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 would be considered situated on a reserve and thus exempt from tax.
Position: Likely.
Reasons: Guideline 4 does not likely apply to the situation. However, there appears to be connecting factors that could situate the employment income on a reserve.
XXXXXXXXXX 2018-078499
Michel Gauthier
September 9, 2019
Dear XXXXXXXXXX:
Re: Employment Income and the Tax exemption under section 87 of the Indian Act
This is in reply to your inquiry asking whether your employment income as a teacher (Teacher) delivering the XXXXXXXXXX (Program) to students living on-reserve is considered 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.
Based on the information contained in your emails and our phone conversations (XXXXXXXXXX, Gauthier), it is our understanding that you are registered as an Indian under the Indian Act and you do not live on the reserve. You are employed by the XXXXXXXXXX (School Board) to teach the Program to XXXXXXXXXX (First Nation) students. The School Board and the schools at which you teach are not located on a reserve, although the XXXXXXXXXX elementary schools where you teach are located in close proximity to the reserve (i.e., XXXXXXXXXX). As detailed in the agreement with respect to XXXXXXXXXX (Agreement) and the funding agreement for the Program, the First Nation provides funding either directly or indirectly to the School Board for the services of a qualified teacher to deliver the Program for on-reserve First Nation students.
Our Comments:
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 70-6R9, Advance Income Tax Rulings and Technical Interpretations.
Paragraph 81(1)(a) of the Income Tax Act, together with paragraph 87(1)(b) of the Indian Act provides 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. Therefore, the employment income of an Indian may qualify for an exemption from income tax if it is determined to be situated on a reserve.
The Supreme Court of Canada, in Williams v. The Queen, 92 DTC 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 Canada Revenue Agency (CRA), together with interested First Nations organizations, developed the Indian Act Employment Income Guidelines. For details on the Guidelines, please go to canada.ca/en/revenue-agency/services/aboriginal-peoples/indian-act-exemption-employment-income-guidelines.html.
You have asked us whether Guideline 4 applies to your situation.
Guideline 4 allows an exemption for employment income where certain conditions are met. Specifically, Guideline 4 requires that:
a) The employer is resident on a reserve; and
b) 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
c) 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.
In the situation you have described, the School Board is not resident on a reserve; it is not an Indian band which has a reserve or a tribal council representing one or more Indian bands which have reserves; nor is it an Indian organization controlled by one or more such bands or tribal councils. Therefore, it is our opinion that Guideline 4 will not apply to your situation.
Occasionally there may be unique situations for which the Guidelines do not apply but employment income is found to be situated on a reserve and exempt from tax because of significant connecting factors other than those taken into account by the Guidelines. Connecting factors that have been considered and given weight by the courts in cases involving employment income include the location or residence of the employer; the nature, location, and surrounding circumstances of the work performed by the employee; the nature of any benefit that accrued to the reserve from the work; and the residence of the employee. The weight assigned by the courts to each of these factors has varied according to the facts of each particular case.
It is our understanding that the purpose of the Program is to develop the XXXXXXXXXX skills of on-reserve First Nation students and it is in addition to the regular school curriculum. The First Nation and the XXXXXXXXXX, a corporation established by the XXXXXXXXXX, have a significant degree of control over the Program through the powers provided to them under that Act, the Agreement, and the funding agreement for the Program. This includes determining the hiring panel for the Teacher of the Program, monitoring the effectiveness of the Program, and identifying the on-reserve First Nation students who participate in the Program. The First Nation also provides the funding for the Program and for the Teacher, who is responsible to liaise with the parents of the students and the Director of Education of the First Nation. In addition, all of the students in the Program are members of the First Nation and live on-reserve.
It is our view that all of these factors would be accorded significant weight in connecting the income to the reserve such that it is likely that your employment income could be considered situated on the 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.
We trust that these comments will be of assistance.
Yours truly,
Roger Filion, CPA, CA
Manager
Non-Profit Organizations and Aboriginal Issues
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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