6 November 2012 External T.I. 2012-0443291E5 - Exemption of Indian's Employment Income

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 employment income of XXXXXXXXXX who perform some of the duties of employment on a reserve is exempt from income tax under Guideline 3 or 4.

Position: Guideline 3 exempts the income of the Indian employees resident on the reserve, provided 50% or more of duties of employment are performed on reserves. Partial exemption under Guideline 1 for the employment duties that are performed on a reserve and the Indian does not live on a reserve.

Reasons: Since the employer is not located on a reserve and it is not an Indian band or tribal council or Indian organization, income will be exempt under Guideline 3 where the Indian lives on a reserve and more than 50% of the duties are performed on a reserve. Otherwise partial exemption for duties performed on the reserve.

XXXXXXXXXX 2012-044329
A. Townsend

November 6, 2012

Dear XXXXXXXXXX:

Re: Indian Employment Income

This is in response to your letter, received in our office on April 11, 2012, asking whether the employment income earned by yourself and XXXXXXXXXX other XXXXXXXXXX employed at the XXXXXXXXXX is exempt from income tax. You are of the opinion that Guideline 3 and 4 of the Indian Act Exemption for Employment Income Guidelines (the “Guidelines”) should apply in your situation to exempt the employment income. In addition, you are of the opinion that the facts in your situation are similar to the case of Folster v. the Queen ( 97 DTC 5315) (“Folster”), which also supports that the employment income is exempt.

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

• All XXXXXXXXXX employees are Indians, as that term is defined in subsection 2(1) of the Indian Act.
• XXXXXXXXXX employees live on reserves.
• The XXXXXXXXXX (the “School”) is located XXXXXXXXXX. The students that attend the School are for the most part located on reserves. The School provides XXXXXXXXXX services for its students.
• Approximately 50% of the employment duties of the XXXXXXXXXX are performed on a reserve since the duties of employment include XXXXXXXXXX. Knowledge of the First Nation language, culture and traditions are integral to the XXXXXXXXXX services provided.

Our Comments

The situation outlined in your letter appears to relate 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 our website at http://www.cra-arc.gc.ca. However, we are prepared to provide the following general comments.

Paragraph 81(1)(a) of the Income Tax Act (the “Act”) together with paragraph 87(1)(b) of the Indian Act exempts from income tax personal property of an Indian that is situated on a reserve. Employment income has been held by the courts to be personal property for the purposes of section 87 of the Indian Act. Therefore, the employment income of an Indian may qualify for an exemption from income tax if the income is determined to be situated on a reserve.

The Supreme Court of Canada (“SCC”), 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 identification and weighing of the various factors in common employment situations, the CRA, together with other government departments and interested Indian organizations, developed the Indian Act Exemption for Employment Income Guidelines (the “Guidelines”).

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 reserve. These elements must all be satisfied in order for Guideline 4 to apply.

The decision of the Federal Court of Appeal (the “FCA”) in Folster involved a fact situation in which the FCA concluded that the location of the employment was of less significance due to the circumstances surrounding the employment. In Folster, the taxpayer was an Indian residing on a reserve. She was employed by the local hospital, which was built to serve the First Nations community living in the area. It was estimated that 90% of the patients were members of that community. The original hospital had been located on the reserve; however it was destroyed by fire. When the hospital was rebuilt it was situated off-reserve. The FCA, in reversing the decision of the Tax Court of Canada, concluded that the historical factors surrounding the employment were sufficient to connect the income earned from the employment to the reserve. The fact that the hospital was located off-reserve was given little weight.

In some situations, unusual factors result in employment income being treated differently than the way the Guidelines describe. Based on the information provided in your letter, the School is located in XXXXXXXXXX. The School is a community school that was never located on a reserve and is responsible for the education of students within its geographical boundaries. In our view of your situation, there are no unique or extenuating circumstances such as there was in the Folster decision.

You have indicated that Guideline 4 may apply in your case since the work you do benefits the First Nations community. In order for Guideline 4 to apply the employer must be an Indian band, tribal council or Indian organization. The School is not an Indian band, tribal council or Indian organization, therefore, Guideline 4 will not apply to exempt the employment income.

In your situation, XXXXXXXXXX of the Indians live on a reserve and perform more than 50% of their employment duties on a reserve. Therefore, Guideline 3 will apply and the employment income will qualify for a full exemption from tax. With respect to the Indian that does not live on a reserve and performs less than 90% of the duties of employment on a reserve, Guideline 1 will apply and only the portion of income that is earned from duties performed on a reserve is exempt from tax.

A record of duties completed or time spent working on a reserve should be maintained to support a claim for an exemption as described above. When recording time spent completing duties on a reserve it is only duties completed in accordance with a contract of employment that are taken into account. Commuting time to and from work, and stand-by time if applicable, is not considered time spent completing duties of employment on a reserve.

We trust that our comments will be of assistance.

Yours truly,

R.A. Albert, CA
Manager
Non-Profit Organizations and
Aboriginal Issues Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs