16 January 1997 Internal T.I. 9627627 - XXXXXXXXXX INDIAN EMPLOYEES VS. GUIDELINES 2 & 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 the Cree Indian employees of XXXXXXXXXX who work off reserve, ( XXXXXXXXXX ), would be exempt on their (XXXXXXXXXX) employment income under Guidelines 2 and 4 of the Indian Act Exemption for Employment Income Guidelines.

Position TAKEN:

1.Insufficient information provided to determine whether Guideline 2 applies.

2.Guideline 4 cannot apply.

Reasons FOR POSITION TAKEN:

1.Based on the facts of this case, we would agree that the Indians (who otherwise live on a reserve, but are absent from the reserve to perform the work) live on a reserve for purposes of the Guidelines (as in file 952749). However, we cannot conclusively establish whether XXXXXXXXXX (i.e., the employer) is resident on reserve, as XXXXXXXXXX maintains an administrative office on reserve, and another off reserve, and there were no meetings of the board of directors of XXXXXXXXXX.

2.The requirement 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" has not been met. That is, XXXXXXXXXX pursuant to a contract, and for a fee, does not constitute employment duties in connection with the employer's non-commercial activities. Furthermore, it is questionable whether almost all of the Indians in the population served by XXXXXXXXXX must live on reserve, as XXXXXXXXXX employed " XXXXXXXXXX "

							January 16, 1996

Mr. M. Morel				HEADQUARTERS
	Director					M. Azzi
	Rouyn-Noranda Tax Services		957-8953
							5-962762

Indian Employees of XXXXXXXXXX

Please find enclosed a letter dated August 15, 1996 and another dated November 29, 1996, with related supporting documents, from XXXXXXXXXX. The legal representative indicates that certain Cree Indian employees of XXXXXXXXXX have been assessed income tax by the Department in respect of certain employment income received in XXXXXXXXXX. The legal representative feels that this employment income is exempt from tax, and therefore requests that the Indian employees be reassessed accordingly.

As this request concerns assessments and completed transactions, we are forwarding it to you for your action. We also advised the legal representative that his request should have been addressed to the relevant Tax Services Office, as the request involves completed transactions and identifiable taxpayers (we have enclosed a copy of our letter to the legal representative). We have, however, provided you with our views with respect to the situation outlined in the legal representative's letters, and the representative will likely be contacting you in the near future.

Facts

Our understanding of the facts is as follows:

XXXXXXXXXX

In the legal representative's view, the employment income received by the Indian employees of XXXXXXXXXX in connection with the Work, is exempt from taxation under Guidelines 2 and 4 of the Indian Act Exemption for Employment Income Guidelines (the "Guidelines"), issued by the Department in June 1994.

Our Comments

Guideline 2 will exempt all the income of an Indian from an employment, regardless of the location of the employment duties, when the employer is resident on a reserve and the Indian lives on a reserve. "On a reserve", by definition includes Category IA lands under the Cree-Naskapi (of Quebec) Act.

The term "Indian lives on a reserve", as used in the Guidelines, means the Indian lives on the reserve in a domestic establishment that is his or her principal place of residence and that is the centre of his or her daily routine. The fact that an Indian is absent from a reserve for short periods of time because of either the type of employment duties being performed, the distance between the reserve and the location of those duties, or both, does not necessarily mean that the Indian has taken up residence off reserve. It is a question of fact whether, in those circumstances, the Indian continues to live on a reserve. However, the longer the period of absence from the reserve, the more likely it is that the domestic establishment maintained on the reserve is not part of the daily routine of the employee. Based on the above facts, we would agree that the above-described Indian employees of XXXXXXXXXX (who otherwise live on a reserve, but are absent from the reserve to perform the Work) live on a reserve for purposes of the Guidelines.

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 is required to conclusively resolve this question of fact.

As XXXXXXXXXX maintains an administrative office on reserve, and another off reserve, and there were no meetings of the board of directors of XXXXXXXXXX, we cannot conclusively establish whether XXXXXXXXXX (i.e., the employer) is resident on reserve, and consequently, whether Guideline 2 can apply to the above Indian employees. Such a determination would require a review, by a Tax Services Office, of XXXXXXXXXX affairs to establish which of the two locations is XXXXXXXXXX principal place of business and at which location decisions are made which direct XXXXXXXXXX operations. The fact that resolutions were adopted in XXXXXXXXXX by the unanimous consent of the directors, the majority of whom reside on reserves, does not, in our view, establish that XXXXXXXXXX is resident on reserve.

Also, please note that, on page 4 of the legal representative's letter of August 15, 1996, he indicates that the facts of this case "are similar in all relevant aspects" to those of a previous case (XXXXXXXXXX), wherein the Department agreed that Guideline 2 would apply to certain Indian employees. While we agree that, in both cases, the Indian employees were in similar situations, in that they meet the requirement that they live on a reserve, we do not agree that the employers were in a similar situation. In the previous case, the facts which were provided to us clearly pointed to the conclusion that the employer was resident on a reserve, as the employer's head office was on reserve, all of its administrative activities were carried out at the head office and all meetings of the board of directors and executive committee of the employer were held on reserve. The facts provided with respect to XXXXXXXXXX, on the other hand, are not conclusive as to its residence, as explained above.

As regards to Guideline 4, please note that it 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. Furthermore, if Guideline 4 applies with respect to an Indian's employment, the Indian's income from the employment will be exempt regardless of whether the Indian performs the duties of the employment on or off reserve.

As indicated above, it is unclear whether XXXXXXXXXX is resident on a reserve and, consequently, whether the requirement in a) above has been met. Nonetheless, in our view, the requirements in at least c) above have not been met and, accordingly, Guideline 4 cannot apply to exempt the employment income of the above-noted Indian employees of XXXXXXXXXX. That is, in our view, XXXXXXXXXX pursuant to a contract, and for a fee, does not constitute employment duties 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. On the other hand, an example of a non-commercial activity would be a governmental or quasi-governmental activity.

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 (92 DTC 6320), so it is appropriate to restrict its application to situations that fit squarely within it. A review of XXXXXXXXXX objects or mandate would be required in order to determine whether this element of Guideline 4 could have been met.

Finally, please note that one of the requirements of Guideline 4 is that the organization must be dedicated exclusively to the development of Indians "who for the most part live on reserves". That is, almost all of the Indians in the population served by the organization must live on reserve. In this respect, we note that the legal representative indicates that XXXXXXXXXX employed " XXXXXXXXXX " and that, consequently, it appears that XXXXXXXXXX of the workers were not Indians. Furthermore, section 15 of the Joint Venture agreement provides that " XXXXXXXXXX ", without restricting, in any way, the hiring to Indians living on reserves. It therefore appears questionable whether XXXXXXXXXX is dedicated exclusively to the development of Indians "who for the most part live on reserves".

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