22 March 2013 Internal T.I. 2012-0470371I7 - Indian - XXXXXXXXXX

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 XXXXXXXXXX exempt from tax where the XXXXXXXXXX is temporarily located at an office on a reserve.

Position: It appears to fall within Guideline 1.

Reasons: Duties of employment were performed on a reserve during this period.

March 22, 2013

Individual Returns Directorate IT Rulings Directorate
25 McArthur, 5th Floor,Room 582 Ann Townsend
Ottawa, ON K1A 0L5 905-721-5096

Attention: Steve Carscadden
2012-047037

Indian – XXXXXXXXXX

This is in response to your email of November 20, 2012, asking for our comments on the taxation of the employment income of an XXXXXXXXXX (the "Employee"). The Employee is an Indian, as that term is defined in section 2 of the Indian Act, and worked from a temporary office located on a reserve for part of the XXXXXXXXXX taxation years.

Based on the information you have provided to us, our understanding of the facts are as follows:

• The Employee does not live on a reserve and works as an XXXXXXXXXX for the XXXXXXXXXX (the "Centre"). The Centre is registered by the XXXXXXXXXX (the "Employer") in partnership with XXXXXXXXXX. We understand that the Employer is not resident on a reserve.
• Due to a shortage of office space at the Centre, the XXXXXXXXXX were encouraged by the Employer to work from home or make other arrangements until renovations were completed that would increase the office space available for the XXXXXXXXXX.
• The Employee found office space at the XXXXXXXXXX reserve and worked from that location. XXXXXXXXXX

OUR COMMENTS

Paragraph 81(1)(a) of the Income Tax Act together with paragraph 87(1)(b) of the Indian Act exempt from tax personal property of an Indian that is situated on a reserve. Income, including income from employment, 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, established the general principle that all factors connecting income to a reserve must be identified and the significance of each factor weighed, in determining whether that income is situated on a reserve. To simplify the application of this connecting factors test to common employment situations, the Canada Revenue Agency ("CRA"), together with other government departments and interested Indian organizations, developed the Indian Act Exemption for Employment Income Guidelines (the "Guidelines").

You have reviewed the Guidelines and determined that since neither the Employee nor the Employer is located on a reserve, Guidelines 2, 3 and 4 are not applicable. Guideline 1 may apply in the situation that you have described and is summarized as follows:

Guideline 1 exempts all of the employment income of an Indian if at least 90% of the duties of employment are performed on a reserve.

Proration rule: 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.

It is our view that when determining the locations where the duties of employment are performed for the purpose of the Guidelines, the most relevant location is the location where the employee is required by the terms of employment to perform the duties of employment. In the case of telework arrangements, where the terms of an employment agreement require the employee to work certain hours from a particular location, such as from a home office, this is the location that the employee is required to perform the duties of employment. Generally, when the office is located on a reserve, the employment duties are considered to be performed on a reserve.

In the situation you have described, it appears that the Employee was asked to find alternative office space until renovations were completed at the Centre. The Employee found office space on a reserve, and performed her duties of employment from this location. Therefore, provided that there is evidence to support that the Employer was in agreement with this arrangement, in our view, where the employment duties are actually performed on the reserve, the proration rule contained in Guideline 1 could apply to exempt that portion of employment income earned on reserve.

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Mrs. Celine Charbonneau at (613) 952-1361. In such cases, a copy will be sent to you for delivery to the taxpayer.

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