exempt from tax XXXXXXXXXX .
Paragraph 81(1)(a) of the Income Tax Act together with paragraph 87(1)(b) of the Indian Act exempt from tax personal property of an Indian that is situated on a reserve. Income, including income from employment or self-employment, has been held by the courts to be personal property for the purposes of section 87 of the Indian Act.
In Williams v. The Queen, 92 D.T.C. 6320, the Supreme Court of Canada established the general principle that all factors connecting income to a reserve must be weighed in determining whether income is situated on a reserve. In consultation with other government departments as well as interested Indian groups and individuals, CRA identified a number of connecting factors that can be used to determine whether a person's employment income is situated on a reserve. This initiative resulted in the development of the Guidelines, which apply to common employment situations involving Indian individuals. You have identified Guideline 1 and Guideline 3 as most applicable to the Employees.
Guideline 1
When at least 90% of the duties of an employment are performed on a reserve, all of the income of an Indian from that employment will usually be exempt from income tax.
Proration
When less than 90% of the duties of an employment are performed on a reserve and the employment income is not exempted by another guideline, the exemption is to be prorated. The exemption will apply to the portion of the income related to the duties performed on the reserve.
Guideline 3
When:
- more than 50% of the duties of an employment are performed on a reserve; and
- the employer is resident on a reserve, or the Indian lives on a reserve;
all of the income of an Indian from an employment will usually be exempt from income tax.
If the duties of employment of an Indian are in fact carried out at a location on a reserve at least 90% of the time, the income related to those duties will generally fall within Guideline 1 and be exempt from tax. If no other Guideline applies to exempt the income from tax, and less than 90% of the duties are carried out on a reserve, only the percentage of income that is earned on a reserve will be exempt from tax; the portion of the income that relates to duties that are not carried out on a reserve will not be exempt from tax.
Guideline 3 may apply to exempt all of the employment income from tax under certain circumstances even where less than 90% of the duties of employment are actually carried out on a reserve. Since you have indicated that most of the Employees do not live on a reserve, Guideline 3 would only apply if more than 50% of the duties of employment are carried out on a reserve and the employer is resident on a reserve. Therefore, the residency of the employer must be determined. As indicated in the Guidelines, an employer is generally considered to be "resident on a reserve" if the central management and control of the organization is on the reserve. The place where the board of directors (or the chief and council if the Indian band is the direct employer) meet and conduct business is generally considered to be the place where central management and control is exercised. However, it may be that the real management and control of an organization is exercised by some other person or group, which can only be determined by reviewing the facts of the situation. It is a question of fact each year whether an employer is resident on a reserve.
In the situation you have outlined, the Employees do not perform their duties of employment on a reserve as the reserves have not yet been created. XXXXXXXXXX , both section 87 of the Indian Act and the Guidelines require that income be connected to an existing reserve as defined under subsection 2(1) of the Indian Act. According to subsection 2(1) of the Indian Act, "reserve means a tract of land, the legal title to which is vested in Her Majesty, that has been set apart by Her Majesty for the use and benefit of a band". Thus, income can only be exempt from tax under section 87 or the Guidelines after the reserves have been created. Moreover, the Guidelines would not apply retroactively to income earned at a particular location before the location was designated as a reserve.
We note that when applying all the connecting factors to situate income on a reserve, there may be unusual or exceptional circumstances where:
(i) income may not be taxable even though it does not fall within one of the Guidelines; or
(ii) income may be taxable even though it appears to fall within one of the Guidelines.
The latter may include situations where a particular connecting factor, for example, the residence of the employer, cannot be given sufficient weight for a Guideline to be considered a reasonable approximation of the connecting factors test described in Williams. You have also asked for our comments on the requirements of the employers to withhold source deductions with respect to the Employees. Under subsection 153(1) of the Income Tax Act, every person making a payment of salary or wages or other remuneration is required to withhold source deductions. Where an employer determines that the income of an Indian is exempt or partially exempt from tax and the employee requests withholdings to be reduced, the employee must complete a TD1-IN, "Determination of Exemption of an Indian's Employment Income", and the employer must maintain this form on file for the employee.
CRA's T4001, "Employers' Guide - Payroll Deductions and Remittances", provides information for employers to determine which deductions are to be made for Indians. Where an employer has determined that income from employment is exempt from tax, the income is also exempt from Canada Pension Plan contribution deductions. The employer may elect to participate in the Canada Pension Plan, but the election cannot be revoked and must cover all employees. If the employer chooses not to participate in the Canada Pension Plan, an Indian whose employment income is exempt from tax may elect to participate. In situations where an employer has determined that there are no requirements to deduct income tax or Canada Pension Plan contributions due to the tax exempt status of the income, earnings are still subject to deductions for Employment Insurance premiums. See the CRA website, "Information for Status Indians" for more information.
We trust that these comments will be of assistance.
Yours truly,
Eliza Erskine
A/Manager
Non-Profit Organizations and Aboriginal Issues Section
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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