13 August 2009 External T.I. 2009-0318031E5 - Indian Employment Income - Pilot

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: Is the employment income of an Indian, who works as a pilot in remote areas, considered tax exempt pursuant to paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act?

Position: Maybe. Whether employment income is taxable or exempt is a question of fact. Only general comments provided.

Reasons: Guideline 2 will likely apply if it is determined that the employer is in fact resident on a reserve. If not, Guideline 1 may apply to prorate the income. It is not likely that the Folster decision applies; specifically, the location of the employer has no historical connection to a reserve.

									2009-031803
XXXXXXXXXX 								L. Merrigan
(613) 957-8979
August 13, 2009

Dear XXXXXXXXXX :

Re: Taxation of Employment Income Earned as a Pilot

This is in response to your letter of April 16, 2009, and your further correspondence of June 15, 2009, requesting our comments as to whether the employment income you earn as a pilot, flying in the XXXXXXXXXX area, is exempt from tax under paragraph 81(1)(a) of the Income Tax Act (the "Act") and section 87 of the Indian Act. We also acknowledge our various telephone conversations (Merrigan/XXXXXXXXXX ).

The situation outlined in your letter relates to a factual one, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings". This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Generally, where a situation involves a specific taxpayer and a completed or ongoing transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views.

Although we cannot comment on your specific situation, we are able to provide the following general comments, which may be of assistance. Also, as discussed with you, we are forwarding your letters and documentation, along with this response, to the TSO in your area.

Facts

You have provided us with the following facts, which we have not confirmed:

You are an Indian as that term in defined in subsection 2(1) of the Indian Act.

• You reside on the XXXXXXXXXX reserve in XXXXXXXXXX .
• Your employer is XXXXXXXXXX
• The airports you fly into and out of are located at or near XXXXXXXXXX , all of which are located in the province of XXXXXXXXXX . It is your understanding that the only runway that may actually be located on a reserve is the XXXXXXXXXX runway. The others (with the exception of XXXXXXXXXX ) are located XXXXXXXXXX .
• It is your understanding that the runways (other than at XXXXXXXXXX ) exist exclusively to serve the socio-economic, health and educational needs of the Indian communities living on the nearby reserves.
• It is your understanding that approximately XXXXXXXXXX of your passengers are Indians as that term in defined in subsection 2(1) of the Indian Act.

Our Comments

General

Paragraph 81(1)(a) of the Act, together with paragraph 87(1)(b) of the Indian Act, exempt from tax certain income of Indians. Paragraph 87(1)(b) of the Indian Act states that "the personal property of an Indian or a band situated on a reserve" is exempt from taxation. The courts have determined that income from employment is personal property for purposes of section 87 of the Indian Act. The Supreme Court of Canada, in Williams v. The Queen, 92 D.T.C. 6320, concluded that the determination of whether income is situated on a reserve, and thus exempt from tax, requires identifying the various factors connecting the income to a reserve and weighing the significance of each such factor.

To simplify the application of this "connecting factors test" with respect to common employment situations, the CRA, together with interested Indian organizations, developed the Indian Act Exemption for Employment Income Guidelines (the "Guidelines"). The Guidelines that may apply in your situation may be summarized as follows:

1. Guideline 1 exempts all of the employment income of an Indian if at least 90% of the employment duties are performed on a reserve. When less than 90%, but more than an incidental proportion, of the duties are performed on a reserve, and none of the other Guidelines apply, only the portion of income that is earned from duties performed on a reserve is exempt from tax.

2. Guideline 2 exempts all of the employment income of an Indian employee who lives on a reserve, provided that the employer is also resident on a reserve.

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

For purposes of the Guidelines, reserve means a "reserve" as that term is defined in section 2 of the Indian Act. It may also include certain settlement lands treated as reserves for tax purposes pursuant to the Indian Settlements Remission Order, and any other areas given similar tax treatment under federal legislation (for example, Category 1A Lands under the Cree-Naskapi (of Québec) Act). The term reserve has this expanded meaning throughout this document.

Application of the Guidelines

The following analysis assumes that you are resident on a reserve. This is a question of fact that can only be confirmed by your local TSO.

If your employer is resident on a reserve, then Guideline 2 will apply to exempt all of your employment income from that employer. 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 a reserve. It is a question of fact where the central management and control is exercised, but the place where the board of directors meets and conducts business or where the central operational and management decisions are made is generally considered to be the place where management and control is exercised. It is not clear to us that your employer is resident on a reserve; this determination can only be made by your local TSO.

If Guideline 2 does not apply to your employment income because your employer is determined not to be resident on a reserve, Guideline 3 may still apply to exempt all of your employment income if more than 50% of your duties of employment are performed on a reserve. We note that travel time to and from a reserve before and after performing duties of employment (i.e., commuting time), is not included in calculating the time spent performing duties on a reserve. Also, time spent in flight between two runways would generally not be considered to be time spent on a reserve. However, an exception may be made in situations involving transportation services provided principally to Indians who reside on a reserve, where the trip both begins and ends on a reserve. Since it appears that only one of the runways may be located on a reserve, it is unlikely that Guideline 3 will apply to you; a final determination can only be made by your local TSO.

As Guideline 1 only applies to exempt all of your employment income if at least 90% of your employment duties are performed on a reserve, it is unlikely that Guideline 1 will apply to you, for reasons discussed above in our review of the application of Guideline 3. However, the exemption may be prorated if some of your duties of employment are performed on a reserve and those duties are not merely incidental to duties performed off a reserve. The exemption will apply to the portion of the income related to the duties performed on the reserve. In calculating the time spent performing duties on a reserve, the same considerations apply with respect to proration as with respect to Guideline 3.

There are occasionally situations in which the Guidelines do not apply but income is found to be situated on a reserve and exempt from tax as a result of significant connecting factors not taken into account by the Guidelines. In this regard, you have asked us to consider the connecting factors in your situation in light of the decision of the Federal Court of Appeal in Folster v. The Queen, 97 DTC 5315. We note that the CRA will generally only apply the Folster decision to exempt employment income in situations where duties are not performed on a reserve where the facts of the particular situation are the same as, or very similar to, the facts in Folster.

In the Folster decision, the connecting factors given the most weight were:

1. The residence of the taxpayer;
2. The nature of the services performed and the circumstances surrounding those services; and
3. The historical background.

While the additional connecting factors that you have described to us, such as your understanding that most of the runways exist exclusively to serve the socio-economic, health and educational needs of the Indian communities living on the nearby reserves, are relevant in considering whether your employment income is exempt from income tax, we are of the view that it is unlikely that the decision in Folster applies in your situation. In particular, there is nothing to suggest a clear historical connection between your employment situation and the local reserves. In any event, only your local TSO can determine whether your situation is similar enough to the situation in Folster for that decision to apply to you.

We trust that our comments will be of assistance to you. We will be forwarding your letters, along with the documentation that you have provided to us and a copy of this letter, to XXXXXXXXXX

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