13 April 1994 Internal T.I. 9404597 - INDIANS - TAXATION OF 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.

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.

Principal Issues:

Whether employment income received by Indians for work performed off the reserve will be tax-exempt if their services are contracted out by an on-reserve employer to a school situated off the reserve?

Position TAKEN:

taxable

Reasons FOR POSITION TAKEN:

It can reasonably be considered that one of the main purposes for the use of an employer on the reserve is to establish a connecting factor between the income in question and a reserve and only 6% of the population lives on a reserve.

		April 13, 1994

	Edmonton District Office	Head Office
	Source Deductions	Rulings Directorate
C. Chouinard
 	Shirley Rains
		7-940459

Taxation of Employment Income Earned by Status Indians

This is further to your round trip memorandum of December 22, 1993 addressed to Rick Owen, Client Assistance Directorate, which was forwarded to us for reply.

We understand that the XXXXXXXXXX Indian Education Authority has requested your comments on their proposal to qualify Indian employees of the XXXXXXXXXX School Division for the Indian Act tax exemption. We assume that these Indians are presently taxable on the employment income they derive from their positions with the school, presumably because the employer, the XXXXXXXXXX is not resident on a reserve.

More specifically, the XXXXXXXXXX Indian Education Authority is proposing to have an unidentified employer on the reserve hire the Indians who are presently employed by the Board and contract out their services to the Board.

Our Comments

According to Guideline 2 of the Indian Act Exemption for Employment Income Detailed Guidelines (the "Guidelines"), where the duties of employment are performed entirely off a reserve, the employment income of a status Indian will be tax-exempt only if both the employer is resident on a reserve and the Indian lives on a 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.

If the XXXXXXXXXX Indian Education Authority proceeds with its proposal, the employer will become the proposed unidentified on-reserve employer. Since the employer would then be resident on a reserve, Guideline 2 could apply to exempt the Indians from taxation if they lived on a reserve. However, since the avowed objective of the XXXXXXXXXX Indian Education Authority is to qualify Indian employees of the XXXXXXXXXX School Division for the tax exemption, it is unlikely that we would exempt them on their employment income since it could reasonably be considered that one of the main purposes, if not the only one, behind the use of the unidentified on-reserve employer is to establish a connecting factor between the income in question and a reserve. Accordingly, Guideline 2 would not apply to exempt the Indians' employment income from taxation.

Guideline 4 would equally not apply, even if the proposed unidentified on-reserve employer were an Indian band, a tribal council or an Indian organization, since only 6% of the XXXXXXXXXX population lives on a reserve. Therefore, the requirement under Guideline 4 that the Indian band, tribal council or Indian organization, as the case may be, be dedicated exclusively to the social, cultural or economic development of Indians who for the most part live on reserves, would not be met.

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

cc.Pierre Boucher

A/Chief
Enquiries Programs Division
Client Assistance Directorate