11 April 1994 External T.I. 9407125 - INDIANS - SALARIES PAID BY BAND

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 is taxable, in light of the fact that their salaries are paid for by the band?

Position TAKEN:

taxable

Reasons FOR POSITION TAKEN: The band is not the employer. It is paying the salaries of native employees of the school board to defray the portion of the operating costs relating to the Indian students attending a school.

										5-940712
XXXXXXXXXX 					C.Chouinard

Attention: XXXXXXXXXX

April 11, 1994

Dear Sir:

Re: Taxation of Employment Income Received by Status Indians

We are writing in response to your memorandum of February 23, 1994 received by the Payroll Deductions Division, which was forwarded to us for reply.

XXXXXXXXXX

Our Comments

The Department's position on the taxation of income earned by Indians was, until 1983, outlined in Interpretation Bulletin IT-62. With respect to employment income, the Interpretation Bulletin states that if the employment duties were performed on a reserve, the employment income is tax-exempt.

In 1983, the Supreme Court of Canada in the Nowegijick 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. In order to exempt such income from tax, a Remission Order was put in place.

However, in 1992, the Supreme Court of Canada, in the Williams (92 DTC 6320) case, rejected the situs of the employer test developed by the Court in the Nowegijick case. The Court adopted instead a test that requires an analysis of all the relevant factors that connect the income to a location on or off the reserve in order to determine if an Indian is taxable with respect to that income.

After analyzing the Williams case and receiving input from the Indian community, the Department developed guidelines which explain the application of the tax exemption relating to an Indian's employment income. The goal of these guidelines is to clarify which types of employment situations qualify for the Indian tax exemption. We are enclosing a copy of the guidelines which were issued on December 15, 1993 for your information.

You will note from Guideline 2 that, where the Indian performs his or her duties off a reserve, the employment income of the Indian is tax-exempt only if the employer is resident on a reserve and 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. The employment income earned by an Indian off a reserve will also be tax-exempt where 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 and the employment duties are part of the non-commercial activities of the band, council or organization.

Presumably, the Board (not unlike other school boards) carries out its mandate through funding received from several sources such as municipal taxes, tuition fees from persons not paying taxes in the Board's jurisdiction and provincial and federal grants. Our understanding of the arrangements entered into under Tuition Agreements is that they are intended to defray the portion of the operating costs relating to Indian students attending a school. The fact that the Board has been receiving a portion of its funding from the Band does not alter the fact that the Indian employees have been and continue to be paid from a pooling of funds, received from an employer (the Board) who is situated off the reserve. Furthermore, there is nothing in the few clauses of the Tuition Agreement which you have reproduced in your memorandum which indicate that the Board has been or is presently acting as bare trustee for the Band. Accordingly, we are of the view that the employment income earned by the Indian employees is not presently, nor has it ever been, tax-exempt, since the employer (the Board) is not resident on a reserve, nor are the employment duties performed on the reserve.

Should you have further questions, we suggest you contact Mr. Brian Dawe, Director of the Sudbury District Office, at 705-671-0590.

We trust that these comments will be of assistance.

Yours truly,

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

Encl.

cc. Rick Owen, Client Assistance