1993 External T.I. 9324795 F - Employment Income - Indians

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.

XXXXXXXXXX

932479

January 14, 1994

Dear XXXXXXXXXX

RE:  Taxation of Status Indians

This is in reply to your letter of August 27, 1993 requesting information pertaining to the taxation of status Indians in the following circumstances:

1.      A status Indian residing and working on an Indian reserve, performing all and/or most of his duties on a reserve and being paid by an on-reserve employer.

2.      The conditions in 1. above remain the same except the status Indian does not reside on a reserve.

OUR COMMENTS

The 1992 decision of the Supreme Court of Canada in the Glenn Williams (92 DTC 6320) case, required the Department to reconsider its existing interpretation of the scope of the exemption from income taxation enjoyed under the Indian Act by status Indians. This does not represent a change in law or in departmental policy, but rather a re- interpretation of the existing law in light of new jurisprudence. Such an exercise is necessary after every significant court case.

BACKGROUND - TAXATION OF INDIANS

By virtue of section 87 of the Indian Act the following property is exempt from taxation, namely:

a)      the interest of an Indian or a band in a reserve or surrendered lands; and

b)      the personal property of an Indian or band situated on a reserve.

No Indian or band is subject to taxation in respect of ownership, occupation, possession or use of property mentioned in paragraphs a) or b) or is otherwise subject to taxation in respect of any such property.

The exemption from taxation set out in the Indian Act is available only to status Indians under that Act. It does not apply to other persons with some claim to aboriginal status, such as Innuit, Metis or non- status Indians.

The Department's position on the taxation of Indians was, until 1983, contained in Interpretation Bulletin IT-62. The Bulletin, which is still available, states that it is considered that the intention of the Indian Act is not to tax Indians on income earned on a reserve.

The Bulletin goes on to say that various facts and factors must be considered in determining whether or not a specific amount of income is exempt from taxation. The key factor in determining whether or not a specific item of income received by an Indian is taxable or exempt is the location where the income is earned.

Salary and wages were, in the Bulletin, considered to be earned where the services were performed. However, in 1983, the Supreme Court in the Nowegijick (83 DTC 5041) case said that employment income was a simple debt, the location of the debt determined whether the property was on a reserve or not, and the location of the debtor determined where the debt was located. Therefore, if an employer resided on a reserve, employment income earned by an Indian from that employer was exempt no matter where the services were performed.

As this implied that Indians working on a reserve for an employer sited off a reserve would now be taxable, which was not considered appropriate in policy terms, the Departments of Indian Affairs and Northern Development ("DIAND") and Finance sponsored the Indian Remission Order (the "Remission Order"). The Remission Order remitted tax on employment income earned on a reserve as well as retirement allowances and pension income in respect of exempt income and training allowances from a government when the Indian resided on a reserve.

The Remission Order was originally in effect for 1983 and has been renewed each year up to and including 1992.

THE GLENN WILLIAMS CASE

In 1992, the Supreme Court's decision in the Glenn Williams case, called into question the conclusions drawn from the earlier Nowegijick case. In the Glenn Williams case, the taxpayer's employer was located on a reserve, as were his duties of employment. After being laid-off, he received enhanced UI benefits as a result of a job creation project on a reserve. The taxpayer was assessed on the basis that the debtor with respect to the UI payments, the federal Crown, was located off a reserve.

The Court rejected the situs of the debtor test derived from the Nowegijick case as the sole test for determining whether or not a particular property was on a reserve, saying that "any overly rigid test which identified one or two factors as having controlling force ... would be open to manipulation and abuse." Instead, the Court recommended the following approach:

(a)      analyze the matter in terms of categories of property and types of taxation;

(b)      identify the various connecting factors (i.e. factors connecting the property to a location on or off a reserve) which are potentially relevant;

(c)      determine the weight to be given the connecting factors in the light of three considerations:

1.      the purpose of the exemption under the Indian Act,

2.      the type of property in issue, and

3.      the nature of taxation of the property.

SALARY AND WAGES

In Glenn Williams, the Supreme Court states that "the location of the employment must be re-examined." The Supreme Court identified the following factors as potentially relevant in determining the location of employment income:

(1)      the location of the employer,

(2)      the location where the employment duties are carried out,

(3)      the location where the salary is payable (normally the same as in (1)),

(4)      the location where it is actually paid, and

(5)      the residence of the Indian.

As a result of the Glenn Williams case, a new remission order, the Indian Income Tax Remission Order, was put in place P.C. 1993-523, to remit for taxation years 1992 and 1993 income tax on salaries and wages received by an Indian from an employer situated on a reserve, and to refund income taxes paid for taxation years 1985-91 by Indians on unemployment insurance benefits that would have been exempt as a result of the Glenn Williams interpretation.

During 1993, the Department met with several numerous parties concerning the taxation of Indians and with input from the Indian community has developed "INDIAN ACT EXEMPTION DETAILED GUIDELINES".

These guidelines were released on December 15, 1993. The Department now views the Indian Act exemption as applying to employment income as follows:

(1)      Employment income of an Indian for duties performed on a reserve will be exempt from income tax.

(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.

(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.

(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.

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, which falls under the first guideline, 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.

In calculating the time spent performing the employment duties on a reserve, travel time to and from the reserve is not included.

The meaning of some of the terms as used in the guidelines are as follows:

"Indian lives on a 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.

"principally" means 50%.

"substantially all" means 90%.

As these guidelines were only just recently 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 arrange their affairs if necessary. This extended transition period will only apply to arrangements already in place.

We trust that this is the information you require.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch