24 July 2024 External T.I. 2023-1000141E5 - Guideline 4 of the Indian Act Guidelines

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: Will Guideline 4 apply to the employees who live off-reserve and who work off-reserve when the employer's head office moves off-reserve?

Position: Likely Yes.

Reasons: Based on the information provided, the Employer appears to be resident on a reserve, controlled by First Nations that have reserves, and dedicated to the social, cultural and economic benefit of First Nations individuals who for the most part live on a reserve.

July 24, 2024

XXXXXXXXXX									Ann Townsend
										2023-100014

Dear XXXXXXXXXX:

RE: Employees of XXXXXXXXXX and the tax exemption under section 87 of the Indian Act

This is in response to your enquiry asking whether section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act (Act) apply to exempt the employment income of employees of the XXXXXXXXXX (Employer), who are registered under the Indian Act (Employees). Specifically, you ask about the application of Guideline 4 of the Indian Act Exemption for Employment Income Guidelines (Guidelines) to the employment income of the Employees who live off-reserve and who will perform all their duties of employment off-reserve when the Employer relocates its head office from the XXXXXXXXXX Reserve to off-reserve. The Employer’s head office is one of its two offices that are currently located on-reserve.

The following is our understanding of the information submitted:

• The Employer is a non-profit organization incorporated without share capital and is governed by a XXXXXXXXXX of directors which consists of XXXXXXXXXX elected Chiefs from the Assembly of XXXXXXXXXX (Assembly).
• The Assembly is a collaborative governing body representing XXXXXXXXXX.
• As the Assembly is not an incorporated body, it established the Employer to facilitate funding agreements related to the implementation of treaty rights. The Employer takes direction from the Assembly.
• The Assembly currently meets at the Employer’s head office located on the XXXXXXXXXX Reserve at least once a month, or at one of the XXXXXXXXXX First Nations reserves. In those meetings, updates are received from the Employer about various portfolio and governance issues and direction is given to the Employer.
• Funding for treaty initiatives is received by the Employer from Crown-Indigenous Relations and Northern Affairs Canada and/or Indigenous Services Canada.
• The majority of the Employer’s board of directors’ meetings take place on a reserve.
• The Employer currently has two offices located on-reserve and plans to move one, its head office, off-reserve as there is inadequate office space available on the XXXXXXXXXX Reserve.
• Despite the head office relocation, the majority of board of directors’ meetings will continue to take place on-reserve, either in person from its remaining on-reserve office or virtually with board members participating from on-reserve offices where they live.

It is your view that Guideline 4 will apply since the Employer will continue to be resident on a reserve, is controlled by First Nations that have reserves, and the employment duties of the Employees are in connection with the Employer’s non-commercial activities which directly improve the lives of the XXXXXXXXXX who for the most part live on reserves.

Our Comments:

This technical interpretation provides general comments about the provisions of the 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 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Employment income earned by an individual who is registered or entitled to be registered under the Indian Act (First Nations individual), is exempt from income tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Act, only if the income is situated on a reserve. The courts have established that determining 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 factor. This is referred to as the “connecting factors test”.

To simplify the application of the connecting factors test in common employment situations, the Canada Revenue Agency (CRA) together with First Nations organizations developed the Guidelines. The Guidelines are an administrative tool and generally apply in situations where the employment duties are fully or partially performed on a reserve or the employer or the employee are resident on a reserve.

You have asked whether Guideline 4 will apply to the employment income of Employees who live off-reserve and who will perform all their employment duties off-reserve when the Employer relocates its head office off-reserve. Under Guideline 4, all the employment income of an employee will be exempt from income tax regardless of where their employment duties are performed or where they live, if all of the following conditions are met:

a) The employer is resident on a reserve; and

b) The employer is:

i) a First Nation that has a reserve (FNR), or a tribal council representing one or more FNRs; or

ii) an organization controlled by one or more such FNRs or tribal councils (First Nations Organization), if the organization is dedicated exclusively to the social, cultural, educational, or economic development of First nations individuals 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 First Nations individuals who for the most part live on reserves.

The CRA views Guideline 4 as a generous interpretation of the connecting factors test established by the courts. Therefore, it is appropriate to restrict the application of Guideline 4 to situations that squarely fit the criteria.

Condition “a” requires that the employer be resident on a reserve. For purposes of the Guidelines, “employer is resident on a reserve” means:

“… that the reserve is the place where the central management and control over the employer organization is actually located.

Note

The central management and control of an organization is usually considered to be exercised by the group that performs the function of a board of directors of the organization. However, it may be that the real management and control of an organization is exercised by some other person or group. Generally, management and control is exercised at the principal place of business but it is recognized that this function may be legitimately exercised in a place other than the principal administrative office of the organization. It is a question of fact where the central management and control is exercised.” (footnote 1)

Provided the information submitted is accurate, and our understanding of it is correct, it appears that the Employer’s central management and control will continue to be exercised on a reserve as the board of director meetings will continue to take place on-reserve even when the head office moves off-reserve. In addition, the Employer receives its operational direction from the Assembly which holds its board meetings on-reserve. Therefore, provided the information submitted is accurate and our understanding of it is correct, it appears that the Employer will continue to be resident on a reserve when its head office moves off-reserve.

For Guideline 4 to apply, the employer must be an FNR, a tribal council representing such FNRs, or a First Nations Organization. It is our understanding that the Assembly is an unincorporated association consisting of XXXXXXXXXX and is the aggregate governance institution for the XXXXXXXXXX. Provided this information is accurate and our understanding of it is correct, the Employer appears to be a First Nations Organization (i.e., controlled by FNRs).

Further, the Employer must be exclusively dedicated to the social, cultural, educational, or economic development of First Nations individuals who for the most part live on reserves. The CRA interprets this condition to be a two-part test, first the organization must be exclusively dedicated to the social, cultural, education, or economic development of First Nations individuals and secondly, the First Nations individuals that benefit must, for the most part (that is, a majority), live on a reserve.

The fact that the Employer is a non-profit organization that receives funding from Canada for the implementation of treaty rights for XXXXXXXXXX is an indicator that its activities are non-commercial and are dedicated exclusively to the social, cultural, and economic development of First Nations individuals (i.e., XXXXXXXXXX). According to the census information for XXXXXXXXXX for 2021, the majority of First Nations individuals in XXXXXXXXXX live on reserves. (footnote 2)

In summary, provided the information submitted is accurate and our understanding of it is correct, Guideline 4 appears to apply as: the Employer appears to be controlled by FNRs; the central management and control of the Employer appears to continue to be exercised on a reserve after its head office moves off-reserve (i.e., Employer will be resident on a reserve), and the Employer’s non-commercial activities are dedicated exclusively to the social, cultural, and economic development of First Nations individuals (i.e., XXXXXXXXXX) who for the most part live on reserves. Consequently, the employment income related to the Employees’ employment duties performed in connection with those non-commercial activities would usually be exempt from tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Act. However, as noted above, this technical interpretation does not confirm the income tax treatment of the employment income earned by the Employees but is intended to assist you in making that determination.

We trust our comments will be of assistance.

Yours truly,

Ms. Nerill Thomas-Wilkinson, CPA, CA

Manager
Non-Profit Organizations and Indigenous Issues Section
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Indian Act Exemption for Employment Income Guidelines - Canada.ca (https://www.canada.ca/en/revenue-agency/services/indigenous-peoples/indian-act-exemption-employment-income-guidelines.html)

2 Focus on Geography Series, 2021 Census - XXXXXXXXXX (statcan.gc.ca) XXXXXXXXXX