1 October 2009 External T.I. 2008-0302001E5 - Employment Income--Situated on a Reserve

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 the employment income of members of the particular First Nations in the situation described be exempt from tax?

Position: Question of fact, but may be exempt.

Reasons: Although this is a decision for the local TSO, in our view, Guideline 2 may apply to this situation. This is an employee leasing situation, however, the unusual, specific facts surrounding this employment support the location of the employer as a significant connecting factor.

								2008-030200
XXXXXXXXXX 							L. Zannese
(613) 957-2747
October 1, 2009 

Dear XXXXXXXXXX :

Re: Employment Income Earned by Members of the XXXXXXXXXX
(the "First Nations")

We are writing in response to your letter of November 24, 2008, requesting an advance income tax ruling on behalf of the First Nations. The First Nations have requested confirmation that employment income earned by their members working at the XXXXXXXXXX , which will not be located on either of the First Nation's reserves, will be exempt from tax under the Indian Act Exemption for Employment Income Guidelines (the "Guidelines"). We also acknowledge your additional submissions of December 4 and 9, 2008, February 26, 2009, and June 29, 2009. In addition we have had several telephone conversations with you regarding this file (Erskine/XXXXXXXXXX ).

As we have discussed with you, we are unable to provide you with an advance income tax ruling, as the determination of whether an individual's income is exempt from tax is a matter for the taxpayer's Tax Services Office. However, we are willing to provide you with our general comments on this situation and we will send a copy of this letter to the XXXXXXXXXX Tax Services Office, which is the Canada Revenue Agency (the "CRA") office responsible for the area in which most members of the First Nations appear to reside.

COMMENTS

General

Paragraph 87(1)(b) of the Indian Act provides that "the personal property of an Indian or a band situated on a reserve" is exempt from taxation. A reserve is defined in the Indian Act to mean land which is held by Her Majesty and has been set apart for the use and benefit of Indians. An Indian is defined by the Indian Act to be "an individual who pursuant to this Act is registered as an Indian or is entitled to be registered as an Indian". We recognize that many aboriginal people in Canada prefer not to describe themselves as Indians. However, we use this term because it has legal meaning under the Indian Act.

The exemption from tax provided by the Indian Act is given effect, for purposes of the Income Tax Act (the "Act"), by paragraph 81(1)(a) of the Act, such that personal property of an Indian is exempt from tax if that property is situated on a reserve. Although income is personal property, its intangible nature makes it difficult to determine its location. In Williams v. The Queen, the Supreme Court of Canada set out the connecting factors test to assist in this determination. The test requires identifying the connecting factors that tie the particular income to a location either on or off a reserve and weighing the significance of each such factor.

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 Guidelines 1, 2 and 3 as most applicable to the present situation. These Guidelines may be summarized as follows:

• Guideline 1 applies to exempt employment income earned from duties carried out on a reserve. If only a part of an employee's duties are carried out on a reserve then it may be possible to prorate the exemption.
• Guideline 2 exempts employment income if both the employer and the employee are resident on a reserve.
• Guideline 3 applies to exempt employment income if either the employer or the employee is resident on a reserve, and more than 50% of the duties of employment are completed on a reserve.

Facts

You have provided us with the following information, which we have reviewed but not confirmed:

The XXXXXXXXXX are both Indian bands as that term is defined in section 2 of the Indian Act. The XXXXXXXXXX has XXXXXXXXXX members of which XXXXXXXXXX live on their one reserve, which is located approximately XXXXXXXXXX . The XXXXXXXXXX has XXXXXXXXXX members with XXXXXXXXXX living on their one reserve, which is located XXXXXXXXXX .

XXXXXXXXXX

XXXXXXXXXX has completed an impact and benefit agreement with XXXXXXXXXX , the terms of which include facilitating employment and training of members of the First Nations. The First Nations will be creating a limited partnership (the "LP") which will be responsible for training First Nation members and leasing them to both XXXXXXXXXX and subcontractors. Each First Nation will hold equal units in the LP. The general partner will be a corporation owned equally by both First Nations and will hold one unit of the LP.

The LP will operate from a location on the XXXXXXXXXX reserve. All meetings, including directors' meetings of the general partner will take place at the LP's office on the reserve. The LP will enter into a contract with XXXXXXXXXX (an independent third party) ("XXXXXXXXXX ") to assist with establishing the employee leasing operations. XXXXXXXXXX will provide oversight of and assistance with the creation of the employee training program, the dispatching of employees, and the management services for these employees. It is intended that the First Nations will assume this role in the long-term. The LP will have employees that will work at its offices as payroll clerks, aboriginal liaison officers and employment co-ordinators, among other things. Employees of the LP that are leased to XXXXXXXXXX or its subcontractors will spend XXXXXXXXXX weeks in lodging at the XXXXXXXXXX and then return to the reserve for XXXXXXXXXX weeks. XXXXXXXXXX

Discussion

Where duties of employment are carried out on a reserve, the resulting income is considered to be situated on a reserve. As a result, for employees completing all or substantially all of their duties of employment on a reserve, Guideline 1 applies to their employment income such that all of this income is exempt from tax. In cases where less than 90% of an employee's duties are carried out on a reserve, it may be possible to prorate the exemption, as long as the duties are not merely ancillary to work being done off-reserve.

