4 March 1993 Income Tax Severed Letter 9306345 - Indians—Connecting Factors

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.

930634
XXXXXXXXXX J.D. Brooks
(613) 957-2103

Attention: XXXXXXXXXX

March 4, 1993

Dear Sirs:

This is further to your telephone conversation of March 2, 1993 (Wheeler/XXXXXXXXXX). You requested more information regarding the Department's views on the application of the Indian Act exemption as a result of the Supreme Court of Canada's decision in the Glenn Williams [[1992] 1 C.T.C. 225] case. The following outlines the Department's present position, some of which was stated in a letter issued on December 29, 1992 by Assistant Deputy Minister, Denis Lefebvre. A key purpose of Mr. Lefebvre's letter was to inform the Indian community that unemployment insurance benefits received in respect of employment income exempt from taxation (personal property of an Indian on a reserve) were also exempt from taxation.

Of course, 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".

With a view to fairness, tax paid or payable on such unemployment insurance benefits received in taxation year 1985 or later will be refunded.

The Department must now identify the connecting factors which will determine whether the income of an Indian is exempt from taxation. We have every intention of adopting a fair and liberal interpretation that will respect the purpose of section 87 of the Indian Act. This is a difficult task for we may not be aware of all the factors.

With a view to assisting the Indian community, the Department will issue guidelines that will describe the situations where the exemption applies. For instance it has already been determined that the exemption will apply to:

• • employment income for duties performed entirely on a reserve;
• • employment income for duties performed entirely off a reserve where the employer resides on a reserve and the Indian lives on the reserve;
• • employment income for duties, a substantial amount of which are performed on a reserve and either the employer is located on the reserve, or the Indian lives on the reserve; and,
• • unemployment, pension and retiring benefits received in respect of exempt employment income.

Of course the Department remains of the view that it is appropriate to prorate the exemption in cases where duties are performed both on and off a reserve.

We appreciate however, that there may be other situations where the income is linked to a reserve in a manner that warrants a tax exemption. In developing the guidelines, the Department will anticipate as many of those situations as possible and the assistance of interested parties would be appreciated, for they may be aware of other connecting factors. The guidelines will be published as soon as possible and situations not covered by the guidelines will have to be dealt with on a case by case basis.

As you are no doubt aware, a remission order will be passed to ensure that no one will be adversely affected by the Williams decision prior to 1994.

As you can see, the December 29 letter is not about a new policy concerning the taxation of Indians. It deals only with information regarding the administration of the Income Tax Act following a court decision. This is not a new practice. There have been many court decisions over the years clarifying the meaning of section 87 of the Indian Act and the Department has always been guided by such decisions.

We trust these comments will be of assistance.

Yours truly,
E. Wheeler
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch