12 July 1996 Internal T.I. 9619177 - INDIAN EXEMPTION V. TREATIES AND GUIDELINES

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:

1.Whether Indians are immune from taxation by virtue of treaties dating back to 1850 and by virtue of the Charter of Rights and Freedoms.

2.Whether Guideline 4 applies to exempt the employment income of an Indian who lives off reserve and is employed off reserve by XXXXXXXXXX.

Position TAKEN:

1.No.

2.No.

Reasons FOR POSITION TAKEN:

1.Although a number of First Nations have treaties which recognize some rights, the courts have never recognized that an exemption from taxation was granted under any such treaty. On the contrary, the courts have recognized that the Indian tax exemption is a statutory one. Paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act provide the principal Indian exemption from taxation.

Furthermore, in Mitchell v. Peguis Indian Band ((1990) 2 SCR 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.

2.XXXXXXXXXX cannot be said to be dedicated exclusively to the social, cultural, educational, or economic development of Indians living on reserves. Furthermore, employment at XXXXXXXXXX is not in connection with the employer's "non-commercial activities". As a general rule, a commercial activity entails, as in this case, the provision of services or the creation of a product to be provided to others for compensation.

Based on the information provided, none of Guidelines 1, 2 or 3 can apply, as the Indian does not perform any of her employment duties on reserve and she does not live on reserve.

								July 12, 1996

	Saskatoon Tax Services			HEADQUARTERS
	Revenue Collections				M. Azzi
								957-8953
	Attention: G. Wolfe
								7-961917

Indian Act Exemption - XXXXXXXXXX

This is in reply to your memo of May 28, 1996 requesting our views on whether the employment income of the above-noted status Indian is exempt from taxation.

We understand that XXXXXXXXXX became entitled to status as an Indian pursuant to the Bill C-31 amendments to the Indian Act. She is employed off reserve by XXXXXXXXXX and, although it is unclear from the information provided, it appears that she also lives off reserve. Essentially, in XXXXXXXXXX view, as a status Indian she is immune from taxation by virtue of treaties dating back to 1850 and by virtue of the Charter of Rights and Freedoms.

Alternatively, XXXXXXXXXX feels that her employment income from XXXXXXXXXX should be exempt as "the employee's employment duties are connected to the employer's non-commercial activities carried on exclusively for the benefit of Indians who for the most part reside on reserves and the employer (primary employer) resides on a reserve and the employer is: an Indian band that has a reserve or a tribal council representing one or more Indian bands that have reserves".

XXXXXXXXXX

Furthermore, in her view, the employer is resident on reserve, as the central management and control of XXXXXXXXXX situated on reserves.

Our Comments

Although a number of First Nations have treaties which recognize some rights, the courts have never recognized that an exemption from taxation was granted under any such treaty. On the contrary, the courts have recognized that the Indian tax exemption is a statutory one. Paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act provide the principal Indian exemption from taxation, which is that personal property of an Indian situated on a reserve is exempt from taxation.

Furthermore, in Mitchell v. Peguis Indian Band ((1990) 2 SCR 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."

La Forest, 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 determining whether the income earned by an Indian is situated on a reserve, and thus exempt from taxation, the approach taken by the Supreme Court of Canada, in Williams v. The Queen (92 DTC 6320), must be followed. This approach requires the examination of all factors connecting income to a reserve to determine if the income is located on the reserve. In Williams, the Supreme Court ruled that the proper approach to determining the situs of intangible personal property is to evaluate the various connecting factors which tie the property to one location or another. The Court also indicated that the ultimate question is to determine to what extent each connecting factor is relevant in determining whether taxing the particular kind of property in a particular manner would erode the entitlement of an Indian to personal property situated on a 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. You may wish to send a copy of the Guidelines to XXXXXXXXXX for her information.

XXXXXXXXXX alternative position explained above appears to relate to Guideline 4. It should be noted, however, 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.

Based on the information provided, it appears that at least b) and c) above have not been met and that, consequently, Guideline 4 cannot apply to exempt XXXXXXXXXX employment income from taxation. That is, in our view, XXXXXXXXXX cannot be said to be dedicated exclusively to the social, cultural, educational, or economic development of Indians living on reserves. 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.

Furthermore, in our view, employment at XXXXXXXXXX is not in connection with the employer's "non-commercial activities". As a general rule, a commercial activity entails, as in this case, the provision of services or the creation of a product to be provided to others for compensation. An example of a non-commercial activity, on the other hand, would be a governmental or quasi-governmental activity.

It should also be noted that 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.

In addition, as XXXXXXXXXX is not an Indian band or tribal council, it 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. Based on the information provided, we cannot determine whether this element of Guideline 4 could have been met with respect to XXXXXXXXXX.

Also, based on the information provided, in our view, none of Guidelines 1, 2 or 3 can apply to exempt from taxation XXXXXXXXXX employment income from XXXXXXXXXX as she does not perform any of her employment duties on reserve and she does not live on reserve.

Finally, we note that throughout XXXXXXXXXX letter, she refers to "discriminations" under the Indian Act (and in particular in subsection 77(1) of that Act) with respect to Bill C-31 Indians. She should be advised that Revenue Canada does not write or amend legislation; the function of Revenue Canada is to administer the laws as set out in the Income Tax Act and Income Tax Regulations. The Department of Indian Affairs and Northern Development is responsible for writing and considering amendments to the Indian Act.

We trust that these comments will be of assistance.

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