17 October 1996 Internal T.I. 9625997 - INDIAN EMPLOYMENT 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:

Whether the employment income of an Indian in a particular situation is taxable.

Position TAKEN:

1.Guidelines 1 and 3 cannot apply.

2.Insufficient information provided to determine whether Guideline 2 or 4 can apply. It should also be established whether the anti-avoidance statement of the Guidelines applies.

Reasons FOR POSITION TAKEN:

1.None of the employment duties are performed on reserve.

2.It is unclear who the employer is and whether the employer is resident on reserve: An Indian Band provides a status Indian employee to a company through a service contract. The company is located off reserve and the work is performed off reserve.

								October 17, 1996

	Charlottetown Tax Services		HEADQUARTERS
	Client Services				M. Azzi
								957-8953
	Attention: Barbara Crosby
								7-962599

XXXXXXXXXX - Employment Income of a Status Indian

This is in reply to your referral of July 19, 1996 of a query from the above-noted taxpayer, who has requested the Department's views on the taxability of the employment income of an Indian in a particular situation. At your request, we are responding to you and you will respond directly to the taxpayer.

We understand that an Indian Band provides a status Indian employee (the "Employee") to a company through a service contract. The company is located off reserve and the work is performed off reserve. Each day, after work, the Employee returns to a reserve, where the Employee resides and supports a family.

Our Comments

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 Williams (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 understand that you have forwarded a copy of the Guidelines to XXXXXXXXXX.

Based on the above information, it appears that none of the employment duties of the Employee are performed on reserve. Consequently, Guidelines 1 and 3 cannot apply to exempt the Employee's employment income from taxation. As to Guidelines 2 and 4, we cannot determine whether they could apply, as it is unclear, from the information provided, who the employer is (i.e, the Indian Band or the company) and whether the employer is resident on reserve. Furthermore, in order to establish whether all of the requirements of Guideline 4 are met, we would need additional information, such as details regarding the objects and activities of the employer, and regarding the duties of employment of the Employee. Nonetheless, assuming that the employer is the company and that it is not resident on a reserve, Guidelines 2 and 4 could not apply to exempt the Employee's employment income from taxation.

The term "employer is resident on a reserve", as used in the Guidelines, 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.

Finally, as stated on page 1 of the Guidelines, "The Guidelines are not intended to apply when it can reasonably be considered that one of the main purposes for the existence of an employment relationship is to establish a connecting factor between the income in question and a reserve". Consequently, if, in the above-described situation, the Indian Band is claiming to be the employer, rather than the company which is located off reserve, it must be established whether the Band is simply an employer of convenience (for example, an employer which leases its employees to an organization which would otherwise be their employer) in an attempt to create a connection between the Employee's employment income and a reserve. In such instances, the employment income will not be considered to be connected to a reserve, even though all the stated criteria of one of the Guidelines may be met.

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