20 June 2014 External T.I. 2014-0521931E5 - Employment Income - Indians

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 employment income of Indians would be exempt from tax?

Position: No, not in this situation.

Reasons: See below.

XXXXXXXXXX
2014-052193
R. Meers
(613) 957-2100
June 20, 2014

Dear XXXXXXXXXX:

Re: First Nations Employees

This is in response to the letter we received from you on February 24, 2014, inquiring as to whether the income of an Indian, as that term is defined in section 2 of the Indian Act, would be situated on a reserve and thus exempt from tax for purposes of section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act. In particular, you have asked us to comment whether the income of the Indian employees of XXXXXXXXXX (the "Corporation") working at the XXXXXXXXXX (the "Location") would be exempt from tax.

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings. Although we cannot comment on your specific situation, we are able to provide the following general comments, which may be of assistance.

Your letter referenced a XXXXXXXXXX with respect to the taxation of XXXXXXXXXX business income earned by members of your Band, the XXXXXXXXXX. As you noted, the Location is off the reserve and the Corporation is a non-Native company and is not located on a reserve. In addition, your current request relates to employment income and not self-employed XXXXXXXXXX income.

The location of the duties of employment is usually the key factor in determining whether an Indian's employment income is situated on a reserve and exempt from tax. However, the courts have recognized that employment income may be situated on a reserve even where many or all of the duties of employment are carried on off a reserve, as long as other connecting factors of significant weight connect the employment income to a reserve. These factors may include the circumstances surrounding the employment, the residence of the employer and the residence of the employee.

In consultation with other government departments as well as interested Indian groups and individuals, the Canada Revenue Agency (the "CRA") identified a number of connecting factors that can be used to determine whether a person's employment income is situated on a reserve. This initiative resulted in the development of the Indian Act Exemption for Employment Income Guidelines ("Guidelines"). The Guidelines are an administrative tool intended to approximate the "connecting factors test" described by the Supreme Court of Canada in Williams v. The Queen, 92 DTC 6320. The Guidelines were intended to apply in common employment situations to assist Indian employees to determine whether their employment income was taxable. Unlike the connecting factors test, each Guideline relies on only 2 or 3 elements, which are implicitly given significant weight, in determining whether the employment income is exempt. Your letter references a connection between the bank the employees use to have their pay deposited and the reserve. This is not one of the elements relied upon in the Guidelines.

• Guideline 1 exempts the employment income of an Indian when 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 exemption is prorated to apply to the portion of income related to the duties that are performed on a reserve (the proration rule). As you have indicated, the employees work at the Location which is not on the reserve. As such, Guideline 1 would not apply.
• Guideline 2 exempts the employment income of an Indian employee when the employer is resident on a reserve and the Indian lives on a reserve. Based on the information you have provided, the Corporation is not resident on a reserve, therefore Guideline 2 would not apply.
• Guideline 3 exempts 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. Although the Indian employees reside on the reserve, from the information provided, it does not appear that any of the employees perform their duties on a reserve. Therefore, Guideline 3 would not apply.
• Guideline 4 allows an exemption for the employment income of an Indian where certain conditions are met. Specifically, 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 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 these conditions must be met for Guideline 4 to apply. As the Corporation is not resident on a reserve, is not an Indian band or an Indian organization controlled by one or more bands and the duties of employment are not in connection with the Corporation's non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on reserves, Guideline 4 does not apply.

Based on the above, it appears that the employment income earned by Indian employees of the Corporation at the Location would be taxable.

We trust that these comments will be of assistance.

Yours truly,

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