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 corporation is resident on a reserve.
Position: General comments provided.
Reasons: Very limited information provided.
February 10, 2016
Re: Income Earned by Employees and Shareholders of XXXXXXXXXX
This is in response to your correspondence asking for our comments on whether the income earned by employees and shareholders of XXXXXXXXXX (the “Corporation”) would be exempt from tax. Based on the information you provided, we understand that the Corporation has been operating in the province of XXXXXXXXXX since XXXXXXXXXX and rented office space on a reserve in XXXXXXXXXX to facilitate its XXXXXXXXXX activities. In particular, you would like to confirm that the Corporation is resident on a reserve and therefore, the income earned by the employees and shareholders of the Corporation will be exempt from tax under the Indian Act Exemption for Employment Income Guidelines (the “Guidelines”).
This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation. 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 IC70-6R6, Advance Income Tax Rulings and Technical Interpretation.
The determination of the appropriate tax treatment in any situation depends on the specific facts. As noted during our telephone conversation of November 2, 2015 (Mahendran/XXXXXXXXXX), we require some clarification with respect to your particular situation. Although you indicated that you would be submitting additional information immediately, we have not received any information from you. However, we will provide the following general comments, which may be of assistance to you.
Paragraph 81(1)(a) of the Act together with paragraph 87(1)(b) of the Indian Act exempt from tax “the personal property of an Indian or a band situated on a reserve.” For the purposes of the exemption, an Indian is defined in subsection 2(1) of the Indian Act as a person who is registered as an Indian or is entitled to be registered as an Indian. The courts have determined that income, including employment income and dividend income, is personal property for purposes of section 87 of the Indian Act. Therefore, employment income or dividend income earned by an Indian will be exempt from tax if it is situated on a reserve.
The determination of whether income is situated on a reserve, and thus exempt from tax, requires the identification and evaluation of factors connecting the income to a location on a reserve. The type of property is important in identifying the relevant connecting factors. In your particular situation, there are two types of property: employment income and dividend 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 therefore, 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-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.
To simplify the application of the “connecting factors test” with respect to common employment situations, the Canada Revenue Agency (“CRA”), together with interested Indian organizations, developed the Guidelines, which can be found on the CRA’s webpage at http://www.cra-arc.gc.ca/brgnls/gdlns-eng.html. Based on your understanding of the Guidelines, you believe that Guideline 2 would apply to your particular situation to establish the tax exemption for employees and shareholders of the Corporation. We note that the Guidelines only apply to employment and employment-related income.
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. The term “employer is resident on a reserve,” as defined in the Guidelines, means that the reserve is the place where the central management and control over the employer organization is actually located. The central management and control of a corporation is usually considered to be exercised by the group that performs the function of a board of directors of the corporation. It is not the residency of the individual directors that is relevant, but the location at which major organizational decisions are made. In terms of control of a corporation, there must be sufficient control exercised from a reserve in order for the corporation to be considered to be resident there.
In the present situation, 51% of the shares of the Corporation are owned by an individual and 49% of the shares are owned by another corporation, the head office of which is located off-reserve in XXXXXXXXXX. The fact that the Corporation has rented an office space on a reserve to facilitate its XXXXXXXXXX activities does not necessarily mean that the Corporation is managed or controlled from the reserve; locating an office on the reserve is not necessarily the same as being resident on the reserve. The courts have concluded that although an employer’s residence on a reserve is a connecting factor to a reserve, that factor will have minimal weight if the location of the employer has no tangible significance to the reserve.
Generally, the courts have indicated that weight should be given to the location of an employer on a reserve only where the scope of the employer’s activities on a reserve, or the direct benefits flowing to a reserve, indicate a clear nexus between the employer and the reserve. In determining whether a benefit to a reserve is provided, the CRA will take into account whether the location of the employer benefits the particular reserve or reserves where the employees reside. Furthermore, the courts have also stated that connections that are artificial should not be given weight in determining the location of income for purposes of the exemption. Based on the information you submitted, it is not clear to us whether the Corporation would in fact be resident on the reserve or has a clear nexus with the reserve.
In addition to the employer being resident on a reserve, for purposes of Guideline 2, the Indian employee must live on a reserve. The term “Indian lives on the reserve,” as defined in the Guidelines, means that the Indian lives on the reserve in a domestic establishment that is his or her principal place of residence and that is the centre of his or her daily routine.
The CRA’s general position with respect to shareholder’s income (dividend income) is provided on the Information for Indians webpage at http://www.cra-arc.gc.ca/brgnls/stts-eng.html. The webpage states:
“If you are a shareholder of a corporation that operates only on a reserve, any dividends you receive from the corporation will be eligible for the tax exemption under section 87 of the Indian Act. This applies when the head office, management, and principal income-generating activities of the corporation that pays your dividends are situated on a reserve.”
Based on the information you submitted, it does not appear that the Corporation operates only on a reserve. Therefore, we are unable to comment on whether the dividend income earned by the shareholders of the Corporation will be exempt from tax under paragraph 87(1)(b) of the Indian Act.
Roger Filion, CPA, CA
Non-Profit Organizations and Aboriginal Issues Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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