29 August 2024 External T.I. 2024-1022841E5 - Indian Act Tax Exemption & Employment Income

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 employment income of a First Nations individual is situated on a reserve and exempt from income tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act.

Position: Based on the information provided, no.

Reasons: Based on the information provided, none of the Indian Act Exemption for Employment Income Guidelines apply and the connecting factors identified by the Employee are not sufficient to situate the income on a reserve.

August 29, 2024

XXXXXXXXXX								Phyllis Chiu
									2024-102284

Dear XXXXXXXXXX:

RE: Off-reserve employment and the tax exemption under section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act

This is in response to your enquiry asking whether your employment income is exempt from tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act (Act).

The following is our understanding of the information provided:

* You are registered under the Indian Act and do not live on a reserve.

* You are employed as a classroom teacher by a regional school board which is located off-reserve.

* Your employment duties are performed off-reserve at a school and solely consist of teaching Indigenous children as a XXXXXXXXXX language teacher and Indigenous support worker.

* There are no schools on the reserve so the Indigenous students who live on-reserve are only able to attend a school off-reserve and you have no choice but to teach off-reserve.

* The school where you teach is located 2.2 km from a reserve.

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 income 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 with respect to common employment situations, the Canada Revenue Agency (CRA) together with interested First Nations organizations, developed the Indian Act Exemption for Employment Income Guidelines (Guidelines) (endnote 1) . Guidelines 1 and 3 apply where the employment duties are performed on a reserve and therefore do not apply to your employment situation. Guidelines 2 and 4 apply where the employer is resident on a reserve and therefore do not apply to your employment situation either as your employer does not appear to be resident on a reserve.

However, the Guidelines are an administrative tool created to address the most common employment situations. There may be situations where there are other connecting factors that may result in employment income being treated differently than under the Guidelines. In such situations, it is necessary to apply the connecting factors test as established by the courts.

The courts have established that the weight assigned to each connecting factor is determined by considering the purpose of the exemption, the type of property in question, and the nature of the taxation of the property. The weight assigned by the courts to each of these factors has varied according to the facts of each particular case.

Connecting factors that have been considered and given weight by the courts in cases involving employment income include: the residence of the employer; the residence of the employee; and the nature, location, and special circumstances of the work performed by the employee.

Your employer appears to be resident off-reserve and you are resident off-reserve, so these factors do not to situate your employment income on a reserve. The information you provided suggests you believe that the “nature, location, and special circumstances of the work performed” factor may be relevant on the following basis:

Location and special circumstances of the work performed

You stated that there are no schools on the reserve so the Indigenous students who live on-reserve are only able to attend a school off-reserve and you have no choice but to teach off-reserve, and argue this as a basis to situate your employment income on a reserve. However, this argument has not been accepted by the courts as a significant connecting factor to situate employment income on a reserve.

You also indicated that the school is located 2.2 km from the reserve. However, simply working in close proximity to a reserve is not, in and of itself, a significant connecting factor to situate your employment income on a reserve. Working near the reserve is not working on the reserve.

Nature of work performed

You stated that your work as a XXXXXXXXXX language teacher and Indigenous support worker is solely provided to Indigenous children who live on-reserve. This suggests that your work may benefit reserves. However, the courts have concluded that benefitting a reserve is not in and of itself sufficient to situate the income on a reserve because it has nothing to do with the purpose of the Indian Act tax exemption, which is to prevent property of First Nations individuals on reserves from being eroded by taxation.

In summary, none of the Guidelines apply to your employment situation and the connecting factors you identified and discussed above, do not situate your employment income on a reserve. Therefore, absent the identification of additional connecting factors, the employment income related to your employment duties performed off-reserve is not situated on a reserve and is not exempt from tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Act.

We trust these 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

ENDNOTES

1 https://www.canada.ca/en/revenue-agency/services/indigenous-peoples/indian-act-exemption-employment-income-guidelines.html