30 November 2021 Roundtable, 2021-0914531C6 - 2021 TEI – Q3A - Section 87 Indian Act

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: Question concerning CRA's administration of the Indian Act Exemption for Employment Income Guidelines.

Position: see response.

Reasons: see response.

Question 3A

“The CRA has indicated that where an Indian (as defined in the Indian Act) lives on a reserve and normally works off the reserve but is required to work at a home situated on a reserve due to the COVID-19 pandemic, that income will be treated as exempt. Post-pandemic, many employers will be shifting to hybrid work arrangements where employees may (but not necessarily be required to) work in a physical office certain days of the week and at home other days of the week. Will the CRA update its guidelines to capture these situations where an employee works part of the time from a reserve?”

CRA Response

The employment income of an individual who is registered or entitled to be registered under the Indian Act is exempt from income tax under paragraph 81(1) (a) of the Income Tax Act and section 87 of the Indian Act, only if the income is situated on a reserve. The courts have established that determining whether income is situated on a reserve, and exempt from tax, requires identifying the various factors connecting the income to a reserve and weighing the significance of each factor. This is referred to as the “connecting factors test”. To simplify the application of this connecting factors test with respect to common employment situations, the Canada Revenue Agency (CRA) together with other government departments and interested First Nations organizations, developed the Indian Act Exemption for Employment Income Guidelines (Guidelines).

The location where the duties of an employment are performed is one of the main connecting factors used by the Guidelines in determining whether employment income is exempt from tax under the Indian Act. Although the Guidelines do not make any specific reference to the location where an employee is required by their employer to perform the duties of their employment, it is the CRA’s longstanding view that this is the most relevant location when determining where the duties were performed for purposes of applying the Guidelines. For example, if an employee is not required to, but performs their duties on a reserve as a matter of convenience, the employee will not be considered to have performed their duties on a reserve for purposes of the Guidelines. This view is reflected on Form TD1-IN, “Determination of Exemption of an Indian’s Employment Income”. For example, the heading of section 2.5 of the form states:

“Employee does not live on a reserve and employer is not resident on a reserve but the employee is required to perform duties on a reserve.” [Our emphasis]

Ordinarily, an express requirement under the terms of a written employment contract or a formal hybrid work arrangement would be necessary to show that the employee is required to perform their duties of employment from certain locations on a reserve, such as a home office. However, although an arrangement may be voluntarily entered into, once an employer and an employee have entered into a formal hybrid work arrangement, the employee would be considered to be required to perform duties from the agreed location in the arrangement. The formal hybrid work arrangement need not be in writing provided the details of the arrangement are agreed to and clearly understood by both the employee and the employer. Whether such an arrangement exists is a question of fact and will depend on the circumstances of each situation.

Ann Townsend
2021-091453
November 30, 2021