26 March 2012 External T.I. 2011-0425781E5 - Indian Act Exemption - XXXXXXXXXX

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: Whether the income of an Indian XXXXXXXXXX may be considered exempt from tax.

Position: Maybe.

XXXXXXXXXX 2011-042578
Lori Merrigan
(613) 957-9229

March 26, 2012

Dear XXXXXXXXXX :

Re: Indian Act Exemption – Income XXXXXXXXXX

This is in response to your correspondence of October 20, 2011, inquiring whether the income of a XXXXXXXXXX , when paid to an Indian, as that term is defined in section 2 of the Indian Act, could be considered exempt from tax pursuant to section 87 of the Indian Act.

Section 87 of the Indian Act exempts from taxation the personal property of an Indian situated on a reserve. The courts have determined that, for purposes of section 87 of the Indian Act, employment income is personal property. Therefore, what must be determined is whether the employment income of an Indian is situated on a reserve. The courts have directed that connecting factors must be considered when making this determination. 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”).

It is our understanding that XXXXXXXXXX receive compensation consisting of a salary, XXXXXXXXXX and a pension. XXXXXXXXXX . Generally, we are of the view that it is appropriate to treat income from an office, such as the income of a XXXXXXXXXX, as employment income for purposes of section 87 of the Indian Act and the Guidelines. As we do not consider a XXXXXXXXXX’s “employer” (in the sense of the person paying the income to the XXXXXXXXXX ), to be resident on a reserve, the Guidelines that might apply with respect to the income of an Indian XXXXXXXXXX are Guidelines 1 and 3, which may be summarized as follows:

• Guideline 1 exempts all of the employment income of an Indian employee 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.
• Guideline 3 exempts all of the employment income of an Indian employee 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.

It is always a question of fact whether the conditions for one of the above Guidelines to apply are met in a specific case. Only duties related to the particular office or employment for which the remuneration was received, and performed in person on a reserve, can be taken into account. In considering what time is relevant for the purpose of this determination, we generally take into account:

• whether XXXXXXXXXX “duty of employment” was performed (i.e., was the XXXXXXXXXX performing duties required to meet XXXXXXXXXX commitments ) for which the XXXXXXXXXX was entitled to receive his or her salary XXXXXXXXXX; and
• whether the duty of employment was performed on a reserve.

It would be important to distinguish XXXXXXXXXX duties performed on a reserve from XXXXXXXXXX activities; the latter would not qualify as duties of a XXXXXXXXXX ’s office performed on a reserve and could not be taken into account for purposes of applying the Guidelines. In addition, time spent travelling to and from reserves XXXXXXXXXX would not be considered time spent performing duties on a reserve.

In any case, the XXXXXXXXXX would need to keep a record of actual time spent on the reserve in the course of performing his or her duties XXXXXXXXXX . For purposes of Guidelines 1 and 3, the XXXXXXXXXX would have to be able to provide evidence of his or her time spent on the reserve as a percentage of total time spent on all of the duties of his or her office for which the XXXXXXXXXX received his or her salary XXXXXXXXXX (including time spent attending XXXXXXXXXX, which would not be time spent on a reserve).

We trust that these comments will be of assistance.

Yours truly,

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