3 May 2013 External T.I. 2013-0484341E5 - Indian Tax Exemption - 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 individual's employment income qualifies for the Indian Act exemption pursuant to section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act.

Position: Likely not.

Reasons: See comments in letter.

XXXXXXXXXX
2013-048434
Lori Merrigan
(613) 957-9229
May 3, 2013

Dear XXXXXXXXXX:

Re: Indian Tax Exemption – Business Income

This is in response to your e-mail of April 4, 2013, inquiring whether employment income you earned as an Indian, as that term is defined as in subsection 2(1) of the Indian Act, as XXXXXXXXXX, is exempt income for purposes of paragraph 81(1)(a) of the Income Tax Act (the "Act").

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 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 tax certain income of Indians. Paragraph 87(1)(b) of the Indian Act states that "the personal property of an Indian or a band situated on a reserve" is exempt from taxation. The courts have determined that income from employment is personal property for purposes of section 87 of the Indian Act. 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" with respect to common employment situations, the CRA, together with interested Indian organizations, developed the Indian Act Exemption for Employment Income Guidelines (the "Guidelines") which may be accessed on the CRA website at http://www.cra-arc.gc.ca/brgnls/gdlns-eng.html. Based on the information that you have provided, the Guidelines that may apply in your situation may be summarized as follows:

• Guideline 1 exempts all of the employment income of an Indian employee 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.
• Guideline 3 exempts all of the employment income of an Indian employee 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.

To determine whether employment income is exempt from tax under the Guidelines referred to above, the portion of employment duties performed on a reserve must be determined. In considering what time is relevant for the purpose of this determination, we generally take into account:

• whether an actual "duty of employment" was performed (i.e., was the employee required to perform the particular task and was the employee compensated by the employer for performing that particular task); and
• whether the duty of employment was actually performed on a reserve.

We note that travel time to and from a reserve before and after performing duties of employment (i.e., commuting time), is not included in calculating the time spent performing duties on a reserve.

In your e-mail, you cited a tax court decision, Alexander Akiwenzie v. Her Majesty The Queen, 2003 TCC 68 (TCC), which you felt was relevant to your situation. In this situation, the taxpayer estimated that he performed approximately 20% of his employment duties on reserve while most of his duties were performed at his office off-reserve. However, because of the nature of his work, as an employee of Aboriginal Affairs and Northern Development Canada (formerly known as Department of Indian Affairs and Northern Development), the taxpayer felt that his income should be exempt from tax because his employment was working with Indians on reserves. The tax court judge concurred and found that his employment income was virtually connected to all reserves in Canada.

However, the decision of the tax court judge in this case was appealed and heard by the Federal Court of Appeal ("FCA"), Akiwenzie v. The Queen (2004 DTC 6007). The FCA found that the fact that an employee's duties were beneficial to reserves does not, in and of itself, result in his income being situated on these reserves. The FCA judge did state, that in his view, the tax court judge did correctly find:

"that the respondent's income was not sufficiently connected with the reserve on which he lived by virtue of his occupancy of the reserve and the amounts which he would have spent on it to support himself and his family (see Bell v. Canada, 2000 DTC 6365 at paragraph 41). However, the "true connection" which he did find is a virtual connection with "each and every reserve in Canada" based on the exceptionally beneficial nature of the services rendered by the respondent through his employment and his genuineness qua Indian (see paragraph 5, supra)."

The FCA judge, however, did continue to state:

"With respect, these factors have nothing to do with the preservation of the respondent's personal property qua Indian on these reserves. Specifically, it cannot be said that the taxation of the respondent's income would result in the erosion of his entitlement qua Indian on any or all of these reserves as there is no connection whatsoever between this income as such and these reserves as economic bases or physical locations (Monias, supra, paragraphs 46 and 67)."

The FCA also cites the case of Monias v. The Queen (2001 DTC 5450) in which the Federal Court of Appeal previously stated:

"That the work from which employment income is earned benefits Indians on reserves, and indeed may be integral to maintaining the reserves as viable social units, is not in itself sufficient to situate the employment income there. It is not the policy of paragraph 87(1)(b) to provide a tax subsidy for services provided to and for the benefit of reserves. Rather, it is to protect from erosion by taxation the property of individual Indians that they acquire, hold and use on a reserve, although in the case of an intangible, such as employment income, it is the situs of its acquisition that is particularly important."

The FCA judge set aside the decision of the tax court judge and returned the matter back to the Chief Justice of the tax court with instructions that 20% of the employment income, which represented Mr. Akiwenzie's actual time spent performing his employment duties on-reserve, be exempt from tax. If we were to consider the facts in Mr. Akiwenzie's situation in accordance with the Guidelines described above, a portion of Mr. Akiwenzie's income would likely have been exempted to the extent that he performed some of his employment duties on a reserve, in accordance with Guideline 1. That is, 20% of his employment income would likely have been exempt from tax.

We trust that these comments will be of assistance.

Yours truly,

Roger Filion, CPA, CA
Manager
Non-Profit Organizations and Aboriginal Issues Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch