5 June 2012 External T.I. 2012-0441791E5 - Employment Income Exemption for an Indian

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: Does the employment income of an Indian qualify for an exemption from income tax where the duties of employment are performed on the traditional territory of an Indian.

Position: No

Reasons: Traditional territory does not meet the definition of a reserve in section 2 of the Indian Act

XXXXXXXXXX
				2012-044179
				A. Townsend
June 5, 2012

Dear XXXXXXXXXX:

Re: Indian Employment Income

This is in response to your letter, received in our office on March 13, 2012, asking whether the employment income that you received from XXXXXXXXXX is exempt from income tax.

Our understanding of the facts in your particular situation is as follows:

• You are an Indian, as that term is defined in subsection 2(1) of the Indian Act.
• You do not reside on a reserve.
• In 2011 you worked for a XXXXXXXXXX which is not resident on a reserve.
• The employment duties you preformed were on traditional lands; however, this land is not on a reserve.

It is not this Directorate’s practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling; however, we can offer the following general comments.

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 the purposes of section 87 of the Indian Act, employment income is considered personal property. Therefore, what must be determined is whether the employment income of an Indian is situated on a reserve.

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” , the CRA, together with interested Indian organizations, developed the Indian Act Exemption for Employment Income Guidelines (the “Guidelines”), which are 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.

4. Guideline 4 requires that the employer be resident on a reserve. It also requires that the employer be an Indian band that has a reserve, or a tribal council representing one or more Indian bands that 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 status Indians who for the most part live on a reserve, and that 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 a reserve. These elements must all be satisfied in order for Guideline 4 to apply.

The definition of a “reserve”, as provided in section 2 of the Indian Act, includes a tract of land, the legal title to which is vested in Her Majesty, which has been set apart by Her Majesty for the use and benefit of a band. It is our understanding that, although the land on which you perform your employment duties is traditional territory, this land does not meet the definition of a reserve under the Indian Act. In addition, it does not appear that you or your employer reside on a reserve. Consequently, the employment income that you received from XXXXXXXXXX does not qualify for an exemption from income tax.

We trust these comments will be of assistance.

Yours truly,

R. Albert, CA
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch