17 August 1995 Internal T.I. 9518307 - INDIANS - 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 Guideline 4 applies to exempt the employment income earned by Indians employed with the XXXXXXXXXX band from taxation.

Position TAKEN:

It does not apply.

Reasons FOR POSITION TAKEN:

The Indian band does not have a reserve and it appears its activities are carried on for the benefit of Indians who for the most part live off-reserve.

								August 17, 1995

	Edmonton Tax Services Office		HEADQUARTERS
	Communications					C. Chouinard
	Attention: Ron Quinn, Manager		957-8953

								7-951830

Tax Plan for the Use of the Indian Act
Tax Exemption by the XXXXXXXXXX Band

This is in response to your memorandum of July 10, 1995, wherein you requested our comments with respect to the above-mentioned matter.

We understand that XXXXXXXXXX letter outlines in detail the tax plan that he has devised to ensure that the employment income earned by the Indians employed by the XXXXXXXXXX band will be exempt from taxation under Guideline 4 of the Indian Act Exemption for Employment Income Guidelines (the "Guidelines"). We have reviewed XXXXXXXXXX tax plan and our comments, the numbers of which coincide with XXXXXXXXXX submission, are as follows:

1.We assume from this paragraph that the employees in question work off-reserve. However, for purposes of Guideline 4, it is irrelevant where the employees perform their duties of employment.

As regards the residence requirement in Guideline 4, 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 your office. Nevertheless, in our view, in a situation where the board of directors meets 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.

1.2Only Indian bands which have reserves qualify as employers under Guideline 4. Therefore, unless the XXXXXXXXXX reserve or some other reserve is the XXXXXXXXXX band's reserve, the XXXXXXXXXX band will not qualify under Guideline 4. An Indian band cannot qualify under Guideline 4 by merely declaring itself to be resident on another band's reserve.

In order for an Indian organization controlled by one or more Indian bands which have reserves or tribal councils representing one or more Indian bands which have reserves to qualify under Guideline 4, the organization must be dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves. It is not sufficient that the organization's activities be connected to reserves. In addition, you should ask XXXXXXXXXX to provide additional information regarding the land claim and reserve infra-structure activities, since we cannot determine whether such activities would constitute social, cultural, educational or economic development activities.

It is not clear to us what is meant by "all employer/employee relations have their locus on reserve". However, whether or not the employees work on reserve or are controlled from a reserve is irrelevant for purposes of Guideline 4.

In our view, based on the limited information provided by XXXXXXXXXX in his letter, the employment income earned by the Indian employees of the XXXXXXXXXX band and its corporations is not exempt from taxation under Guideline 4.

1.2.1For purposes of Guideline 4, where the employer is an Indian band, it must have a reserve. We understand from XXXXXXXXXX comments in this paragraph that the XXXXXXXXXX band does not have a reserve. If this is the case, Guideline 4 cannot apply to the Indians employed by the XXXXXXXXXX band. It is irrelevant whether the band is resident on a reserve if it does not have a reserve.

As indicated above, for purposes of Guideline 4, it is of no consequence where the employees perform their duties of employment.

As regards the example provided by XXXXXXXXXX of an Indian whose employment income is tax exempt, notwithstanding that the Indian works off reserve, because the employer is an Indian band or a tribal council, this example holds true only if the employer is an Indian band which has a reserve or a tribal council representing one or more Indian bands which have reserves.

2.Given the lack of information regarding the XXXXXXXXXX operation, we cannot comment on whether it would qualify as a tribal council representing one or more Indian bands which have reserves.

We have no information upon which to comment on XXXXXXXXXX assertion that the employees of the XXXXXXXXXX are exempt from taxation.

As we indicated above, in order for an employer to be resident on a reserve, the reserve must be the place where the central management and control over the employer organization is actually located. The fact that the employer's head office is on a reserve is not an indication that the employer is resident on a reserve.

3.a)XXXXXXXXXX relies upon the McNab case and the case of The Queen v. Poker et al., 94 DTC 6658 (F.C.T.D.) in support of his argument that the Indian employees of the XXXXXXXXXX band and its organizations are exempt from taxation.

In the McNab case, Ms. McNab, a status Indian was employed by the Saskatchewan Treaty Indian Women's Council whose offices were situated off reserve. In determining the situs of her employment income, the Tax Court held that, since the President of the Council resided on the reserve, the mind and management of the employer was also on reserve. The Court also relied on the fact that the taxpayer's work was with Indians and on the instructions of an employer whose sole purpose was to benefit Indians on reserves. In the end, the Court concluded that her employment income was situated on reserve and therefore exempt from taxation. In our view, the Guidelines are in keeping with the decision rendered in this case, since there were sufficient factors connecting Ms. McNab's employment income to the reserves served by her employer.

As regards the Poker case, in our view, the case simply confirms that in determining whether the employment income earned by an Indian is exempt from taxation, all of the factors connecting that income to the reserve must be considered. The Court ruled in favour of Elizabeth Ann Poker since there were sufficient factors connecting her income to the reserve, namely, the residence of her employer was on reserve, she lived on reserve and her employment was closely connected to the reserve. In terms of the Department's Guidelines, her employment income would be exempt under Guideline 2. As regards Marianne Folster, the Court held that her employment income was not exempt from taxation since the only factors connecting her income to the reserve, that is, her residence on the reserve and the nature and purpose of her employment, were not judged to be sufficient. Given that her employer was off reserve and that she also performed her duties off reserve, none of the Guidelines would have applied in her situation. Therefore, in our view, the Department's Guidelines are in keeping with the Poker case and the fact that the employer engages in activities connected to the reserve is not sufficient to connect the employment income to a reserve.

In order for Guideline 4 to apply where the employer is an Indian band, the band must not only be resident on a reserve, it must also have a reserve. In addition, the employees' duties of 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. It is not sufficient that the Indians have "communal interests in reserve lands".

b)In order to meet Guideline 4, it is not necessary that the employees work on a reserve.

c)For purposes of Guideline 4, it is not necessary that the employees live on a reserve.

d)It is not clear what "policy considerations" XXXXXXXXXX is referring to.

e)In all of the examples set out in Guideline 4, the employer is either 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, educational, or economic development of Indians who for the most part live on reserves. Unless the employer meets this description, the fact that the services provided by the employer are connected to reserves and that the employer is resident on a reserve is inconsequential as regards Guideline 4.

f)As we indicated above, in order for an employer to be resident on a reserve, the reserve must be 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 your office. Nevertheless, in our view, in a situation where the board of directors meets 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.

Based on the comments above, in our view, the only factor listed by XXXXXXXXXX in his letter which could support his view that the employer organizations are resident on a reserve is factor #11. However, as mentioned above, a review of the minutes of the board of directors and band meetings and resolutions or by-laws passed thereat would be required to conclusively resolve the question of the employers' residence.

4.It is a question of fact whether an employer organization is resident on a reserve. XXXXXXXXXX has not provided sufficient information to make this determination.

In order for an Indian organization to qualify as an employer under Guideline 4, it must be controlled by one or more Indian bands which have reserves or tribal councils representing one or more Indian bands which have reserves, and it must be dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves. We cannot determine from the limited information provided by XXXXXXXXXX whether the "band controlled NPOs/Municipal Corporations" meet this description. In order to establish that these organizations meet Guideline 4, we would require information regarding the identity of the entity or persons who control the organizations and the mandate or objects of these organizations, as well as, information as to who benefits from the services provided by these organizations. Thus, it is not sufficient to indicate that the employer organizations carry on activities for the benefit of band members, unless it can be established that the band members are Indians who for the most part live on reserves. In addition, the fact that the employer provides a worthwhile service to Indians and 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.

Since XXXXXXXXXX letter concerns the application of Guideline 4, we are not commenting upon the status of the "band corporations" under either paragraph 149(1)(l) or 149(1)(d) of the Income Tax Act (the "Act"). In any event, whether or not the "band corporations" are tax-exempt is irrelevant for purposes of Guideline 4.

5.1We do not agree with XXXXXXXXXX statement that the examples under Guideline 4 on pages 7 and 8 of the Guidelines confirm that all that is required is a close connection to a reserve and that the employer be resident on a reserve. XXXXXXXXXX seems to be ignoring the fact that, in all of those examples, the employer is a particular employer, that is, the employer is either a tribal council representing one or more Indian bands which have reserves or an Indian organization controlled by one or more Indian bands which have reserves or tribal councils representing one or more Indians bands which have reserves and dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves. In addition, we disagree with XXXXXXXXXX statement regarding urban native friendship centres and commercial ventures, since Guideline 4 is not intended to single out any particular organization.

5.2Since section 87 of the Indian Act applies to exempt from taxation the personal property of an Indian situated on a reserve, there must be sufficient connection of employment income to a reserve in order for the income to be exempt. The reason why Indian bands and tribal councils of bands were included in Guideline 4 is that bands typically have reserves. Thus, when applying the Williams case, which requires a consideration of the factors which connect an Indian's income to a reserve, the fact that a band has a reserve is considered significant. Therefore, in our view, where the employment duties are performed off reserve, it is not absurd, where the employer is an Indian band, to require that the band have a reserve.

XXXXXXXXXX indicates that "many members live and work on the reserves". If that is the case, the employment income of these employees may be tax-exempt under the other Guidelines. Whether the employer is an Indian band which has a reserve is irrelevant for purposes of the other Guidelines.

As regards XXXXXXXXXX comments concerning the application of Guideline 4, in our view, Guideline 4 is a generous interpretation of the direction provided by the Supreme Court of Canada in the Williams case and it is therefore appropriate to restrict its application to situations that fit squarely within it.

With respect to the "governance 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 Williams case is that the Indian Act was not intended to provide Indians with an economic advantage when dealing in the commercial mainstream. 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.

5.3One of the requirements of Guideline 4 is that an organization must be dedicated to the development of Indians "who for the most part live on reserves". That is, almost all of the Indians in the population served by the organization must live on reserve. Guideline 4 recognizes that there will be situations where an Indian works for an organization which is dedicated to the development of Indians on reserves and the work may require the Indian to live away from the reserve. Although the employee's residence would not be a factor which connects the Indian's employment income to the reserve, it is appropriate under the circumstances laid out in Guideline 4 to recognize a connection since the employee is working for the benefit of Indians on reserve. Although there may be valid reasons for Indians not living on reserve, if the population served by the organization was not comprised almost entirely of Indians who live on reserve, this latter connection would not exist.

5.4In our view, Guideline 4 is a generous provision in that it 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. If the requirement that Indian organizations serve Indians who for the most part live on reserves were removed from Guideline 4, in our view, there would not be sufficient factors to connect the employment income to a reserve.

5.5In Mitchell v. Peguis Indian Band (1990), 2 S.C.R. 85, the Supreme Court of Canada described the purpose of the Indian Act as being the preservation of the entitlements of Indians to their reserve lands and the prevention of their erosion through taxation, but not the conferring of a general economic benefit upon Indians. In this respect, La Forest, J. stated that:

"... one must guard against ascribing an overly broad purpose to ss. 87 and 89. These provisions are not intended to confer privileges on Indians in respect of any property they may acquire and possess, wherever situated. Rather, their purpose is simply to insulate the property interests of Indians in their reserve lands from the intrusions and interference of the larger society so as to ensure that Indians are not dispossessed of their entitlements.

Indians have a plenary entitlement to their treaty property; it is owed to them qua Indians. Personal property acquired by Indians in normal business dealings is clearly different; it is simply property anyone else might have acquired, and I can see no reason why in those circumstances Indians should not be treated the same as other people." "Property of that nature will only be protected once it can be established that it is situated on a reserve."

