20 December 1996 External T.I. 9640865 - 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 a particular Indian employee of XXXXXXXXXX exempt from taxation by virtue of Guideline 4?

Position TAKEN:

No.

Reasons FOR POSITION TAKEN:

The Supplementary Letters of Patent of XXXXXXXXXX provide that the objects of XXXXXXXXXX are, inter alia,

" XXXXXXXXXX "

The objects of XXXXXXXXXX under its Supplementary Letters of Patent are very broad and do not satisfy the element of Guideline 4 that XXXXXXXXXX be dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserve. That is, its services are not restricted to the benefit of status Indians. Furthermore, it does not appear that almost all of the Indians served by XXXXXXXXXX must live on reserve (and it is a question of fact as to where the Indians served by the Indian employee, at the XXXXXXXXXX, live).

									7-964086
XXXXXXXXXX							M. Azzi

Attention: XXXXXXXXXX

December 20, 1996

Dear Sir:

Re: Status Indian Employee - XXXXXXXXXX

This is in reply to your letters of October 23 and November 28, 1996, which have been forward to us for reply by Mr. Raymond Cousineau of Trust Accounts Division. You have requested our views on the tax status of the employment income of XXXXXXXXXX, an Indian employee of XXXXXXXXXX.

You indicate that XXXXXXXXXX is a native organization and that its head office is situated on "XXXXXXXXXX", which land is owned by XXXXXXXXXX Indian bands. You also indicate that all of the directors of XXXXXXXXXX are status Indians elected from their respective communities (i.e., from " XXXXXXXXXX ") and that XXXXXXXXXX has XXXXXXXXXX full-time employees. We understand that XXXXXXXXXX lives and is employed at your XXXXXXXXXX, which is located off reserve. We understand that substantially all of XXXXXXXXXX employment duties are performed at the off reserve location, while a minimal amount (less than 10%) of her duties are performed on reserve.

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 have enclosed a copy of the Guidelines for your information.

Based on the information you have submitted, it appears that you are requesting that XXXXXXXXXX employment income from XXXXXXXXXX be exempt from tax by virtue of Guideline 4. Please note 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.

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 and this would be best resolved by a Tax Services Office. Nevertheless, in our view, in a situation where the board of directors meet on 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.

As XXXXXXXXXX is not an Indian band or tribal council, in order for Guideline 4 to apply, XXXXXXXXXX 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 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. Based on the information provided, we cannot determine whether this element of Guideline 4 has been met with respect to XXXXXXXXXX

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. In this respect, we note that the Supplementary Letters of Patent of XXXXXXXXXX provide that the objects of XXXXXXXXXX are, inter alia,

" XXXXXXXXXX"

In our view, the objects of XXXXXXXXXX under its Supplementary Letters of Patent are very broad and do not satisfy the element of Guideline 4 that XXXXXXXXXX be dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserve. That is, its services are not restricted to the benefit of status Indians. Furthermore, it does not appear that almost all of the Indians served by XXXXXXXXXX must live on reserve (and it is a question of fact as to where the Indians served by the XXXXXXXXXX live). Accordingly, in our view, Guideline 4 cannot apply to exempt XXXXXXXXXX employment income from taxation.

We would also like to point out that, in determining whether Guideline 4 applies to a particular Indian employee, the employment duties of the Indian employee would also have to be considered to be 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. While the employer may have a non-profit mandate, this does not necessarily mean that all of its activities are non-commercial.

Also, please note that, based on the information provided, Guideline 2 cannot apply with respect to XXXXXXXXXX, as she does not live on a reserve and Guideline 3 cannot apply since she does not perform more than 50% of her employment duties on a reserve. Furthermore, Guideline 1 cannot apply to exempt all of XXXXXXXXXX employment income from taxation, as she does not perform at least 90% of her employment duties on a reserve. However, the Proration Rule to Guideline 1 may apply to exempt the portion of her employment income that relates to her employment duties performed on a reserve. In this respect, it should be noted that, in calculating the time spent performing employment duties on a reserve, travel time to and from the reserve is not included.

Finally, please note that, from the information provided, it is unclear whether the "XXXXXXXXXX", to which you refer, qualifies as a reserve for purposes of the Guidelines. The term "on a reserve", as used in the Guidelines, is defined on page 10 of the Guidelines to mean "on a reserve as defined for purposes of the Indian Act, including any settlements deemed to be reserves for purposes of the Indian Settlements Remission Order, and any other areas given similar treatment under federal legislation (for example, Category I-A lands under the Cree-Naskapi (of Quebec) Act)." According to subsection 2(1) of the Indian Act, "reserve", for purposes of the Indian Act, means a tract of land, the legal title to which is vested in Her Majesty, that has been set apart by Her Majesty for the use and benefit of a band, and for purposes of section 87 of the Indian Act, includes designated lands. "Designated lands" is defined in subsection 2(1) of the Indian Act as "a tract of land or any interest therein, the legal title to which remains vested in Her Majesty and in which the band for whose use and benefit it was set apart as a reserve has, otherwise than absolutely, released or surrendered its rights or interests."

We trust that these comments will be of assistance.

Yours truly,

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

c.c. R. Cousineau
Trust Accounts Division