29 September 1997 External T.I. 9720175 - INDIAN ACT EXEMPTION - GUIDELINES 3 AND 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:

(1) Status Indian employee of a reserve-based organization: whether duties performed on a reserve but only "constitute approximately XXXXXXXXXX% of the services provided" are enough for tax exemption under Guideline 3.

(2) Whether tax exemption under Guideline 4 available.

Position:

(1) Exemption cannot be granted.

(2) Exemption cannot be granted.

Reasons:

(1) Tax exemption under Guideline 3 is granted only if both requirements are met. Since the requirement that more than 50% of the duties be performed on a reserve is not met, tax exemption cannot be granted.

(2) Tax exemption under Guideline 4 may be granted provided that the employer resides on a reserve and is a Tribal Council, Indian Band or Indian Organization owned by one or more Indian Bands or Tribal Councils. The facts submitted to us seem to indicate that the organization is owned by private interests rather than by Tribal Councils or Indian Bands.

5-972017
XXXXXXXXXX P.-A. Sarrazin

September 29, 1997

Dear XXXXXXXXXX:

Re: Indian Act Exemption for Employment Income

This is in reply to your letter dated July 24, 1997, in which you requested our opinion as to the applicability of the Indian Act exemption to your situation and that of other employees of the XXXXXXXXXX.

We understand that the staff is employed by XXXXXXXXXX, a social services organization owned by Status Indians. The administrative office is located on reserve land and the home is at an off-reserve location central to the bands served. The duties include providing children and families with traditional, cultural and spiritual services on reserve land. These services constitute approximately XXXXXXXXXX% of the services provided by the employer.

Other duties involve working with Family Social Services, therapists, the criminal justice system and special needs schools, all of which are off reserve. These other services are provided to treaty status children and with a view to reunite the families on their reserve.

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.

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.

Based on the information submitted in your letter, it appears that you are contemplating a situation where employment income would be exempt from income tax by virtue of Guideline 3 or 4.

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. As it appears that less than 50% of your duties are performed on a reserve, one of the two requirements is not met and Guideline 3 is inapplicable to your situation.

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 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 it appears that the employer you described to us is owned and controlled by private interests rather than by one or more Indian bands or tribal councils, one of the requirements is not met and Guideline 4 cannot apply to this situation.

In the course of our review, we considered the application of Guideline 2 to the above situation. If an Indian employee lives on a reserve and the employer is resident on a reserve, within the meaning of those expressions defined in the Guidelines, all of the employment income earned by the Indian would be exempt from taxation.

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. As regards Guideline 2, the Tax Services Office is in a better position to determine whether an employer is resident on a reserve and whether any Indian employees live on a reserve.

We also considered the application of the Proration Rule to Guideline 1 to hypothetical situations where an employee would not reside on a reserve. As none of the other Guidelines would then apply to this employee's situation, the Proration Rule to Guideline 1 could apply to exempt the portion of the employee's employment income that relates to the employment duties performed on a reserve, provided that such portion is significant enough to constitute a meaningful connecting factor and that the employee's presence on a reserve by virtue of the employment is not merely occasional.

We trust that these comments will be of assistance. For further information on tax exemption, please contact your XXXXXXXXXX Tax Services Office XXXXXXXXXX

Yours truly,

Roberta Albert, CA
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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