LaForest, J. concluded that:

"... Indians, when engaging in the cut and thrust of business dealings in the commercial mainstream are under no illusions that they can expect to compete from a position of privilege with respect to their fellow Canadians."

In the Williams case, the Supreme Court of Canada described the analytic approach to be taken in the application of the exemptions described in the Mitchell case. The Department has followed the guidance provided by the Supreme Court of Canada in the Mitchell and Williams cases in developing the Guidelines. In our view, the Guidelines apply these decisions in a fair and liberal manner, consistent with the Supreme Court of Canada decisions.

As we indicated above, in our view, the Department's Guidelines are in keeping with the Poker case. Although it is true that the Courts have established that the purpose of the exemptions from taxation under sections 87 and 90 of the Indian Act is to preserve the entitlement of Indians to their reserve lands and to prevent their erosion through taxation and seizure, the Courts (see quotation above from Mitchell case) have also ruled that the Indian Act tax exemption was not intended to confer privileges on Indians in respect of any property they may acquire and possess, wherever situated.

5.6As we indicated above, if the requirement that Indian organizations serve Indians who for the most part live on reserves were removed from Guideline 4, in our view, there would not be sufficient factors to connect the employment income to a reserve, since Guideline 4 applies 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.

5.7Guideline 4 will apply to exempt the employment income earned by Indians employed with the XXXXXXXXXX band, only if all of the elements of the Guideline are satisfied.

It is not clear to us what "issues" XXXXXXXXXX is referring to in this paragraph, nor do we understand why the situation of his client is unique. You should ask him to provide more information regarding his client's situation and to clarify what the issues are.

5.8Section 87 of the Indian Act exempts from taxation the personal property, including salary and wages, of an Indian situated on a reserve. In the Williams decision, the Court indicated that all the factors which link the income of an Indian with a reserve must be weighed with a view to meeting the purpose of section 87 of the Indian Act. Therefore, the issue is not whether there is a connection between an Indian and a reserve, but whether there are factors connecting the Indian's income to a reserve.

5.9Where the employer is an Indian band, in order to meet Guideline 4, it must have a reserve and its activities must be carried on exclusively for the benefit of Indians who for the most part live on reserves. Therefore, the fact that the activities carried on by an Indian band are connected to reserves is not sufficient to connect the employment income of the Indian employees to a reserve.

5.10According to subsection 2(1) of the Indian Act, "reserve" means a tract of land, the legal title to which is vested in Her Majesty, that has been set apart by Her Majesty for the use and benefit of a band, and for purposes of section 87 of the Indian Act, includes designated lands. "Designated lands" are defined in subsection 2(1) of the Indian Act as "a tract of land or any interest therein, the legal title to which remains vested in Her Majesty and in which the band for whose use and benefit it was set apart as a reserve has, otherwise than absolutely, released or surrendered its rights or interests". In addition, the following settlements, situated in Alberta, are deemed to be reserves: Cadotte Lake Settlement (Woodland Cree), Fort MacKay Settlement, Little Buffalo Settlement, Lubicon Lake. Only these lands are considered to be "reserves" in Alberta.

With respect to the residence of the employer, the fact that the board of directors meetings may be held on different reserves would not, in and by itself, cause an organization not to be considered resident on a reserve. In our view, in a situation where the board of directors meets regularly on a reserve, albeit different reserves, and decisions are made at these meetings which direct an organization's operations, such an organization would generally be considered resident on a reserve.

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. In our view, it is unlikely that Guideline 4 would apply since it does not appear that the XXXXXXXXXX band has a reserve, that the employers are resident on a reserve, that the Indian organizations are controlled by Indian bands having reserves or by tribal councils representing Indian bands which have reserves, that the Indian organizations are dedicated exclusively to the social, cultural, educational or economic development of Indians, that the Indians for the most part live on reserves or that the employment duties are in connection with the employer's non-commercial activities.

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