26 September 1996 Income Tax Severed Letter 9522945 - Indians — employment-related income

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:

Taxability of payments out of an RPP to a registered Indian whose relevant employment income may have been partially exempt.

POSITION:

The RPP payments will be exempt to the same extent that the relevant employment income was exempt.

REASONS:

As per the Indian Act Exemption for Employment Income Guidelines.

952294 XXXXXXXXXX J.D. Brooks

Attention: XXXXXXXXXX

September 26, 1996

Dear Sirs:

Re: Registered Pension Plans - Indian Beneficiaries

This letter is in reply to your letter of August 24, 1995 in which you requested our opinion concerning investment income earned in a registered pension plan of which a beneficiary is a status Indian. We acknowledge our related telephone conversations (XXXXXXXXXX/Brooks). We apologize for the delay in replying.

We understand that the XXXXXXXXXX is a trust that is governed by a registered pension plan and, accordingly, is exempt from Part I tax under the Income Tax Act (the "ITA") by virtue of paragraph 149(1)(o) thereof.

XXXXXXXXXX

Our Comments

In our telephone conversation (XXXXXXXXXX/Brooks) of September 24, 1996, you clarified that your concern lies with the taxability of payments made out of the trust to beneficiaries that are status Indians. You are not concerned with the taxability of income that is earned by and remains in the trust since the trust can rely on the general exemption provided by paragraph 149(1)(o) of the ITA.

The income of a status Indian is exempt to the extent that it is connected to a reserve. Although it was formerly considered (since 1983) that an Indian individual's employment income was exempt from taxation if the employer was situated on reserve, this view was overturned by the 1992 decision of the Supreme Court of Canada in the case of Glenn Williams v. Her Majesty the Queen [ [1992] 1 C.T.C. 225] (92 DTC 6320). Following that decision, the Department formulated the Indian Act Exemption for Employment Income Guidelines (copy attached) to explain the circumstances in which an Indian's employment income is exempt. In order for an Indian employee's employment income to be exempt, it is no longer sufficient that the employer is situated on reserve. However, as described in Guidelines 2 and 3, the employer's location on reserve combined with the fact that the Indian employee lives on reserve or performs more than half of the employment duties on reserve will result in all of that employee's income from that source being exempt.

When pension benefits are paid to a beneficiary, the trust would normally be required by subsection 153(1) of the ITA to withhold taxes and remit such to the Receiver General on behalf of the beneficiary. Where an Indian has earned only exempt employment income, the Guidelines note that employment-related income such as benefits from a registered pension plan will be similarly exempt from tax. Where a person is entitled to full or partial exemption, the amount that would normally be withheld from payments to that person may be reduced or cancelled if properly approved by the Department. You should consult your local taxation services office for direction in this matter.

This letter should not be considered to confirm that XXXXXXXXXX qualifies under 149(1)(o) of the ITA since that was not the purpose of the letter. Rather, we have assumed that that is the case for the purpose of answering your enquiry. We trust that these comments will be of assistance.

Yours truly,

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