25 September 1997 External T.I. 9708335 - INDIAN ACT EXEMPTION GUIDELINE 3

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:

(1) Status Indian employee (network coordinator) of an XXXXXXXXXX-based organization: whether working either at home on a reserve or in a "First Nation environment" for a total of 60% of the duties leads to exemption under Guideline 3.

(2) Application of Proration Rule under Guideline 1 if answer to (1) is negative.

Position:

(1) Exemption might be granted provided certain conditions are met.

(2) Proration Rule might be applicable provided no other Guideline applies.

Reasons:

(1) Exemption could be available if (a) working at home is a condition of employment, i.e. that it is required by the employer under the employment contract or the "working at home" agreement, (b) one of the main reasons for the "working at home" agreement is not to create a connecting factor to a reserve, and (c) the expression in a First Nation environment" means work performed on a reserve.

(2) Proration Rule under Guideline 1 only applies if no other Guideline is applicable.

5-970833
XXXXXXXXXX P.-A. Sarrazin

September 25, 1997

Dear XXXXXXXXXX:

Re: Indian Act Exemption for Employment Income

This is in reply to your letter dated March 13, 1997, in which you requested that we establish the "Income Tax Status" of XXXXXXXXXX, an employee.

XXXXXXXXXX

At least 60% of her work time is spent either at home networking by means of electronic communication or "directly within First Nation environments".

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Department.

In our analysis we have considered your statement that "at least 60% of (the employee's) time is spent working at home or directly within First Nation environments". While the employee's residence appears to be on an Indian reserve in that it is situated in XXXXXXXXXX, this statement is somewhat confusing as to what is intended by "within First Nation environments". Therefore, we were unable to assess whether indeed 60% of the employee's duties are performed on an Indian reserve.

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 the case of Williams v. The Queen, 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.

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. Assuming that the central management and control of XXXXXXXXXX is in XXXXXXXXXX, the requirement that the employer be resident on a reserve would not be met. Therefore, Guidelines 2 and 4 are inapplicable to this situation.

Based on the information submitted in your letter, it appears that you are requesting that the employment income be exempt by virtue of Guideline 3. Please note that Guideline 3 requires a) that more than 50% of the duties of an employment are performed on a reserve; and b) that either the employer or the Indian is resident on a reserve. Both these elements must be satisfied in order for Guideline 3 to apply.

Assuming that the employee indeed lives on a reserve, then requirement b) of Guideline 3 would be met. However, we are unable to determine whether requirement a) is met. For the Department to consider that this requirement has been met, the duties performed in respect of the employment contract must be performed on a reserve. The expression "60% of (the employee's) time is spent working at home or directly within First Nation environments" raises three issues.

First, it must be established that the reason why the employee is working at home is that the employer has required the employee to do so. The determining factor is that working at home (on the reserve) is required by the employer under the employment contract or "working at home" agreement. While the Guidelines do not make any specific reference to the location where an employee is required to work, all of the examples published with the Guidelines contemplate situations where the employee is working at a location determined by the employer. That is, for the purposes of the Guidelines that take into consideration the location where the duties of employment are performed, in our view, the most relevant locations are the locations at which the employee is required to perform the duties. Evidence to satisfy this requirement may be tendered by providing the Department with a copy of the employment contract or "working at home" agreement specifically reflecting the obligations to work at home.

Second, it must be established that one of the main purposes for the existence of this arrangement is not to establish a connecting factor between the income in question and a reserve. Evidence to satisfy this requirement may be tendered by showing, for example, that other employees participate in the "working at home" programme.

Third, the expression "within First Nation environments" is too vague and must be clarified. If it means that a portion of the employee's duties are required to be performed elsewhere than at home but still on a reserve, then this portion qualifies and can form part of the 60% referred to in your letter. Again, the determining factor is the physical place where the duties are required to be performed.

If these three issues can be resolved in the employee's favour, then Guideline 3 will apply to the situation and all of the employment income will usually be exempted from income tax.

In the event that less than 50% of the duties are performed on a reserve, Guideline 3 would become inapplicable and, as a result, none of the Guidelines could fully apply to this situation. However, the Proration Rule to Guideline 1 can apply to exempt the portion of the employment income that relates to employment duties performed on a reserve.

We trust that these comments will be of assistance.

XXXXXXXXXX

Yours truly,

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

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