29 May 1997 Internal T.I. 9703367 - INCOME FROM EMPLOYMENT OF INDIANS - WHETHER EXEMPT

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 income from employment exempt under Guidelines

Position:

No.

Reasons:

Guideline Requirements not met

		May 29, 1997

	Audit Directorate			HEADQUARTERS
	Verification Enforcement and	Roxane Brazeau-LeBlond, CA
        Compliance Research Branch	Tel: (613) 957-2058

	Attention: J.J. Fennelly
		970336

Tax exempt status of employment income

This is in reply to the November 29, 1996 memo you received from Ms. Marilyn Dudek of the Winnipeg Tax Services Office (hereinafter "the TSO") which was forwarded to us on February 6, 1997.

The TSO has concluded from the "situs" audit of XXXXXXXXXX that XXXXXXXXXX employees are taxable on their employment income.

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.

Guideline 1 would apply to exempt all of the income of an Indian if at least 90% of the employment duties are performed on a reserve. When less than 90% of the duties are performed on a reserve and none of the other guidelines apply, only the portion that is performed on a reserve is exempt (the proration rule).

Guideline 2 would apply to exempt the employment income of employees who live on reserve provided that the employer is in fact resident on a reserve.

Guideline 3 would apply to exempt all of the income of an Indian if more than 50% of the employment duties are performed on a reserve and the employer is resident on a reserve or the Indian lives on a reserve.

Guideline 4 requires that the employer is resident on a reserve. It also requires 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 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 auditor's report concludes that all of XXXXXXXXXX employees work on an off reserve location. Therefore, the fact that none of the employment duties are performed on a reserve precludes the application of Guideline 3 and of Guideline 1 and its proration rule. In addition, Guideline 2 would not apply as the audit of XXXXXXXXXX revealed that none of XXXXXXXXXX employees resides on a reserve. However, the auditor's report concludes that XXXXXXXXXX is an Indian Organization controlled by one or more Indian bands and that it is dedicated exclusively to the social, cultural, or economic development of Indians who for the most part live on reserves. However, the condition that the employer is resident on a reserve must also be met for Guideline 4 to apply.

The condition that the 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 said to be located on a reserve, but its main place of business is located off reserve. 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 is legitimately exercised during those meetings.

In our view, based on the following facts gathered during the course of the audit, it would appear that XXXXXXXXXX main place of business is located off reserve. All banking and bank accounts are off reserve. The books and records, including financial statements and audit reports are maintained off reserve, at the XXXXXXXXXX. As well, all administrative duties and functions, including payroll and contract negotiations, are performed off reserve, at the XXXXXXXXXX. Nevertheless, if XXXXXXXXXX management and control were legitimately exercised at board of directors meetings held on reserve, XXXXXXXXXX could be considered to be resident on a reserve. XXXXXXXXXX Although it is a question of fact to be determined based on a review of the minutes of the meetings of the board of directors and of the resolutions and bylaws passed during those meetings, in our view, management and control, in this situation, would appear to be exercised off reserve.

In our view, based on the above, we agree with the auditor's report that the central management and control over XXXXXXXXXX does not appear to be located on a reserve and that the conditions for the Guidelines to apply do not appear to be met. Therefore, XXXXXXXXXX employees would not be exempt from tax under paragraph 81(1)(a) of the Income Tax Act.

R. Albert
for Director
Business and Publications Division
Income tax Rulings and
Interpretations Directorate
Policy and legislation Branch