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.
February 2, 1994
Vancouver District Office Head Office
Public Affairs Division Rulings Directorate
957-8953
Attention: David Cowie
940073
Taxation of Status Indian
This is in reply to your fax of January 12, 1994, concerning the employment income of
XXXXXXXXXX
The taxpayer's representative, XXXXXXXXXX states that his sales are made primarily to native customers on the reserve. He has also indicated that the sales contracts are signed on the reserve and payment is made on the reserve.
In a letter dated September 27, 1993, to the Department from the taxpayer's employer, the following statement was made:
XXXXXXXXXX
In your T2020's there are statements from two other Departmental officers as follows:
"...appears final paperwork done on reserve to avoid PST + GST... and income tax..." and
"...it would appear client is delivering XXXXXXXXXX to reserve where contract is signed and payment made (mainly to avoid PST/GST) and that probably less than 10% of...work is done on reserve..."
You have requested our opinion on this case.
We would agree with your views that the main purpose of finalizing the sales on the reserve is to avoid GST, PST and income tax.
The Department's position on the taxation of income of Indians was, until 1983, outlined in IT-62. The IT states that the purpose of the exemption in the Indian Act is not to tax an Indian on the income the Indian earns on a reserve. For employment income, the IT states that if the employment duties are performed on a reserve, the employment income is tax exempt.
In 1983, the S.C.C. in the Nowegigick case (83 DTC 5041), determined that as employment income was a simple debt, the situs of the employer determined whether employment income of an Indian was tax exempt. Accordingly, if an employer resided on a reserve, the employment income of an Indian from that employer was tax exempt regardless of where the employment duties were performed. This decision implied that Indians working on a reserve for an employer situated off a reserve would be taxable, which was contrary to long existing practice. As a result, the "Indian Remission Order" was established.
The Indian Remission Order P.C. 1988-787 was effective for 1983 and was renewed each year up to and including the 1992 taxation year. It remitted tax, interest and penalties payable by an Indian on employment income earned on a reserve where the employer was located off a reserve, as well as retirement allowances and pension income in respect of exempt income and training allowances paid to an Indian by a government if the Indian resided on a reserve. This remission order was not renewed after 1992 because in the Department's view all this income will now be exempt under the Indian Act, as a result of the decision in Glen Williams v The Queen, (92 DTC 6320), a case dealing with unemployment insurance benefits where it was decided that the benefits were exempt from tax since the qualifying income that gave rise to the benefits was exempt from tax.
The decision in the Williams case rejected the situs of the employer test as the only test to establish that a status Indian was tax exempt in respect of a particular type of income. Instead, the S.C.C. recommended an analysis of all the relevant factors that connect the income to a location on or off the reserve to be used to determine if a status Indian is taxable with respect to that income. As a result, the Indian Income Tax Remission Order P.C. 1993-523 was put in place 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 Williams interpretation. With respect to employment income, this Remission Order will be extended until the end of 1994 for arrangements already in place on December 31, 1993.
Following the decision in the Williams 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 DETAILED GUIDELINES". These guidelines were released on December 15, 1993. A copy of these guidelines was attached to a letter sent by the Taxation Programs Branch to all District Offices, Processing Centres and the International Tax Office on December 20, 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%.
In our view, based on the information provided, it would appear that less than 10% of all of the taxpayer's employment duties are performed on the reserve. Consequently, all of his employment income would be taxable.
R. Albert
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
cc. R. Owen, Client Assistance Directorate
R. Cousineau, Source Deductions Division
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© Her Majesty the Queen in Right of Canada, 1994
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© Sa Majesté la Reine du Chef du Canada, 1994
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