16 May 1994 External T.I. 9335145 - EMPLOYMENT INCOME - STATUS INDIAN

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.

		933514
XXXXXXXXXX		B. Kerr

May 16, 1994

Dear Sir:

Re: Exempt Income for Status Indian

This is in response to your letter of November 14, 1993, sent to the Victoria District Taxation Office that was forwarded to us for reply wherein you asked us to determine whether your income will be tax exempt for the 1994 and subsequent taxation years. Our understanding of the facts are as follows:

1.You are employed by your wholly-owned corporation,
XXXXXXXXXX
which is under sub-contract to another corporation to provide your talent and services. You are the president and only employee of XXXXXXXXXX.

2.The type of services provided relate to tree falling and bucking in the logging industry.

3.The business office XXXXXXXXXX is located XXXXXXXXXX on XXXXXXXXXX Reserve XXXXXXXXXX The books and records and all equipment of the company are stored at this location.

4.You state that the employment duties are carried out at various locations which may or may not be within 100 kilometres of the reserve.

5.You have indicated that you have lived with your family on the reserve in rented premises XXXXXXXXXX for about a year.

6.In your letter you indicate "...that the following conditions were to be complied with before I could work where I am (sub-contracting):

(i) it is a pre-requisite that I have my own incorporated company with private W.C.B. coverage.

(ii) my company must supply an employee (myself) along with all the necessary tools to perform daily falling duties."

7.It is your view that your employment income should be exempt from income tax.

Our Comments

The situation described in your letter involves actual proposed transactions with identifiable taxpayers. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Taxation. However, we can offer the following general comments.

The taxation of the income of a status Indian is dependent on its source and a determination of the taxability of that particular source can only be made after a review of all the relevant facts of a particular case.

The exemption from taxation set out in the Indian Act is available only to status Indians under that Act. Therefore, as indicated in paragraph 6(d) of Interpretation Bulletin IT-62 entitled "Indians", a corporation cannot meet the definition of "Indian" in the Indian Act and its income is not exempted from tax by these provisions.

Following the decision in the Glenn Williams v. The Queen (92 DTC 6320) case and as a result of a letter issued by the Department on December 29, 1992, which was followed up with considerable input from the Indian community, the Department has developed "INDIAN ACT EXEMPTION FOR EMPLOYMENT INCOME DETAILED GUIDELINES" which were released on December 15, 1993. A copy of the guidelines are enclosed for your information. These guidelines identify four types of employment situations to which the tax exemption will apply. The guidelines state:

(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.

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.

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

The term "employer is resident on a reserve" means the reserve is the place where the central management and control over the employer organization is actually located. The central management and control of an organization is normally considered to be exercised by the group that performs the function of a Board of Directors of the organization. However, it may be that the real management and control of an organization is exercised by some other person or group. Generally, the management and control is exercised at the principal place of business but it is recognized that this function may be legitimately exercised in a place other than the principal administrative office of the organization. It is a question of fact where the central management and control is exercised. This determination would depend on a complete review of all the facts and other relevant information concerning a particular situation.

In your case if the employment duties are performed on a reserve then they would fall within guideline 1 and be tax exempt.

If they are performed off-reserve then they may fall within guideline 2. You will note that your situation appears to be similar to that of Mrs. D in the examples under guideline 2. However, if it may 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 your employment income would be excluded from guideline 2 and would be taxable. This determination would be a question of fact, which we cannot make from the information provided in your letter. In order to make this determination, we would need to examine the contents of the contract between XXXXXXXXXX and the other corporation to which your services are being subcontracted. We would need to know if this other corporation is the only client of XXXXXXXXXX or if there are other clients as well. We would also need more information about the other corporation, including whether it is resident on a reserve, who its controlling shareholders are, whether it has any of its own employees, whether it requires all of its subcontractor's to have incorporated companies with WCB coverage which are to provide it with the services of its employees and tools, and whether these types of arrangements are normal industry practice. We would also need to review your relationship with this other corporation for the taxation years prior to 1994. These questions of fact would need to be resolved by your District Office.

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 rearrange their affairs if necessary. This extended transition period will only apply to arrangements already in place on December 31, 1993. For example prior to the Williams decision, if the employer was resident on a reserve, then employment income was exempt. This fact alone will be sufficient to exempt income from taxation only until the end of 1994.

We trust that our comments will be of assistance.

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