23 May 1996 Internal T.I. 9609737 - 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 by the XXXXXXXXXX and other organizations.

Position:

Cannot determine whether Guideline 4 applies.

Reasons:

Lack of information

								May 23, 1996

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

								7-960973

The Indian Act Tax Exemption - XXXXXXXXXX

This is in response to your memorandum of March 8, 1996, wherein you requested our further comments with respect to the application of Guideline 4 of the Indian Act Exemption for Employment Income Guidelines (the "Guidelines") in respect of nine Indian employees employed off reserve by various organizations.

In your view,

XXXXXXXXXX

are resident on a reserve because the meetings of the regular chief, the council and senior management are all held on the XXXXXXXXXX reserve.

As we indicated in our previous memorandum dated February 8, 1996, in order for an employer to be resident on a reserve, as indicated in the Guidelines, 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 or corporation is usually considered to be exercised by the group that performs the function of a board of directors of the organization (or corporation). However, it may be that the real management and control of an organization or corporation 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. However, the fact that the employer's head office is on a reserve is not an indication that the employer is resident on a reserve.

Where an organization or a corporation 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 or the corporation 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.

Although it appears from the corporate organizational chart of

XXXXXXXXXX

we cannot determine conclusively from this chart whether these two corporations have board of directors of their own. If they do not and if they are managed and controlled by the board of directors of XXXXXXXXXX in our view, the minutes of the board of directors' meetings of XXXXXXXXXX should be looked to in order to determine whether XXXXXXXXXX are resident on a reserve. As regards XXXXXXXXXX as there is no reference to these corporations on the above-mentioned organizational chart, we cannot comment further on the question of the residence of these corporations.

You also indicate that the organizational chart shows clearly that the above-mentioned corporations are controlled by one or more Indian bands which have reserves. According to the organizational chart,

XXXXXXXXXX

Guideline 4 contemplates direct control of an Indian organization by an Indian band, as opposed to indirect control through tiered corporations. Although there may be other situations which satisfy this control requirement, the question of whether the indirect control by the band of the two above-mentioned corporations is acceptable is not one which we need consider at this time, since, as expounded below, other elements of Guideline 4 are not met.

In addition, you are of the opinion that the employer organizations are dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves and that the duties of 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, since the employer organizations are funded with land claim monies and all of their profits are invested in the community to further the social and economic development of the community. As we indicated previously, it is not sufficient to indicate that the employer organizations carry on activities for the benefit of the community, unless it can be established that the community is composed of 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 are used to assist the Indian community is insufficient rationale to provide the employees of the organization with a tax exemption on their employment income. Even though an organization is operated without a profit motive, it may still be carrying on a commercial operation. 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 order to determine whether the employer organizations meet the "dedicated exclusively" test and whether the duties are in connection with non-commercial activities, we would require information regarding the mandate or objects of these employers and the nature of the duties carried on by the Indians, as well as, information as to who benefits from the services provided by the employer organizations.

As regards XXXXXXXXXX in your view, the documentation you provided supports your view that the duties of employment of the Indians employed by XXXXXXXXXX are in connection with the employer's non-commercial activities. You further opine that, although these activities are not carried on exclusively for the benefit of Indians who for the most part live on reserves, since the employment income earned by Indians employed on the XXXXXXXXXX reserves is exempt from tax, notwithstanding that their employment duties are not carried on exclusively for the benefit of Indians who for the most part live on reserves, the Indians employed by the XXXXXXXXXX should be granted the same treatment.

In our view, the documentation provided not only does not establish that the duties of employment of the Indians employed by XXXXXXXXXX are in connection with the band's non-commercial activities, it does not provide any information whatsoever about the nature of the duties performed by these Indians. With respect to your comments regarding the Indians employed on the XXXXXXXXXX reserves, we have no knowledge of the employment situation or tax status of these Indians and cannot comment further.

As regards your comments with respect to the requirement that the duties of employment be carried on exclusively for the benefit of Indians who for the most part live on reserves, you should note that 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. Although there may be valid reasons for Indians not living on reserve, if the population served by the employer organization is not comprised almost entirely of Indians who live on reserve, in our view, there would not be sufficient factors to connect the employment income to a reserve.

With respect to your comments regarding paragraph 149(1)(d) of the Act, a corporation or a wholly-owned subsidiary of such a corporation may qualify pursuant to paragraph 149(1)(d) of the Act where not less than 90% of the shares or capital of the corporation or the subsidiary is owned by Her Majesty in right of Canada or a province or by a Canadian municipality. Accordingly, in order for a corporation whose shares are owned by an Indian band to qualify under paragraph 149(1)(d) of the Act, the Indian band must be considered a Canadian municipality.

In the Otineka Development Corporation Ltd. et al. v. The Queen, 94 DTC 1234 (T.C.C.) case, the Tax Court of Canada concluded that, since there is no definition of a "Canadian municipality" in the Act, the term must be given its ordinary meaning and is not to be solely determined by the provincial legislation governing municipalities. In the Court's view, the powers conferred under the Indian Act and their exercise by the band created a form of self-government that is an essential attribute of a municipality. In this case, the band had passed by-laws to regulate water and sewers, garbage disposal, weed control, domestic animal control, law and order, the provision of housing and other by-laws. It also provided services to band members in areas such as education, health care, social services, employment and training services, counselling and economic development. In the end, the Court concluded that the band was a municipality for the purposes of paragraph 149(1)(d) of the Act and, therefore, that corporations owned by the band were exempt from taxation as municipally-owned corporations.

Since the decision rendered in the Otineka case hinged upon the particular facts of the case, only corporations that can demonstrate that they are in exactly the same position as those in Otineka will be exempt from taxation. You should note, however, that, for purposes of Guideline 4, the tax-status of an employer organization under paragraph 149(1)(d) of the Income Tax Act (the "Act") is irrelevant.

In conclusion, 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. In our view, the documentation provided fails to support your conclusion that the Indians employed by the

XXXXXXXXXX

are exempt from taxation pursuant to Guideline 4.

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