17 January 1995 Ministerial Letter 9500788 - INDIAN EMPLOYMENT INCOME EXEMPTION WILLIAMS

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.

MINISTER'S OFFICE(2)
DM'S OFFICE (2)
ADM'S OFFICE(3)

RETURN TO RULINGS, ROOM 303, MET. BLDG.

AUTHOR
SUBJECT OR CORPORATE FILE

January 17, 1995

XXXXXXXXXX

Dear XXXXXXXXXX:

I am replying to your letter of December 16, 1994, in which you made representations on behalf of the employees of the XXXXXXXXXX concerning the Indian Act Exemption for Employment Income Guidelines (the "Guidelines").

You feel that this Department is relying on the Williams case as a basis to alter the application of the tax exemption found in section 87 of the Indian Act.

By virtue of section 87 of the Indian Act, the following property is exempt from taxation, namely:

a)the interest of an Indian or a Band in a reserve or surrendered lands; and

b)the personal property of an Indian or Band situated on a reserve.

No Indian or Band is subject to taxation in respect of the ownership, occupation, possession or use of any property mentioned in paragraph a) or b) or is otherwise subject to taxation in respect of any such property. In the context of the exemption provided by the Indian Act, property includes income.

Prior to the Williams case, direction was provided by the Supreme Court of Canada in the Nowegijick case when it found that the situs of the debtor determined whether income would be exempt from taxation. In Williams, the Court rejected the situs of the debtor test as the sole test for determining whether or not a particular property was on a reserve, saying that "any overly rigid test which identified one or two factors as having controlling force ... would be open to manipulation and abuse." Instead, the Court recommended the following approach:

(a)analyze the matter in terms of categories of property and types of taxation;

(b)identify the various connecting factors (i.e. factors connecting the property to a location on or off a reserve) which are potentially relevant; and

(c)determine the weight to be given to the connecting factors in light of the purpose of the exemption under the Indian Act, the type of property in issue, and the nature of taxation of the property.

Thus, the Williams case requires the Department to adopt an approach different than it formerly used. The Guidelines follow the guidance provided in Williams.

You reached the conclusion that the employees of XXXXXXXXXX do not fit within the four Guidelines and thus you made representation as to why these employees should be entitled to a tax exemption on their employment income on the basis of section 87 of the Indian Act.

You objected that the Guidelines place a great deal of emphasis on the residency of Indians. However, as you can see from the words of section 87 of the Indian Act, it is the personal property of an Indian or Band situated on a reserve which is exempt from taxation. There must be sufficient connection of income to a reserve in order for the income to be exempt. Only Guidelines 2 and 3 consider the residence of the Indian. Although residency is insufficient in itself to connect employment income to the reserve, when combined with other factors it can result in tax exemption. Guideline 1 will exempt employment income when the employment duties are performed on reserve even though the Indian may not live on reserve. Guideline 4 is another situation in which an Indian's employment income may be exempt even though the Indian does not live on reserve.

Regarding residency, you pointed out that at least some Indians who have only recently been recognized as status Indians are not able to move onto a reserve due to housing limitations. You also stated that, for a range of reasons, most of your clients could not consider returning to a reserve. It was your suggestion that the use of a "residency analysis" by the Department could take into consideration these facts. Although there may be valid reasons for Indians not living on reserve, one cannot overlook the fact that it is the property of an Indian situated on a reserve which is exempt from taxation. Residency is a question of fact and this may entail an analysis to determine where an individual resides. However, the rationale for living in a certain place is not sufficient to enable the place of residence to be considered to be somewhere other than where it actually is.

You observed that the fourth Guideline recognizes Tribal Councils and you requested that XXXXXXXXXX be similarly recognized on the grounds that XXXXXXXXXX represents the very same people who are represented by the Bands and Tribal Councils in your area. However, a reason for including Bands or Tribal Councils of Bands in the fourth Guideline is that Bands typically have reserves. Thus, when applying the guidance provided by the Williams case that one needs to consider and weigh the factors which connect an Indian's income to a reserve, the fact that a Band has a reserve is considered significant. Guideline 4 extends further to also apply to organizations under the control of a Band on a reserve or a Tribal Council of such Bands. Other organizations which are not so controlled are not generally as substantially connected to a reserve. Those Tribal Councils which are included in the fourth Guideline are those which represent Bands which have reserves. If a Tribal Council represented Bands which do not have reserves, its employees would not be exempt under Guideline 4. In addition, where an organization is involved, not only must the organization be connected to a reserve by being controlled by a Band or Tribal Council, it must be dedicated exclusively to the social, cultural, educational, or economic development of Indians and those Indians must for the most part live on reserve.

You have reached the conclusion that the employees of XXXXXXXXXX do not fit within the four Guidelines. Based on the facts which you have presented, I cannot disagree with your conclusion except to point out that Guideline 1 or the Proration Rule may enable some of your employees to be fully or partially exempt, as the case may be. I would also like to point out that the Guidelines became effective January 1, 1995. They have application since that date to all employment situations, including yours, regardless of your comments that you will continue to treat your employees as tax exempt unless and until it is demonstrated otherwise to you, even though you have concluded that they fall outside the Guidelines.

I trust that I have explained the Department's position.

						Yours sincerely,

						Denis Lefebvre
						Interim Assistant Deputy Minister
						Policy and Legislation Branch

J.D. Brooks
957-2103
January 12, 1995