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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
December 15, 1993
RE: APPLICATION OF THE INDIAN ACT TAX EXEMPTION
I am writing further to the letter issued by this
department on December 29, 1992, concerning the Supreme Court
of Canada's decision in Glenn Williams v. The Queen,
92 DTC 6320.
One change resulting from Williams was that
Unemployment Insurance benefits received by Indians are now
tax-exempt if they are based on employment income which itself
was exempt. A remission order was put in place to refund
taxes paid on such benefits back to 1985.
Although Williams dealt primarily with the
taxation of Unemployment Insurance benefits, it also discussed
factors to consider in determining if an Indian's income was
situated on a reserve and thus tax-exempt. In Williams,
the Court ruled that to determine if an Indian's income was
situated on a reserve, one must look at all factors connecting
the income to a reserve.
The Department recognized that some individuals and
organizations, who had arranged their affairs on the basis of
previous court decisions, could be adversely affected by the
application of the Williams decision. To allow for a
period of transition and provide the Department time to assess
the scope of any negative impacts of the case, the Government
introduced a remission order to extend the status quo until
December 31, 1993.
During 1993, this department received extensive input
from the Indian community in the form of written submissions
and at a series of meetings held across Canada. This led to a
good understanding of the types of employment income situations
which exist and which could be impacted upon by the Williams
decision.
As a result of this input and a thorough analysis of
the case, the attached guidelines, which explain the application
of the tax exemption relating to an Indian's employment income,
were developed. The goal of these guidelines is to clarify which
types of employment situations qualify for the Indian tax
exemption.
These guidelines do not relate to a change in tax policy.
They deal with the administration of the exemption set out in the
Indian Act following this Supreme Court decision.
In developing these guidelines, the Department had to
bear in mind that we are guided by the decisions of the courts
in administering and interpreting the provisions of the
Income Tax Act. The approach laid down by the Supreme
Court in Williams requires the examination of all factors
connecting income to a reserve to determine if the income was
located there and thus is tax-exempt.
For example, in the case of non-commercial activities
of a band or tribal council representing Indians on a reserve or
an organization controlled by one or more of these entities and
dedicated to the social, political, economic or cultural
development of those Indians which is resident on a reserve,
it is reasonable to conclude that there is sufficient connection
to a reserve to warrant an exemption. This would be the case
even if the Indians are employed off a reserve by the entity.
On the other hand, non-reserve based Indians, who are
involved in commercial activities off reserve on behalf of one
of the above entities or whose services are contracted to
employers located off a reserve through an employment agency
resident on a reserve, do not meet the test for exemption as
there are not sufficient factors connecting this type of
employment income to a reserve.
There may be other circumstances which are not covered
by these guidelines and they will have to be dealt with on a
case-by-case basis. A fair and liberal approach was taken in
developing the following guidelines.
The guidelines provide that the tax exemption will
apply in the following employment situations:
1) Where the duties are performed on a reserve;
2) Where the duties are performed primarily on a reserve
and either the Indian lives on a reserve or the employer
is resident there; 3) Where the duties are performed off reserve but the
Indian lives on a reserve and the employer is resident
on a reserve; and 4) Where the Indian is an employee of a band, tribal
council or organization described above. In each of these cases, sufficient connection exists to a
reserve to locate the income there and grant the tax exemption.
As these guidelines were only just released, the
Government will be extending the transition period to
December 31, 1994, to allow those who may be negatively affected
sufficient time to become aware of the implications of the
guidelines and to rearrange their affairs if necessary. This
extended transition period will only apply to arrangements
already in place.
I would like to request your assistance in helping us
ensure that your members are made aware of these guidelines.
Further information and additional copies of the guidelines may
be obtained by writing or calling the nearest District Taxation
Office or Taxation Centre. A list of these offices is attached
for your information.
Although these guidelines were developed after
receiving extensive input from the Indian community in the form
of written submissions and from a series of visits across Canada,
plus a thorough analysis of the case, I welcome your comments
concerning them. If situations arise which do not fit within
the examples listed in the guidelines, we will be pleased to
receive your representations in that regard so that they may be
given due consideration. I would appreciate receiving any comments
you may have by March 31, 1994.
Yours sincerely,
Denis Lefebvre
Assistant Deputy Minister
Legislative and
Intergovernmental
Affairs Branch
Attachments
December 15, 1993
INDIAN ACT EXEMPTION
FOR EMPLOYMENT INCOME
DETAILED GUIDELINES
TABLE OF CONTENTS
INTRODUCTION PAGE 1
GUIDELINE 1 PAGE 3
PRORATION RULES PAGE 4
GUIDELINE 2 PAGE 5
GUIDELINE 3 PAGE 7
GUIDELINE 4 PAGE 8
MEANING OF TERMS USED PAGE 11
INTRODUCTION
The decision of the Supreme Court of Canada in the Glenn Williams case, 92 DTC 6320, required the Department to reconsider its interpretation of the scope of the exemption from income taxation enjoyed under the Indian Act by Indians. The case decided that unemployment insurance benefits received in respect of employment income that was exempt from taxation were also exempt from taxation.
In order to reach that decision, the Court had to conclude that the situs of the debtor (being on a reserve) is not the sole factor to be considered in exempting income from taxation since unemployment insurance benefits are not paid from a reserve. Rather the Court indicated that it is more appropriate to weigh all the factors which link the income of an Indian with a reserve with a view to meeting the purpose of section 87 of the Indian Act which is to "preserve the entitlements of Indians to their reserve lands and to ensure that the use of their property on their reserve land was not eroded by the ability of governments to tax, or creditors to seize."
Indian people who deal with property or earn income in the commercial mainstream outside the lands reserved for their use are taxable to the same extent other Canadians would be in the same circumstances. However, in cases where there are sufficient "connecting factors" linking income of an Indian to a location on a reserve, section 87 of the Indian Act will apply to exempt that income from taxation.
Section 87 of the Indian Act exempts from taxation the personal property of an Indian situated on a reserve. The Courts have determined that, for the purposes of section 87 of the Indian Act, employment income is personal property. In the case of employment income earned by an Indian, therefore, what must be determined is whether the employment income is situated on a reserve. The Department, after receiving representations from interested Indian groups and individuals, has identified a number of connecting factors which can be used to indicate whether employment income is situated on a reserve. With a view to assisting the Indian community, the Department has developed the following guidelines, incorporating the various relevant connecting factors, which describe the situations considered by the Department to be covered by section 87 of the Indian Act. This is intended to be a fair and liberal interpretation of that section.
It should be noted that there may be unusual or exceptional circumstances where, when applying all the connecting factors to the particular facts:
(i) the income may not be taxable even though it
does not fall within one of these guidelines; or
(ii) the income may be taxable even though it
appears to fall within one of these
guidelines.
GUIDELINE 1
Employment income of an Indian for duties performed on a reserve will be exempt from income tax.
Guideline 1, Examples:
Examples where exempt:
- Mr. A works as a mechanic for an automobile
repair shop, performing his duties in a
garage located on a reserve; the wages he
receives are exempt because the duties are
performed on a reserve. - Ms B works for a business located on a
reserve; her duties include a daily drive
into a nearby town, where she does the
banking for the business and picks up the
mail and supplies for the business; the wages
she receives are exempt because, although she
incidentally leaves the reserve in the course
of carrying out her duties, in substance she
works on the reserve.
Example where NOT exempt:
- Mr. C works for a logging company that is not
resident on a reserve, cutting trees under
license on provincial Crown land; the wages
he receives are taxable because the land does
not form part of a reserve (Note: Mr. C
lives on a reserve, but this factor alone is
not sufficient to connect the income to a
location on a reserve.)
