25 March 2013 External T.I. 2012-0462251E5 - Indian Employment Income - Pilot

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 the employment income of an Indian who is a pilot exempt under the guidelines where duties of employment involve the delivery of XXXXXXXXXX to remote First Nation Reserves.

Position: Question of fact, general comments provided

Reasons: Guideline 1 will likely apply to prorate the income for the duties performed on a reserve.

XXXXXXXXXX
2012-046225
A. Townsend

March 25, 2013

Dear XXXXXXXXXX:

Re: Indian Employment Income – Pilot

This is in response to your letter asking whether the employment income earned by a pilot (the "Employee") is exempt from tax where the duties of employment are mainly delivering XXXXXXXXXX by aircraft to First Nation communities on reserves. You have explained that:

• The Employee is an Indian, as that term is defined in subsection 2(1) of the Indian Act.
• The Employee does not live on a reserve and the employer is not resident on a reserve.
• The point of XXXXXXXXXX delivery departure is not located on a reserve and the Employee is only physically working on the reserve for a portion of his time (less than 50%).

You are also requesting clarification of the second example given in the Canada Revenue Agency's ("CRA") Indian Act Exemption for Employment Income Guidelines (the "Guidelines"). The example concerns Mr. B, a truck driver for a heating-oil supplier, whose income is found to be exempt because 90% of his duties of employment are performed on a reserve. You would like to know if in this example, it is intended that 90% of Mr. B's duties of employment are spent on the reserve since you feel that this would not be feasible given the size and location of many reserves.

Our Comments

The situation outlined in your email 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 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 the personal property of an Indian 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, 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 Guidelines.

Your question concerns Guideline 1, which 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, the portion of income that is earned from duties performed on a reserve is exempt from tax (the proration rule). However, when the time spent on reserve is considered incidental, the employment income will not qualify for the exemption.

The hypothetical example concerning Mr. B is intended to illustrate the application of Guideline 1. The facts in the example specify that Mr. B does not live on a reserve however, at least 90% of Mr. B's duties of employment are physically performed on the reserve and therefore his income is exempt. The example is meant to portray a situation where an employee is delivering fuel from house to house on a reserve, which amounts to more than 90% of his employment duties being carried out on a reserve.

Generally, in our view, time spent traveling to and from a reserve would not be time spent on a reserve. Similarly, time spent in flight between reserves would generally not be considered to be time spent on a reserve. An exception may be made in situations involving transportation services provided principally to Indians who reside on a reserve, where the income–earning activities both begin and end on a reserve.

Based on the information given to us, most of the Employee's duties of employment are performed off reserve, and in our view, it is unlikely that a full exemption from tax under Guideline 1 will apply. Guidelines 2 and 3 would also not apply as the Employee does not live on a reserve and the employer is not resident on a reserve. Additionally, Guideline 4 would not apply as the elements required in it are not met.

However, the exemption may be prorated (proration rule) if some of the duties of employment are performed on a reserve and those duties are not merely incidental to duties performed off a reserve. The exemption will apply to the portion of the income related to the duties performed on the reserve. In calculating the time spent performing duties on a reserve, the CRA would require that the Employee keep a detailed log book, clearly outlining the routes and identifying the reserves travelled to and time spent on the reserve in the course of his or her duties of employment.

We trust that these comments will be of assistance.

Yours truly,

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