Principal Issues: 1. How to apply the Indian Act tax exemption to the income received by a First Nations employee who is on paid sick leave or paid suspension leave?
2. How are the Indian Act Exemption for Employment Income Guidelines applied where a First Nations employee’s circumstances changes during a taxation year and the employee’s suspension leave straddles two taxation years?
Position: 1. Income replacement benefits received while on paid sick leave (i.e., wage-loss replacement plan benefits) are benefits received from employment (i.e., employment-related income) and are treated in the same way as the employment income (i.e., wages and salary) that gave rise to the particular benefits. Income received while on paid suspension leave will be exempt from income tax under the Indian Act on the basis of whether the income is situated on a reserve (that is, whether Guidelines apply during the period of suspension).
2.Where there is a change in an employee’s circumstances, the percentage of days worked on a reserve will be calculated separately based on the number of days worked in each period before and after the change.
Reasons: 1. Both the CRA webpage entitled “Information on the tax exemption under section 87 of the Indian Act” and the Indian Act Exemption for Employment Income Guidelines confirm that wage-loss replacement plan benefits (i.e., paid sick leave) are treated in the same way as the employment income that gave rise to the particular benefits. Consistent with prior interpretations, income received while on paid suspension leave will be exempt from income tax under the Indian Act on the basis of whether the income is situated on a reserve (that is, whether Guidelines apply during the period of suspension).
2. Prior interpretations - E2016-065965 XXXXXXXXXX.
