10 March 2014 Internal T.I. 2013-0507901I7 - Indian 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 any of the guidelines or the decision in the Folster case will apply to exempt the employment income and pension income earned by an Indian from employment at a XXXXXXXXXX near a reserve?

Position: No.

Reasons: None of the guidelines apply and the facts are not similar to Folster.

March 10, 2014

Individual and Benefits Services Division Income Tax Rulings Directorate
XXXXXXXXXX Tax Centre Ann Townsend
905-721-5096

Attention: XXXXXXXXXX 2013-050790

Indian Employment Income

This is in response to your email of October 9, 2013, asking for our comments with respect to the taxation of employment and pension income earned by an Indian. Specifically, you are asking if any of the Indian Act Exemption for Employment Guidelines (the "Guidelines") or the decision in Folster v. The Queen (97 DTC 5315) (FCA) ("Folster") would apply to exempt the taxpayer's income from employment at the XXXXXXXXXX (the "XXXXXXXXXX").

You have provided us with the following information:

• The taxpayer is an Indian, as that term is defined in section 2 of the Indian Act.
• The taxpayer resides in XXXXXXXXXX and does not reside on a reserve.
• The taxpayer was employed at the XXXXXXXXXX from XXXXXXXXXX until her retirement in XXXXXXXXXX, at which time she received pension income from this employment.
• The XXXXXXXXXX is located on XXXXXXXXXX. It is not located on a reserve, but is adjacent to a reserve.
• XXXXXXXXXX.
• The taxpayer's employer was the XXXXXXXXXX.

Guidelines 1, 2, and 3 are relevant to employment situations where an Indian lives or works on a reserve. Generally, for employment income to qualify for a full or partial exemption from tax under one of these Guidelines, an Indian must:

• work on a reserve (all or some of the time);
• live on a reserve and the employer must be resident on a reserve; or
• work on a reserve more than 50% of the time and, either live on a reserve or the employer must be resident on a reserve.

According to the information provided, the taxpayer does not live on a reserve and did not work on a reserve. Therefore, Guidelines 1, 2 and 3 do not apply to exempt the employment income.

Guideline 4 has no requirement for an employee to live or work on a reserve; however, there are other, specific criteria that must be met. Guideline 4 requires that:

• the employer is resident on a reserve; and
• the employer is:
  • an Indian band which has a reserve, or a tribal council representing one or more Indian bands which 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 Indians who for the most part live on reserves; and
• the duties of the 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 reserves.

All of the above conditions must be met for Guideline 4 to apply.

You have indicated that the XXXXXXXXXX. The XXXXXXXXXX does not appear to be an Indian-controlled organization, nor is it clear whether it was resident on a reserve. In addition, the XXXXXXXXXX provides XXXXXXXXXX services to all members (Indians and non-Indians) of the local communities, which appear to be both reserve and non-reserve communities. Therefore, in our view, Guideline 4 does not apply to exempt the employment income.

When the Guidelines do not apply, the employment income is usually taxable. However, occasionally employment income is found to be situated on a reserve and exempt from tax as a result of significant connecting factors not taken into account by the Guidelines. In this regard, you have asked us to consider the connecting factors in the present situation in light of the decision in Folster.

In Folster, the taxpayer was an Indian who resided on the Norway House Indian Reserve and was employed by Health and Welfare Canada as an administrator at the Norway House Hospital. This hospital was originally located on the reserve but was rebuilt off-reserve after it was destroyed by fire. It was built primarily to service the residents of the reserve and 80 to 90 per cent of the patients were Indians who resided on the reserve. In Folster, the Federal Court of Appeal found that the performance of the employment duties, being primarily for Indians on reserve, the actual historical circumstances involving the relocation of the hospital off-reserve, and the residence of the employee on the reserve, should be given more weight than the actual location of the hospital and the location of the employment duties. The employment income was found to be exempt.

The Canada Revenue Agency will generally only apply the Folster decision to exempt employment income in situations where the facts of the particular situation are the same as, or very similar to, the facts in Folster. In the situation under consideration, the facts are not the same or similar to Folster since the taxpayer does not reside on a reserve and the XXXXXXXXXX does not have the same historical connection to the reserve. In addition, the XXXXXXXXXX provides XXXXXXXXXX services to all members of the surrounding communities and was not built to primarily service residents of the reserve. Therefore, in our view, Folster will not apply to exempt the taxpayer's employment income from tax.

Based on the above analysis, it is our view that there are insufficient factors connecting the employment and the pension income of the taxpayer to a reserve to conclude that the employment income is personal property of an Indian situated on a reserve within the meaning of paragraph 87(1)(b) of the Indian Act.

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.

We trust our comments will be of assistance,

R. 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