22 February 1996 External T.I. 9604055 - IS INDIAN EMPLOYEE OF XXXXXXXXXX EXEMPT?

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 employment income of a status Indian is exempt from taxation by virtue of Guideline 4.

Position TAKEN:

Based on the information provided, it does not appear that Guideline 4 applies. Insufficient information provided to establish whether any of the other Guidelines may apply.

Reasons FOR POSITION TAKEN:

Assuming that the central management and control of the employer is located at its head office in XXXXXXXXXX the requirement that the employer be resident on a reserve would not be met.

The employer is not a band or tribal council and the facts presented do not indicate that the election of the board of directors of the employer is undertaken in such a manner that bands or tribal councils control the employer.

The services provided by the employer may benefit persons other than status Indians. Furthermore, it does not appear that almost all of the Indians served by employer must live on reserve.

			5-960405
XXXXXXXXXX		M. Azzi

February 22, 1996

Dear Madam:

Re: Indian Act Exemption for Employment Income

This is in reply to your letter of January 9, 1996, wherein you indicate that you wish to appeal a Revenue Canada decision as, in your view, you qualify for full exemption from income tax since you are from the XXXXXXXXXX Band and your work is conducted for the advancement of First Nations people.

XXXXXXXXXX

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request. Where the particular transactions are completed, the enquiry (including a request to appeal a decision of the Department) should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Department.

In your letter, you have not provided details as to which decision you wish to appeal and which years are involved. Therefore, for purposes of this letter, we assume that your concern is whether your employment income from XXXXXXXXXX should be exempt from tax.

Paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act provide a tax exemption for an Indian's personal property situated on a reserve. The Courts have determined that employment income is personal property. Therefore, what must be determined is whether the employment income is situated on a reserve. The Supreme Court of Canada in the case of Williams v. The Queen, 92 DTC 6320, has directed that all factors connecting income to a reserve must be examined to determine if the income is located on the reserve.

Based on the guidance provided in Williams and after receiving representations from interested Indian groups and individuals, the Department identified a number of connecting factors that can be used to determine whether employment income is situated on a reserve. With a view to assisting the Indian community, the Department developed the Indian Act Exemption for Employment Income Guidelines (the "Guidelines"), incorporating the various connecting factors that describe the employment situations covered by the Indian Act. We have enclosed a copy of the Guidelines for your information.

Based on the information you have submitted, it appears that you are requesting that your employment income from XXXXXXXXXX be exempt by virtue of Guideline 4. Please note that Guideline 4 requires a) that the employer is resident on a reserve; b) that the employer is 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) that the duties of the employment are 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.

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. Assuming that the central management and control of XXXXXXXXXX is located at its head office in XXXXXXXXXX the requirement that the employer be resident on a reserve would not be met.

XXXXXXXXXX is not an Indian band or tribal council; consequently, in order for Guideline 4 to apply, XXXXXXXXXX must be 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. The concept of control in Guideline 4 is the kind that exits where there is power to command and direct. Where a band or tribal council can replace the directors of an organization, the band or tribal council could be said to control the organization. The facts presented do not indicate that the election of the board of directors of the XXXXXXXXXX is undertaken in such a manner that bands or tribal councils control XXXXXXXXXX Accordingly, in our view, this element of Guideline 4 has not been satisfied.

The intention of the word "exclusively" is to restrict Guideline 4 to those organizations which are dedicated only to the social, cultural, educational or economic development of Indians living on reserve. It would not be sufficient to have these being only part of an organization's objectives. Guideline 4 is a generous interpretation of the direction provided by the Courts in Williams, so it is appropriate to restrict its application to situations that fit squarely within it. Based on the information provided in the pamphlet on XXXXXXXXXX under the heading "XXXXXXXXXX", in our view, XXXXXXXXXX does not satisfy the element of Guideline 4 that it be dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves. That is, its services may benefit persons other than status Indians. Furthermore, it does not appear that almost all of the Indians served by XXXXXXXXXX must live on reserve.

Your employment duties would also have to be considered to determine if, as required under Guideline 4, they were 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. While XXXXXXXXXX may have a non-profit mandate, this does not necessarily mean that all of its activities are non-commercial.

Also, please note that we have not been provided with sufficient information to determine whether Guideline 2 or 3 may apply. However, if XXXXXXXXXX is not resident on a reserve, as explained above, and you live at the above-noted address (i.e., you do not live on a reserve), Guidelines 2 and 3 cannot apply.

Finally, we also have not been provided with sufficient information to determine whether Guideline 1 or the Proration Rule applies. Guideline 1 would apply to exempt all of your employment income if at least 90% of your employment duties are performed on a reserve. If less than 90% of the duties are performed on a reserve and none of the other Guidelines apply, the Proration Rule can apply to exempt the portion of your employment income that relates to your employment duties performed on a reserve.

We trust that these comments will be of assistance.

Yours truly,

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