14 January 1997 Internal T.I. 9640127 - GUIDELINE 4 - XXXXXXXXXX

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:

Is the employment income of the Indian employees of the XXXXXXXXXX exempt from tax under Guideline 4?

Position TAKEN:

No.

Reasons FOR POSITION TAKEN:

The XXXXXXXXXX provides services to all Indians, whether they live on or off reserve, and it has programs for Indians in urban centres.

		January 14, 1996

	XXXXXXXXXX Tax Services Office		HEADQUARTERS
M. Azzi
	Attention: XXXXXXXXXX		957-8953
			7-964012

XXXXXXXXXX

This is in reply to your memo of November 27, 1996, wherein you enquire whether, in light of additional information, the views expressed in our memo of October 2, 1996 (our file #7-963251) remain unchanged, as to the tax status of the employment income of the Indian employees of the XXXXXXXXXX. In particular, you request confirmation as to whether this employment income would be exempt from tax under Guideline 4 of the Indian Act Exemption for Employment Income Guidelines (the "Guidelines").

Our understanding of the facts is as follows:

1. XXXXXXXXXX

2.The XXXXXXXXXX, a non-profit organization, provides services to all Indians on and off reserve. The goal of the

XXXXXXXXXX

Our Comments

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.

As indicated in our previous memo, 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. Nonetheless, it should be noted that satisfaction of the requirement that the employer be resident on a reserve is always of some concern where the head office of an organization is located on a reserve, but its main place of business is located off reserve. In this respect, we note that the XXXXXXXXXX head office is on a reserve, while XXXXXXXXXX work off reserve; presumably at the XXXXXXXXXX office.

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 the XXXXXXXXXX situation, including the minutes of board of directors meetings and resolutions or by-laws passed thereat, would therefore be required to conclusively establish whether the XXXXXXXXXX (i.e., the employer) is resident on a reserve. Nevertheless, in our view, in a situation where the board of directors meet on a reserve, albeit different reserves, at which decisions are made which direct an organization's operations, such an organization would generally be considered resident on reserve.

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. As indicated in our previous memo, based on the information provided, it appears that this requirement of Guideline 4 has not been met and that, consequently, Guideline 4 cannot apply to exempt the employment income received from the XXXXXXXXXX. That is, the April 19, 1996 letter, which the XXXXXXXXXX submitted to you, clearly states " XXXXXXXXXX " and that it has programs for Indians in urban centres. It therefore does not appear that almost all of the Indians served by the XXXXXXXXXX must live on reserve. Further clarification regarding this issue could be obtained by reviewing the XXXXXXXXXX objects or mandate according to the instruments by which the XXXXXXXXXX was created (i.e., articles of incorporation, letters of patent, memoranda of agreement, by-laws, etc.).

As the XXXXXXXXXX is not an Indian band or tribal council, in order for Guideline 4 to apply, the XXXXXXXXXX would have to 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 exists 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. We were not provided with sufficient information to determine whether this element of Guideline 4 could have been met. Although you indicate that the XXXXXXXXXX board of directors consists of chiefs from various area bands, it is unclear who has the power to nominate and replace such directors. That is, it is unclear whether the chiefs act as directors of the XXXXXXXXXX on behalf of the bands, and whether the bands can replace the directors. A review of the instruments by which the XXXXXXXXXX was created (as explained above) should provide guidance as to how the directors are nominated.

Finally, as noted in our previous memo, in determining whether Guideline 4 could apply to a particular Indian employee, the employment duties of the employee would have to be considered to establish if they were in connection with the employer's (i.e., the XXXXXXXXXX) non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on reserves. While the XXXXXXXXXX may have a non-profit mandate, this does not necessarily mean that all of its activities are non-commercial.

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