PRORATION RULES
Where a portion of the employment income could be viewed as exempt because employment duties related to that portion are performed on a reserve, and the off reserve portion of the income is not otherwise exempt by virtue of the application of the other guidelines, the Department will view the exemption as applying as follows:
a) In a case where substantially all of the
employment duties are performed on a reserve,
the exemption applies to the whole of the
employment income; b) In a case where substantially all of the
employment duties are not performed on a
reserve, the whole of the employment income
will be taxable; and c) In any other case, the employment income is
to be prorated between the duties performed
on a reserve and the duties not performed on
a reserve, with the exemption applying to the
portion of the income related to the duties
performed on the reserve.
GUIDELINE 2
Employment income of an Indian for duties performed off a reserve will normally be exempt from income tax where
a) the employer is resident on a reserve, and
b) the Indian lives on a reserve,
except where it can reasonably be considered that one of the main purposes for the existence of the employment relationship is to establish a connecting factor between the income in question and a reserve.
Guideline 2, Examples:
Examples where exempt:
- Mrs. D works for a logging company, which is
a business carried on by a corporation
resident on a reserve; Mrs. D also lives on
a reserve, but her duties are performed at
lumber camps which are located off the
reserve; her employment income is exempt from
income tax because the place where she lives
and the residence of her employer are factors
connecting her income to a reserve. - Mr. E is a construction worker, employed by a
construction company that is resident on a
reserve to work on building sites that are
not located on a reserve. Mr. E lives on a
reserve, apart from short periods each year
when he lives near the construction sites.
When away from the reserve, he retains his
residence on the reserve, where his family
lives. Mr. E is exempt from income tax on
his employment income because the place where
he lives and the residence of his employer
are factors connecting his employment income
to a reserve.
Examples where NOT exempt:
- Ms F lives on a reserve and works as an
accountant at the head office of a bank,
located off-reserve in a nearby city; the
bank maintains a branch on Ms F's reserve and
arranges for her to be paid at that branch;
Ms F is taxable on her employment income
because the only factor linking her
employment income to a reserve is her
residence, which without other substantial
connecting factors does not result in
exemption. Payment on the reserve is viewed
as a connecting factor of relatively little
weight. - Mr. G is a construction worker, employed by a
corporation the business of which is to make
employees available to other employers (an
"employment agency") that is situated on a
reserve, to work for other employers, that
are not situated on a reserve, on building
sites not located on a reserve. Mr. G lives
on a reserve. Mr. G is taxable on his
employment income because the only
substantive factor connecting his employment
income to a reserve is his residence which,
by itself, is not sufficient to bring the
employment income within the exemption. The
residence of the employment agency on the
reserve is not relevant because it can
reasonably be considered that one of the main
purposes behind the use of the employment
agency is to establish a connecting factor
between the income in question and a reserve.
GUIDELINE 3
Employment income of an Indian for duties performed off a reserve will normally be exempt from income tax where
a) the duties of the employment are principally
performed on a reserve, and
b) the employer is resident on a reserve, or
c) the Indian lives on a reserve,
except where it can reasonably be considered that one of the main purposes for the existence of the employment relationship is to establish a connecting factor between the income in question and a reserve.
Guideline 3, Examples:
Example where exempt:
- Ms H lives on a reserve and works as a
policewoman for an off-reserve employer; more
than one-half of her duties are performed on
reserve, and she has an additional connecting
factor in that she lives on the reserve, so
she is exempt on the whole of the employment
income.
Example where NOT exempt:
- Ms I lives off-reserve in a town where she
works in a restaurant owned by a corporation
resident on a reserve; once a week, she
drives to the reserve to pick up the pay
cheques for the restaurant staff; she is
taxable on the whole of her employment
income, because the only factor connecting
the income to a reserve is the residence of
the employer and, without other connecting
factors, this is not sufficient to confer the
exemption.
GUIDELINE 4
Employment income of an Indian for duties performed off a reserve will normally be exempt from income tax where
a) the employer is an Indian band which has a
reserve, a tribal council representing one or
more Indian bands which have reserves, or an
Indian organization controlled by one or more
such bands or tribal councils and dedicated
exclusively to the social, cultural or
economic development of Indians who for the
most part live on reserves, b) the duties of employment are part of the non-
commercial activities of the band, council or
organization, and c) the band, council or organization is resident
on a reserve.
Guideline 4, Examples:
Examples where exempt:
- Mr. J works for the education department of a
Tribal Council at an off-reserve location
central to several reserves; Mr. J lives off
reserve and the Tribal Council is resident on
one of the reserves; Mr. J is exempt from
income tax on his employment income because
the duties he performs for the Tribal Council
are connected to the reserves served by the
Council and the employer is resident on a
reserve. - Ms K is a librarian working for a technical
training Institute operated by 5 Indian bands
at a location central to several reserves and
a very short distance from a reserve
boundary; Ms K lives off the reserve and the
administrative office of the Institute is on
a reserve. Ms K is exempt from income tax on
her employment income because the duties she
performs for the Indian organization which
employs her are connected to the reserves
served by the Indian organization and the
employer is resident on a reserve. - Mr. L works for an Indian organization
providing child and family related services
to members of a large number of bands with
reserves scattered over a large area within a
province; some of these services are provided
in the provincial capital, where Mr. L works,
and the agency's administrative office is at
an off-reserve location central to the bands
served, but the agency's directors,
consisting of the band chiefs, meet at each
reserve in rotation. Mr. L is exempt from
income tax on his employment income because
the duties he performs for the Indian
organization which employs him are connected
to the reserves served by the Indian
organization and the employer is resident on
a reserve. - Ms M works for a company, resident on a
reserve, which is owned by a Tribal Council;
the company exists to provide adequate low-
cost housing on reserves and the company's
property is for the most part on reserves,
but Ms M performs her duties at a central
location off-reserve. Ms M is exempt from
income tax on her employment income because
the duties she performs for the Indian
organization which employs her are connected
to the reserves served by the Indian
organization and the employer is resident on
a reserve. - Mr. N works for an Indian organization which
manages funds provided by the government to
assist in planning for future education needs
on reserves; his employer is resident on a
reserve, but he works at a location off
reserve. Mr. N is exempt from income tax on
his employment income because the duties he
performs for the Indian organization which
employs him are connected to the reserves
served by the Indian organization and the
employer is resident on a reserve.
Examples where NOT exempt:
- Ms O works for an Indian organization
dedicated to organizing social programs for
off-reserve Indians; the organization is
located off-reserve. Ms O is taxable on her
employment income because there are no
factors connecting that income to a location
on a reserve. - Mr. P works for a commercial building
supplies company which is owned by a Tribal
Council and is resident on a reserve; he
performs his duties off-reserve and lives
off-reserve. Mr. P is taxable on his
employment income because, although there is
one factor, the residence of the employer,
connecting the income to a reserve, this
factor by itself is not sufficient to confer
the exemption when the employer and the
employee are active in the commercial
mainstream of society.
MEANING OF TERMS USED IN THE GUIDELINES
"on a reserve" means on a reserve as defined for purposes of the Indian Act, including any settlements deemed to be reserves for purposes of the Indian Settlements Remission Order, and any other areas given similar treatment under federal legislation (for example, Category I-A lands under the Cree-Naskapi (of Quebec) Act);
"employer is resident on a reserve" means that the reserve is the place where the central management and control over the business is actually located; (note: the central management and control of an organization will normally be considered to be exercised by the group that performs the function of a Board of Directors of the organization and may be exercised in a place other than the principal administrative office of the organization);
"Indian" means an Indian as defined for the purposes of the Indian Act;
"Indian lives on the reserve" means the Indian lives on the reserve in a domestic establishment that is his or her principal place of residence and which is the centre of his or her daily routine;
"social, cultural or economic development" includes the provision of social services such as education, health care or counselling.
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© Her Majesty the Queen in Right of Canada, 1993
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© Sa Majesté la Reine du Chef du Canada, 1993
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