11 February 2025 External T.I. 2024-1045391E5 - Indian Act tax exemption and 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: Do any of the Indian Act Exemption for Employment Income Guidelines apply to the employment income of an employee who lives on reserve and, pursuant to a work arrangement, is required to perform more than 50% of their duties from their on-reserve home office?

Position: Yes.

Reasons: The conditions for Guideline 3 appear to be met.

XXXXXXXXXX									2024-104539
M. Gauthier

February 11, 2025

Dear XXXXXXXXXX:

Re: Indian Act tax exemption and employment income

This is in reply to your question posed during our meeting (XXXXXXXXXX/Mahendran/Gauthier) on December 2, 2024. You asked whether the employment income of an employee of the XXXXXXXXXX (Employer), who works from home on a reserve, would be exempt from income tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act (Act). You indicated that the employee is registered under the Indian Act (Employee), lives on a reserve, and works a minimum of three days per week from their on-reserve home office under a work arrangement with their Employer.

Please note that the documents you submitted subsequent to our meeting were not considered in our comments below as they contain some information that is different from the scenario you described during our meeting. If you would like our views on the scenario contained in the documents, we would be pleased to look into it, at your request.

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 (footnote 1) (Guidelines). There are four Guidelines, and they only apply to employees who are First Nations individuals.

Guidelines 2 and 4 apply where the employer is resident on a reserve. Based on our understanding of the information discussed, the Employer does not appear to be resident on a reserve. Therefore, Guidelines 2 and 4 do not apply to the Employee’s employment situation.

Under Guideline 1, when at least 90% of a First Nations individual’s employment duties are performed on a reserve, all their income from that employment will usually be exempt from income tax. The information discussed indicated that the Employee will perform less than 90% of their employment duties on a reserve and as a result, Guideline 1 would not apply to their employment situation. When less than 90% but more than an incidental proportion of a First Nations individual’s employment duties are performed on a reserve, and none of the other Guidelines apply, the exemption is prorated and only the portion of the income related to the duties that are performed on a reserve will be exempt (the proration rule).

Under Guideline 3, all the employment income of a First Nations individual is usually exempt from income tax if more than 50% of their employment duties are performed on a reserve and either their employer is resident on a reserve or the individual lives on a reserve.

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 situated on a reserve and 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. Although an arrangement may be voluntary, once an employer and an employee have entered into a formal hybrid work arrangement, the employee would 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.

For purposes of the Guidelines, a First Nations individual is considered to live on a reserve if they live “on the reserve in a domestic establishment that is his or her principal place of residence and that is the centre of his or her daily routine” (footnote 2) .

You stated that the Employee lives on reserve and is required to work a minimum of three days per week from their on-reserve home office under a work arrangement agreed to with their Employer. Since the Employee will likely perform more than 50% of their duties on a reserve (that is, three out of five days), Guideline 3 will likely apply to the employment situation of the Employee provided that the Employee does in fact live on a reserve.

If the Employee’s circumstances change such that they cease living on-reserve or they perform less than 50% but more than an incidental proportion of their duties on a reserve, the proration rule described above may apply. Under this rule, the exemption will apply only to the portion of income that is related to duties performed on a reserve.

For your information, every person making a payment of salary or wages or other remuneration (i.e., employment income) is required to withhold income tax under subsection 153(1) of the Act. However, if an employee’s employment income is exempt from income tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Act, then the employer is not required to withhold income tax from that employment income. Form TD1-IN may be used by employers to determine the appropriate income tax withholdings for their employees. This form should be completed by the employer and the employee. For more information on the Employer’s payroll obligations, go to Payments to First Nations workers (footnote 3) .

We trust that these comments will be of assistance.

Yours truly,

Ms. Nerill Thomas-Wilkinson, CPA, CA

Manager
Non-Profit Organizations and Indigenous Issues
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 https://www.canada.ca/en/revenue-agency/services/indigenous-peoples/indian-act-exemption-employment-income-guidelines.html

2 Ibid.

3 https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/payroll-deductions-contributions/payments-first-nations.html