10 February 1994 Internal T.I. 9316307 F - Indians — Taxation of Income from Various Sources

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.

February 10, 1994

Taxation of Income Earned by Status Indians

This is in reply to your memorandum of June 2, 1993 wherein you requested our comments regarding the tax treatment of income received by status Indians.

We understand the facts to be as follows:

XXXXXXXXXX

XXXXXXXXXX

Our Comments

1989-1991 Taxation Years

According to section 87 of the Indian Act, personal property of an Indian or band situated on a reserve is exempt from taxation. The Courts have determined that salary or the right to salary is property. Therefore, in order to resolve the issue of its taxability, we must determine whether this personal property of an Indian is situated on a reserve. This issue was considered by the Supreme Court of Canada in the Nowegijick v. TheQueen, 83 DTC 5041 case. The Court held that it is the residence of the employer which determines whether a salary is situated on a reserve.

With respect to the residence of an employer, the courts have established that the residence of a corporate employer is where its central management and control lies. As a general rule, residence is the place where the central management exercises control of the business. Central management and control of a corporation is normally the place where the directors of the corporation meet and exercise control.

From the information presented, it is likely that OPCO 1 would be considered resident on the reserve, however, more information may need to be obtained to resolve this issue. If, as we suspect, the facts support that OPCO 1 is resident on the reserve, the salary received by the taxpayer from OPCO 1 is equally situated on the reserve. However, if the taxpayer is in actuality an employee of OPCO 2 or OPCO 3 (which appears unlikely in light of our comments below), the situs of these employers will determine the tax status of his salary, regardless of the fact that the salary is received from OPCO 1.

1992-1994 Taxation Years

The Indian Income Tax Remission Order (SI/93-44) remits income tax on employment income received by Indians in 1992 and 1993 from employersresiding on a reserve. This Remission Order was made in order to give such taxpayers time to adjust to the 1992 ruling of the Supreme Court of Canada in the Glenn Williams' case. Therefore, if the employer resides on a reserve, the Remission Order will apply, regardless of whether the Indians work off or on reserve. This Remission Order will be extended until the end of 1994 for arrangements entered into before the end of 1993.

Consequently, if the taxpayer is an employee of OPCO 1, the Remission Order would apply as OPCO 1 is likely resident on the reserve. On the other hand, if the taxpayer is an employee of OPCO 2 or OPCO 3, the Remission Order may be inapplicable as it is unlikely that these employers reside on the reserve. In view of our comments below regarding the nature of the taxpayer's relationship with OPCO 2, we are of the opinion that the Remission Order would apply to the 1992 to 1994 taxation years. However, guidelines regarding employment income, issued December 15, 1993, may also apply to this income.

1992 and Subsequent Taxation Years

In 1992 and subsequent years, the Indian Act Exemption for EmploymentIncome Detailed Guidelines (the "Guidelines") will apply. According to these guidelines, since the employment duties of the taxpayer are performed entirely off the reserve, his employment income will be tax-exempt under Guideline 2 if his employer is resident on the reserve and the taxpayer lives on the reserve. However, 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, the income will not be tax-exempt.

In your opinion, the only reason for the existence of the corporation is to qualify the income derived by the taxpayer for the Indian tax exemption, since, in your view, the taxpayer is an employee of OPCO 2. This raises the question of whether, in the absence of OPCO 1, the taxpayer is an employee of OPCO 2 or an independent contractor. The determination of whether a taxpayer is a employee or an independent contractor (i.e., self- employed) is a question of fact. The Courts have established four tests to be applied in determining whether a particular contract is a contract of service or a contract for services. The four tests are as follows:

(A)     Control Test

     The objective of this test is to assess if the individual is limited or restricted under a master-servant relationship. It recognizes that in most cases, the degree of control of an employer over his or her employee is greater than that which is exercised in an independent contractor relationship. For instance, in a master- servant relationship, the master can order or require not only what is to be done, but how and when it shall be done. In contrast, an independent contractor is usually allowed to choose the manner in which the services are performed.

(B)     Integration Test

     This test acknowledges that work performed by an employee under an employment contract is done as an integral part of the business, whereas under a contract for services, his work, although done for the business, is not integrated into it, but is only accessory to it.

(C)     Economic Reality Test

     This test assesses the economic aspects of the relationship between the parties to determine whether the taxpayer is carrying on business for himself or for someone else. The objective of this test is to verify the existence of various factors of an economic nature, and, using these facts, attempt to assess the nature of the relationship. Factors to be considered in applying this test include the required investments to be made by the individual, permanency of the relationship, and the skill required by the individual.

(D)     Specified Results Test

     This test acknowledges that an independent contractor relationship usually involves the undertaking of a specific task after which the relationship ceases. Also it usually does not require that the undertaking be carried out by a particular individual. In contrast, in an employer-employee relationship, the employee makes himself or herself available to the employer to be used by the employer without reference to a specified result.

Not all of the foregoing tests will be relevant in all cases or have the same degree of importance in all cases and no single test will in all circumstances be viewed as conclusive. However, cases to date have in most instances indicated that the most important distinguishing factor is the nature of control exercised by the employer over the employee. It is necessary to review and analyze carefully the facts of the particular situation to which the above tests are to be applied, and determine whether the relationship is either one of a contract of services or a contract for services.

In light of the above-mentioned tests and based on the following facts, we are of the opinion that the taxpayer is not an employee of OPCO 2:

*      the taxpayer appears to be at liberty to provide his services to other XXXXXXXXXX and has done so in the past (i.e., OPCO 3).

*      the taxpayer is under no obligation to provide his services to OPCO 2 at any given time. He can choose or reject specific jobs at his discretion.

*      the taxpayer is not entitled to certain employee benefits provided to OPCO 2 employees.

*      the taxpayer only gets paid when his services are retained.

Thus, in the absence of OPCO 1, the taxpayer would be an independent contractor and as such he would earn business income which would most likely be tax exempt. Business income of an Indian will be tax exempt if the permanent establishment of the business is located on a reserve. In determining the location of the permanent establishment of a business, the following factors are considered:

*      the location where the business activities are carried out, viz., where employees report for work, where transactions with customers are arranged, and where the inventory is located;

*      the location of the head office; and

*      the location of the books and records.

Consequently, the income would be tax exempt whether it was earned by the taxpayer directly or through his corporation. Under the circumstances, it would be difficult to maintain that OPCO 1's sole raison d'être is to qualify the income earned for the Indian tax exemption.

As per your request, we are enclosing a copy of the Guidelines.

R. Albert for Director Business and General Division Rulings DirectorateLegislative and Intergovernmental Affairs Branch

Encl.

cc.      Rick Owen, Client Assistance