18 October 1993 External T.I. 9317805 F - Taxation of Indian 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.

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Dear XXXXXXXXXX

RE:  Employment Income

As requested by you at our meeting in Ottawa on October 7, 1993, this is to outline our position regarding the tax treatment to be afforded employment income earned in certain circumstances. These positions will be confirmed, and the Department's views regarding employment income earned in other circumstances will be set out, in soon-to-be published guidelines.

Under section 87 of the Indian Act, an Indian's personal property on a reserve is exempt from taxation. Over the years the courts have determined that employment income is an Indian's personal property. However, it is sometimes difficult to determine when employment income is on a reserve and exempt from taxation, and when employment income is not on a reserve and taxable.

In the 1983 Nowegijick case, the Supreme Court of Canada held that the only factor to use in determining whether employment income was exempt was the location of the employer. Therefore, if an employer resided on a reserve, employment income earned by an Indian from that employer was exempt. Revenue Canada, Customs, Excise and Taxation has administered the section 87 tax exemption for Indians on this basis.

In the 1992 Glenn Williams decision, the Supreme Court reviewed the exemption, and concluded that to use "any overly rigid test which identified one or two factors as having controlling force...would be open to manipulation and abuse." The Court concluded that it would be better to look at all connecting factors to determine the relationship of employment income to a reserve.

We have reviewed the Glenn Williams decision and we have determined that the following types of employment income are exempt from taxation because of their relationship to a reserve:

-     employment income for duties performed entirely on reserve;

-     employment income for duties performed entirely off a reserve, but both the employer and employee reside on the reserve; and

-     employment income for duties that are substantially performed on a reserve, and either the employer is located on the reserve, or the Indian lives on the reserve.

If an Indian performs duties both on and off the reserve, we will prorate the exemption.

Also as a result of the Glenn Williams decision, we will not tax Unemployment Insurance benefits or pension income that an Indian receives, if these are based on non-taxable employment income.

The Supreme Court's decision affects how we apply this exemption for Indians, and Revenue Canada must administer the Income Tax Act in accordance with this ruling. However, this is not a change in policy.

As mentioned to you at our meeting, the Department is in the process of writing draft guidelines, taking into consideration the representations made to us during our discussions with various Indian organizations and other interested parties. These draft guidelines will then be circulated to the various Indian organizations and interested individuals for review and comment.

Yours sincerely,

B.W. Dath Acting Director General Rulings DirectorateLegislative and Intergovernmental Affairs Branch