5 July 1995 External T.I. 9514495 - INDIANS -- EMPLOYEES -- GUIDELINE 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 the employees of 2 Indian organizations would be exempt under Guideline 4 or a modification of the guideline.

Position TAKEN:

More facts need to be known to determine whether Guideline 4 applies.

Reasons FOR POSITION TAKEN:

The application of Guideline 4 cannot be determined without knowing all of the relevant facts.

There is no present thought to revise or expand the guidelines. In applying the guidelines, there is provision for unusual circumstances but one would have to know the facts of a situation.

									951449
XXXXXXXXXX							J.D. Brooks

Attention: XXXXXXXXXX

July 5, 1995

Dear Sirs:

Re: XXXXXXXXXX

This is in response to our meeting of May 26, 1995 (XXXXXXXXXX/Albert/Brooks) in which you requested that we inform you of the documentation you should supply in order for us to be able to provide you with assurance that XXXXXXXXXX meet certain criteria specified in Guideline 4 of the Indian Act Exemption for Employment Income Guidelines. You would like to be able to advise your employees as to whether they qualify under Guideline 4 for exemption from income tax.

You would like to know what documentation you can provide in order to demonstrate that the requirement for an employer to be on reserve is met in the case of each of XXXXXXXXXX You would also like to know what documentation you can provide in order to demonstrate that the requirement for an Indian organization to be controlled by a qualifying band or tribal council is met in the case of each of XXXXXXXXXX.

The determination of the residence of an employer is a question of fact. As stated on page 10 of the Guidelines, the term "employer is resident on a reserve" means that 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 which would otherwise not be considered to be resident on reserve is asserting that it satisfies the definition because it holds its board of directors meetings on reserve, it should generally be considered to satisfy the definition where management and control over the organization is legitimately exercised during those meetings. A review of all of the facts surrounding a situation including the minutes of board of directors meetings and resolutions or by-laws passed thereat would be required to conclusively resolve this question of fact. However, in our view, if in fact the board of directors meet regularly on a reserve at which decisions are made which direct an organization's operations, such an organization would generally be considered resident on a reserve. You have not identified the location where XXXXXXXXXX carry on their business. We wish to point out that satisfaction of the residence of the employer requirement is always of some concern where the head office of an organization is located on a reserve but its main place of business is located off reserve.

The concept of control that is used in Guideline 4 is that kind of control that exists where there is power to command and direct. Where a band or tribal council is able to replace the directors of an organization, the band or tribal council could be said to control the organization. Where the organization is a corporation with share capital, control could be exercised by means of ownership of sufficient shares. With regard to XXXXXXXXXX the control of each organization is likely determinable from their by-laws.

The above addresses only two of the requirements stated in Guideline 4. For further comments which pertain to the possible eligibility of the employees of XXXXXXXXXX for tax exemption, we refer you to our letter of December 28, 1994 addressed to XXXXXXXXXX (copy attached) and our letters of March 15 and June 20, 1991 addressed to XXXXXXXXXX (copies attached).

In our meeting of May 26, 1995 we pointed out that Guideline 4 did not contemplate arrangements involving leased employees. In fact, it was envisaged that the anti-avoidance statement ("The Guidelines are not intended to apply when it can reasonably be considered that one of the main purposes for the existence of an employment relationship is to establish a connecting factor between the income in question and a reserve.") would address those leasing arrangements which attempt to establish an artificial connection of the leased employee's employment income to a reserve. We point this out because in situations where this anti-avoidance statement applies, the employment income is not considered to be connected to a reserve even though all the stated criteria of one of the Guidelines may be met. We do not have sufficient information before us to determine whether the anti-avoidance statement would apply with respect to the employment income of any Indian employed by XXXXXXXXXX.

In our meeting, you requested us to create a fifth Guideline which would exempt status Indians on the basis that they are employees of a non-profit organization that is controlled by a band that has a reserve or a tribal council of bands having reserves. We note that this would be the same as Guideline 4 except for some of the requirements being removed and thus we cannot accede to your request. We reiterate that Guideline 4 was intended to apply in limited circumstances, and that 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. Again, the fact that an employer may have a non-profit mandate does not mean that all of its employees are engaged in non-commercial activities. Even though an organization is operated without a profit motive, it may still be carrying on a commercial operation. The guidance provided by the Supreme Court of Canada in the Glenn Williams case (92 DTC 6320, (1992) 1 CTC 225) is that the Indian Act was not intended to provide Indians with an economic advantage when dealing in the commercial mainstream. It is recognized that an organization may be dedicated to the economic development of Indians and thereby enable some or all of its employees to be tax-exempt on their employment income. The extent to which an exemption would be available to the employees would depend on the facts of the situation. A commercial activity would generally entail the provision of services or the creation of a product to be provided to others for compensation. On the other hand, an example of a non-commercial activity would be a governmental or quasi-governmental activity.

In light of all the comments we have made with respect to XXXXXXXXXX it is evident to us that we cannot make a determination with respect to any of your employees except where we are fully informed of the employee's circumstances. Since you have stated that there are no more than XXXXXXXXXX employees who are presently under a lease arrangement, it does not seem to be an onerous task for you to review the facts of each specific case.

We trust that these comments will be of assistance.

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