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 a portion of a payment in lieu of severance received by an Indian qualify for the exemption under paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act?
Position: Yes, in this situation.
Reasons: In general, it is the CRA's position that where there is a service element relevant to the determination of an employment benefit; the taxation treatment of the employment income received during the appropriate service period should be used to determine the portion of the benefit that qualifies for the exemption.
XXXXXXXXXX Ann Townsend
2012-046241
October 24, 2012
Dear XXXXXXXXXX:
RE: Payment in Lieu of Severance Received by an Indian
This is in response to your email enquiry, dated September 14, 2012, asking whether a portion of a payment in lieu of severance will qualify for an exemption from income tax under paragraph 81(1)(a) of the Income Tax Act (“Act”), when it is received by an Indian who worked on a reserve for a period of time. For the purpose of our comments, “Indian” and “reserve” have the meanings assigned by subsection 2(1) of the Indian Act.
Your question relates to the elimination of accrued severance benefits for federal government employees and the option of receiving a payment in lieu of severance in the current year, rather than deferring receipt of the severance until termination of employment. From the information you gave us, we understand that the individual is an Indian with XXXXXXXXXX years of service with the XXXXXXXXXX. The individual is currently not working on a reserve but has XXXXXXXXXX prior years of service in which his duties of employment were performed on a reserve and qualified for the exemption from tax under paragraph 81(1)(a) of the Act at that time.
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 Act together with paragraph 87(1)(b) of the Indian Act exempt from income tax the 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”).
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. In addition, the CRA is of the opinion that the receipt of employment insurance benefits, retiring allowances, Canada pension plan payments, Quebec pension plan payments, registered pension plan benefits or wage loss replacement plan benefits will usually be exempt from income tax when received as a result of employment income that was exempt from tax. Where a portion of the employment income was exempt, then a similar portion of these amounts will be exempt.
A retiring allowance is defined in subsection 248(1) of the Act, to include, in part, an amount other than a pension benefit, received in respect of a loss of an office or employment. In your situation, although the severance payment received upon retirement would meet the definition of a retiring allowance, the receipt of a current payment in lieu of severance does not, since there is no termination of employment.
In Williams, the SCC considered the location of the employment that gave rise to the qualification of the unemployment insurance benefits to be a strong factor connecting the benefits to the reserve. Therefore and as previously expressed by the CRA, in situations where there is a service element relevant to the determination of an employment benefit to be paid, it is reasonable to consider the taxation treatment of the related employment income received during the appropriate service period. This includes benefits such as vacation pay and maternity/parental leave, which the CRA generally considers to be exempt from tax under paragraph 81(1)(a) of the Act and section 87 of the Indian Act, at the same prorated amount as the employment income that generated it.
In your situation, the payment in lieu of severance is calculated as one week pay per every year of continuous service. In our view, this is similar to Williams in that eligibility for and the amount of the payment is determined based on prior service. Therefore, because the payment is based on a service element, it is reasonable that the payment be given the same taxation treatment as other benefits based on service. Consequently, in our view, a payment in lieu of severance that relates to employment services, the income of which was earned on a reserve and was exempt from tax, should also be exempt from tax. If the employment income earned during the service period was partially exempt from tax, then a corresponding proportion of the payment in lieu of severance would also be exempt from tax.
We trust that our comments will be of assistance.
Yours truly,
Mickey Sarazin
Director General
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs
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