29 June 1995 External T.I. 9509215 - INDIANS - GUIDELINES 2 AND 4

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 either Guideline 2 or Guideline 4 would apply to an on-reserve corporation that employs Indians who perform their duties at a work site off reserve.

Position TAKEN:

Neither Guideline 2 nor Guideline 4 would apply.

Reasons FOR POSITION TAKEN:

In order for Guideline 2 to apply, the Indian must live on a reserve. Where employment duties are all located off reserve and returns are made to the domestic establishment on the reserve only for days off and vacations, the domestic establishment on the reserve would not be the centre of the employee's daily routine and the Indian would not be considered to be living on the reserve for purposes of the Guidelines.

Guideline 4 requires, inter alia, that the employer be an Indian band which has a reserve, or 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, if the organization is dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves. It is not clear from the facts provided whether the corporation meets the "dedicated exclusively" test.

In any event, the Guidelines provide that the tax exemption will not apply in a situation where it can reasonably be considered that one of the main reasons for the existence of an employment relationship is to establish a connecting factor between the income in question and a reserve. It is not clear whether the situation described is such a situation.

		                                     3-950921
XXXXXXXXXX	                                    C. Chouinard

Attention: XXXXXXXXXX

June 29, 1995

Dear Sir:

Re: XXXXXXXXXX

We are writing in reply to your letters of March 29 and May 8, 1995, wherein you requested our comments with respect to the tax status of employment income earned by Indians employed by the above-mentioned corporation. More specifically, you inquire whether either Guidelines 2 or 4 of the Indian Act Exemption for Employment Income Guidelines (the "Guidelines") would apply to exempt the employment income earned by these Indians.

In the situation you describe, the employer,

(the "Employer")

You indicate that the Employer is dedicated exclusively to the economic development of Indians who live on the reserve Its activities are non-commercial in nature and its main purpose is to provide the Indians with employment and job training opportunities.

XXXXXXXXXX

The Employer's head office is situated on the reserve and all of its administrative activities are carried out at its head office. All meetings of the Board of Directors and Executive Committee of the Employer are held on the reserve The Indian employees in question perform their work at a work site outside the reserve Although, the employees all reside on the reserve where they maintain their principal domestic establishments and where their spouses and children live, they sleep at the work site from Monday to Friday each week. Each weekend, they return to their residences on reserve.

Our Comments

Guideline 2 will exempt all the income of an Indian from an employment regardless of the location of the employment duties when, the employer is resident on a reserve and the Indian lives on a reserve. "On a reserve", by definition, includes XXXXXXXXXX.

It is a question of fact as to whether an organization is "resident on reserve". As stated in the Guidelines, an employer is resident on reserve if "the reserve is the place where the central management and control over the employer organization is actually located. The central management and control of an organization is usually considered to be exercised by the group that performs the function of a board of directors of the organization. However, it may be that the real management and control of an organization is exercised by some other person or group. Generally, management and control is exercised at the principal place of business but it is recognized that this function may be legitimately exercised in a place other than the principal administrative office of the organization." Where an organization asserts that it satisfies the definition because it holds its board of directors meetings on reserve, it would generally be considered to satisfy the definition where management and control over the organization is legitimately exercised during those meetings. A review of the minutes of board of directors meetings and resolutions or by-laws passed thereat would be required to conclusively resolve this question of fact and this would best be resolved by a District Office. Nevertheless, in our view, in a situation where the board of directors meet on a reserve, at which decisions are made which direct an organization's operations, such an organization would generally be considered to be resident on a reserve.

The term an "Indian lives on a reserve" as used in the Guidelines means the Indian lives on the reserve in a domestic establishment that is his or her principal place of residence and that is the centre of his or her daily routine. The fact that an Indian is absent from a reserve for short periods of time because of either the type of employment duties being performed, the distance between the reserve and the location of those duties, or both, does not necessarily mean that the Indian has taken up residence off reserve. It is a question of fact whether, in those circumstances, the Indian continues to live on a reserve. However, the longer the period of absence from the reserve, the more likely it is that the domestic establishment maintained on the reserve is not part of the daily routine of the employee. In particular, where employment duties are all located off reserve and returns are made to the domestic establishment on the reserve only for days off and vacations, the domestic establishment on the reserve would not be the centre of the employee's daily routine. Accordingly, the employee will not be considered to be resident on the reserve for purposes of the Guidelines. In our view, the employees in the situation described above would not be considered to be an Indian who lives on reserve for purposes of the Guidelines. Accordingly, they would not be exempt on their employment income under Guideline 2.

Guideline 4 requires that a) the employer be resident on a reserve; b) the employer be an Indian band which has a reserve, or 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, if the organization is dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves; and c) the duties of employment 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. These elements must all be satisfied in order for Guideline 4 to apply to exempt the income of an employee.

Although it appears from the facts provided that the Employer is resident on the reserve and that it is an Indian organization controlled by an Indian band that has a reserve (i.e., XXXXXXXXXX), it is not clear to us whether it is dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves, since its Articles of Incorporation provide that there are no restrictions on the business that the corporation may carry on. Since the Employer was incorporated under the Canada Business Corporations Act, we assume that most, if not all, of the activities it carries on are of a commercial nature and therefore, we would require evidence that the Employer carries on non-commercial activities and that the employees' duties of employment are in connection with these non-commercial activities. In our view, where commercial activities are undertaken by an organization, the fact that the organization is operated on a not-for-profit basis or to provide employment does not, in and by itself, render these activities non-commercial. In addition, we have not been provided with information upon which to conclude that the activities are carried on exclusively for the benefit of Indians who for the most part live on reserves. In our view, based on the information that you have provided, Guideline 4 would not apply to exempt the employment income earned by the Indians employed by the Employer to perform XXXXXXXXXX off the reserve.

Finally, the Guidelines provide that the tax exemption will not apply in a situation where it can reasonably be considered that one of the main reasons for the existence of an employment relationship is to establish a connecting factor between the income in question and a reserve. An example of this is an on-reserve employment agency, which contracts the services of Indians to their real off-reserve employers, only to create a connecting factor to a reserve. Given that the Indians in this situation perform their duties at an off-reserve work site, for someone other than the employer, additional information would be required to establish that this is not the kind of situation that does not meet the test for exemption.

We trust our comments will be of assistance to you.

Yours truly,

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch