7 October 2009 External T.I. 2009-0329681E5 - Indian Tax Exemption--Overseas

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 an Indian taxable in Canada on income earned from employment overseas?

Position: Likely the income is taxable.

Reasons: It is unlikely that this employment income would be situated on a reserve, as that term is defined in the Indian Act.

									2009-032968
XXXXXXXXXX 								L. Zannese
(613) 957-2747
October 7, 2009

Dear XXXXXXXXXX :

Re: Indian Act Tax Exemption-Employment Overseas

This is in response to your email of June 28, 2009, inquiring about the taxation of Canadian aboriginal individuals. Specifically, you ask for information on how Canada would tax a Canadian aboriginal individual employed overseas.

General Income Tax Principles

Canada taxes individuals, including aboriginal individuals, on the basis of residency. Very generally, if an individual is resident in Canada, then the individual is taxable in Canada on all of his or her income; if an individual is not resident in Canada, then the individual is only taxable in Canada on income that is from a source in Canada. The tax treatment of individuals who are factually or deemed resident in Canada, and individuals who are not resident in Canada but who have Canadian-source income, is generally the same for both aboriginal and non-aboriginal individuals.

Indian Act Tax Exemption

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 term "Indian" is defined in section 2 of the Indian Act to mean "an individual who pursuant to this Act is registered as an Indian or is entitled to be registered as an Indian." As a result, not all aboriginal individuals qualify for this exemption. Moreover, the property in question must be situated on a reserve. A reserve is defined by the Indian Act to mean "a tract of land, the legal title of which is vested in Her Majesty, that has been set apart for the use and benefit of a band." It is very unlikely that this definition would ever apply to land outside Canada.

Paragraph 81(1)(a) of the Income Tax Act gives effect to the Indian Act exemption, such that an Indian's personal property that is situated on a reserve is exempt from income tax. Income from employment has been held by the courts to be personal property for the 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 evaluating the various factors connecting the income to a reserve and weighing the significance of each such factor. Factors to consider with respect to employment income include:

(i) the location where the employment duties are completed;
(ii) the nature and circumstances surrounding the employment;
(iii) the residence of the employer; and
(iv) the residence of the employee.

To assist Indians in determining whether the Indian Act exemption applies to their income, the Canada Revenue Agency, in consultation with other government departments as well as interested Indian groups and individuals, developed the Indian Act Exemption for Employment Income Guidelines (the "Guidelines"), which apply to common employment situations involving Indian individuals. You can view these Guidelines on the CRA Web site at http://www.cra-arc.gc.ca/brgnls/gdlns-eng.html. The most commonly applicable Guidelines are 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 resulting from duties that are performed on a reserve is exempt from tax.

2. Guideline 2 exempts all of the employment income of an Indian 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 employee lives on a reserve.

Conclusion

Generally, aboriginal individuals are taxable in Canada on the same basis and in the same manner as non-aboriginal individuals. However, if an individual is an "Indian" as defined in the Indian Act, the individual may qualify for an exemption from income tax. In order for this exemption to apply, the income in question must be situated on a reserve. In our view, it is unlikely that employment income earned by an Indian that relates to duties of employment that are carried on outside Canada would be situated on a reserve and thus be exempt from tax.

With respect to your question about the use of the term "national" in Canada's income tax treaties with Indonesia and Mongolia, both define the term national to mean "an individual possessing the nationality of a Contracting State." Generally, a national who is an individual is equivalent to a "citizen" in Canada. We would usually refer to the nationality that is declared in the individual's passport. However, each income tax treaty is unique and reference should be made to the definitions contained in the particular document.

We trust 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