The location of the duties of employment is usually the key factor in determining whether an Indian's employment income is situated on a reserve and exempt from tax. However, the courts have recognized that employment income may be situated on a reserve, even where many or all of the duties of employment are carried on off-reserve, as long as other connecting factors of significant weight connect the employment income to a reserve. These factors may include the residence of the employee, the circumstances surrounding the employment and the residence of the employer.

Guideline 2 is the Guideline that is most often referred to with respect to situations where duties of employment are completed off-reserve. Guideline 2 relies on only two factors: the residence of the employer and the residence of the employee. The courts have concluded that although an employer's residence on a reserve is a connecting factor to a reserve, that factor will have minimal weight if the location of the employer has no tangible significance to the reserve.

Generally, the courts have indicated that weight should be given to the location of an employer on a reserve only where the scope of the employer's activities on a reserve, or the direct benefits flowing to a reserve, indicate a clear nexus between the employer and the reserve (see Shilling v. The Queen, Horn & Williams v. The Queen, GooGoo v. The Queen, McIvor v. The Queen etc.). This is particularly true for employee leasing situations. Thus, Guideline 2 is a reasonable approximation of the connecting factors test in an employee leasing situation only where the location of the employer on a reserve provides direct, significant benefits to the reserve. In determining whether a benefit to a reserve is provided, the CRA will take into account whether the location of the employer benefits the particular reserve or reserves where the employees reside.

The determination of whether an Indian is resident on a reserve is also a question of fact. Generally, the factors the CRA looks to in determining where an individual is resident include:

• where the individual and his or her family currently reside;
• whether a former residence is available for use by the individual and his or her family;
• whether the individual is entitled to live indefinitely at a current residence (as opposed to occupying temporary accommodations);
• where the individual maintains his or her banking information, driver's licence, mailing address and health care coverage; and
• the location of the individual's social relations and other interests.

Conclusions

Guideline 1 will apply to the employment income of those employees of the LP who can demonstrate that their duties of employment are all or substantially all completed on a reserve. If Guideline 1 applies, all of the employment income from this source is exempt from tax.

The proration rule outlined in Guideline 1 will apply to those employees of the LP who only complete part of their duties of employment on a reserve, as long as those duties are not merely ancillary to duties performed off-reserve, and as long as Guideline 2 or Guideline 3 (discussed below), do not apply. Where the proration rule applies, only the portion of income resulting from duties completed on a reserve is exempt from tax.

Guideline 2 and, for employees who are not resident on a reserve, Guideline 3, only apply if the employer (the LP) is determined to be resident on a reserve. In the present situation, the employer will be using office space located on the XXXXXXXXXX reserve. However, locating an office on a reserve is not the same as being resident on the reserve. When determining where an employer is resident, we generally look to the location of the management and control of the business. You have advised us that all of the management and control of the LP will be exercised from the two reserves. If the LP is operated in this manner, then the LP will likely be found to be resident on a reserve. However, the residence of the employer is a question of fact to be determined by the XXXXXXXXXX Tax Services Office.

If the LP is found to be resident on a reserve, then Guideline 2 may apply to the employment income of those employees who are also resident on a reserve. If Guideline 2 applies, all of the employment income from this source is exempt from tax. As discussed above, Guideline 2 only applies in employee leasing situations if the scope of the employer's activities on a reserve, or the direct benefits to a reserve, indicate a clear nexus between the employer and the reserve.

In the situation described in your ruling request, the employer is the First Nations, as they are the partners of the LP. Any income earned from the LP's operations will be available to the First Nations, who generally maintain and govern life on the reserves. As substantially all of the members of the First Nations reside on the reserves, the income earned by the employer and the activities of the employer may reasonably be considered to directly affect the reserves. Finally, employment opportunities for members of the First Nations who live on the reserves form an integral part of agreements between the First Nations and the government and private interests involved in XXXXXXXXXX . Consequently, in our view, if the facts described to us are accurate, significant weight may be given to the location of the employer in the present situation for the purposes of Guideline 2. Again, we note that both the facts and this conclusion must be reviewed and confirmed by the XXXXXXXXXX Tax Services Office.

Based on the limited information that you have provided, it appears to us that the members of the First Nations who reside at the XXXXXXXXXX for XXXXXXXXXX -week periods and who then return to one of the reserves or nearby cities, would not be resident at the XXXXXXXXXX but would instead be resident, for purposes of the Guidelines, at their usual homes. However, this is a question of fact that must be considered by the XXXXXXXXXX Tax Services Office.

If the LP is found to be resident on a reserve, then Guideline 3 will apply to the employment income of those employees who complete more than 50% of their employment duties on a reserve. This may be of particular importance to employees who are not resident on a reserve, as Guideline 2 cannot apply to their employment income. If Guideline 3 applies, all of the employment income from this source is exempt from tax.

We would like to stress that, as indicated in paragraph 22 of Information Circular 70-6R5, "Advance Income Tax Rulings", this opinion is not an advance tax ruling and accordingly it is not binding on the CRA. We trust, however, that these comments will be of assistance.

Yours truly,

Eliza Erskine
A/Manager
Non-Profit Organizations and
Aboriginal Issues
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch