13 February 2012 Internal T.I. 2011-0428241I7 - Indian Employment Income - Guideline 4

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 Guideline 4 will apply to exempt employment income of Indian employees.

Position: Likely yes.

Reasons: Fact specific.

			February 13, 2012

	Team Leader, Audit					HEADQUARTERS
	XXXXXXXXXX 							Income Tax Rulings
									  Directorate

Lori Merrigan
(613) 957-9229
Attention: XXXXXXXXXX
2011-042824

Employment Income of an Indian - Guidelines 3 and 4

This is in response to your correspondence of November 17, 2011, asking for our comments with respect to the taxation of the employment income earned by certain individuals who are Indians, as that term is defined in section 2 of the Indian Act, who were employees of the XXXXXXXXXX (the "Organization"). Specifically, you ask whether Guideline 4 of the Indian Act Exemption for Employment Guidelines (the "Guidelines"), would apply to exempt the employment income earned by the Indian employees while the office of the Organization was temporarily located off-reserve.

FACTS

These are the facts as we understand them from you:

• The Organization is a department of, and is controlled by, XXXXXXXXXX (the "Bands").
• The Organization has temporarily moved its administrative office off-reserve until the construction of its new building is complete. The Organization is expected to return to its new office on-reserve by XXXXXXXXXX .
• All employees of the Organization are Indians and all but one employee resides on a reserve.
• The duties of employment of all of the employees are exclusively related to the education of Indian students residing on a reserve.

ANALYSIS

Guideline 4 allows an exemption for the employment income of an Indian where certain conditions are met. Specifically, Guideline 4 requires that:

a) the employer is resident on a reserve;

b) the employer is:

• an Indian band which has a reserve, or a tribal council representing one or more Indian bands which have reserves; or

• an Indian organization controlled by one or more such bands or tribal councils, if the organization is dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves; and

c) the duties of employment are in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on reserves.

All of these conditions must be met for Guideline 4 to apply.

It is unclear, based on the facts provided, whether the employer is the Organization or the Bands that control the Organization. However, even if the Bands are not the employer, Guideline 4 may still apply as the Organization appears to be an Indian organization controlled by a band which has a reserve and the Organization appears to be dedicated exclusively to the educational development of Indians residing on a reserve.

If the Organization is the employer, in order for Guideline 4 to apply, the Organization must have been resident on a reserve during the years under review. We normally consider an employer to be resident at the location of the mind, management and control of the employer. In this situation, it may be that the mind, management and control of the Organization was exercised from a reserve or it may be that mind, management and control was exercised from the Organization's temporary office off-reserve. This is a question of fact that that must be determined by your office.

Guideline 4 also requires that the duties of employment be in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on reserves. In this case, the employment duties relate to the provision of education services on-reserve, which are non-commercial activities. It also appears that the duties of employment are exclusively for the benefit of Indians who for the most part live on-reserve, as the employees provide education to students living on a reserve.

If the Bands are the employer, it appears to us that Guideline 4 applies to this situation as these Bands are clearly resident on a reserve. If the Organization is the employer, then Guideline 4 will only apply if the employer is found to have been resident on a reserve during the time under review. If Guideline 4 applies, all of the employment income of all of the Indian employees will be exempt from tax regardless of the employees' residence.

If Guideline 4 does not apply to this employment situation during the construction period, because the employer is not resident on a reserve, Guideline 3 may apply to exempt all of the employment income of the Indian employees that reside on a reserve. This guideline applies where more than 50% of the employment duties for the year are performed on a reserve and either the employer is resident on a reserve or the employee lives on a reserve. If Guideline 3 applies then all of the employment income of the employee is exempt from tax.

Where an Indian employee does not live on a reserve, and the employer is not resident on a reserve, the employment income earned from duties completed on a reserve is still eligible for a partial exemption from tax under Guideline 1. However, all employment income arising from duties performed off-reserve would be taxable.

We trust that our 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