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.
December 29, 1994
XXXXXXXXXX Director HEAD OFFICE
XXXXXXXXXX District Taxation Office Rulings Directorate
B. Kerr
Attention: XXXXXXXXXX 957-8953 Communications Manager
943281
XXXXXXXXXX
This is in reply to your request of December 16, 1994 for our response to several queries raised by XXXXXXXXXX concerning the Indian Act exemption from taxation for the personal property of an Indian on a reserve. More particularly, XXXXXXXXXX is concerned with how the Indian Act Exemption for Employment Income Guidelines will apply.
1.The first query concerns Indian-owned corporations and they referred to a corporation owned by XXXXXXXXXX as an example. They question why a profit motive of any such corporation would cause its employees to fall outside the exemption under Guideline 4. They also appear to be questioning why such a company would not be exempt, presumably under paragraph 149(1)(d) of the Income Tax Act as they referred to The Pas Indian Band, as "the operations of this employer are for non-commercial activities as the profits derived are not personally benefited by the owners of the corporation, but the monies are being used for the benefit exclusively of the Indian community."
Section 87 of the Indian Act exempts from taxation the personal property of an Indian situated on a reserve and the courts have determined that for these purposes employment income is personal property. The courts have also determined that, in determining whether employment income is situated on a reserve, connecting factors must be considered. The main connecting factors have been incorporated into Guidelines 1, 2 and 3. Guideline 4 is a generous provision in that is offers exemption to Indians even where major connecting factors are not evident, that is even where the employee does not live on reserve and does not perform the employment duties on reserve.
In order for an employee of an organization which is controlled by a band or tribal council to be exempt under Guideline 4, the organization must be resident on a reserve and must be dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves; and the duties of the employment must be in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on reserves. Thus, even if an organization were found to be dedicated exclusively to, say, economic development of Indians on reserve, that fact alone would not suffice to exempt the employee's income from taxation. Also, the fact that activities may be undertaken by an organization which operates on a not-for-profit basis does not make them non-commercial activities. Each activity of an organization would need to be considered on its own merits as would the employment duties of a particular employee.
The Guidelines are a fair and liberal interpretation of the Indian Act exemption, and it would not be appropriate to expand the effect of the Guidelines by interpreting them in a very broad manner. The mere fact that all of the profits of an organization will be used to assist the Indian community is insufficient rationale to provide the employees of the organization with a tax exemption on their employment income.
The Pas Indian Band, which was referred to by XXXXXXXXXX, owns Otineka Development Corporation Limited and 72902 Manitoba Limited and these taxpayers appealed an assessment to the Tax Court of Canada, which was heard on January 28, 1994 (94 DTC 1234). In that case, it was concluded that The Pas Indian Band was a Canadian municipality within the meaning of paragraph 149(1)(d) of the Income Tax Act and thus its two subsidiaries were exempt from taxation. This case is not being accepted as a broad precedent. It should also be noted that this band had passed by-laws under both sections 81 and 83 of the Indian Act and thus had reached a stage of development which most bands have not reached.
2.The second query concerns an Indian who operates a taxi business from an off-reserve location. Presumably he also lives off reserve. He transports Indians living on reserve to an off-reserve location to receive medical services. The actual time spent on the reserve is nominal consisting of picking up and dropping off the client. Their query concerns both employees who work for the operator and for the operator as a person earning income from a business.
It should be noted that the Guidelines are only in respect of "employment income". Accordingly, they can only apply on a case by case basis to the employees of the business. They will not apply to the proprietor, as his income would constitute income from business. We have not been provided with details as to whether the operator is incorporated but we assume that he is not.
Since only a small portion of an employees duties are performed on the reserve the full exemption provided under Guideline 1 will not apply. However, the proration rule will apply to exempt the portion related to the duties performed on the reserve. Guidelines 2 and 4 will not apply since the employer is not resident on the reserve, and since it appears that less than 50% of the employment duties are performed on a reserve Guideline 3 will not apply.
With respect to the proprietor, the Department is still in the process of considering which connecting factors are appropriate for business income. However, in the meantime the comments in IT-62 concerning business income are applicable and, as stated in paragraph 6(h)(ii) of IT-62, business income is normally allocable to the permanent establishment of the business. Since the permanent establishment of this business is not on a reserve, the proprietor would not be exempt on his business income.
3.The third and fourth queries concern the development of the Guidelines. We can provide the following background on how the Guidelines were developed.
After the Supreme Court's decision in the Williams case in 1992, departmental officials examined and analyzed the potential impact of this case very closely. On December 29, 1992, we issued our initial views of the decision, and announced that a period of transition would be provided through a remission order to maintain the status quo until the end of 1993.
Throughout 1993, the Department received input from Indian organizations and individuals through a series of meetings held across Canada and in over 250 written submissions. As a result of the input received, and a thorough analysis of the Williams case, draft guidelines were developed and issue on December 15, 1993. Interested parties were invited to make additional comments by March 31, 1994. At that time, the Government extended the transition period until December 31, 1994. After considering the additional comments, the guidelines were issued in final form on June 29, 1994.
In particular, the 90% limit in Guideline 1 was included to avoid the issue of having the proration rule apply in instances of incidental duties located off reserve. In addition, some of the submissions received and considered during this process included similar comments on housing.
4.The fifth query involves a "Safe Shelter" that the XXXXXXXXXX owns and operates at an off reserve location in the town of XXXXXXXXXX The shelter provides assistance to battered individuals. However, the service is not restricted to Indians. Since it appears that all of the employment duties are performed off reserve, Guidelines 1 and 3 will not apply. Provided, that XXXXXXXXXX is in fact the employer and is resident on a reserve Guideline 2 would apply to Indian employees that live on a reserve. In order to fit within Guideline 4, inter alia, the duties of the employment must be in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on reserves. Since the services are provided to Indians that do not live on the reserve and to non-Indians this condition would not be met.
As mentioned above, the Guidelines are a fair and liberal interpretation of the Indian Act exemption, and it would not be appropriate to expand the effect of the Guidelines by interpreting them in a very broad manner.
R. Albert
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch
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