29 September 1997 Internal T.I. 9724247 - INDIAN ACT EXEMPTION GUIDELINE 1 AND PRORATION RULE

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 requesting exemption, by virtue of Proration Rule to Guideline 1, of duty performed off reserve but in connection to work performed on reserve.

Position:

(1) Exemption cannot be granted

Reasons:

(1) Exemption may only be granted where the duties are required by the employer to be physically performed on a reserve.

							September 29, 1997

M. Chartrand				HEADQUARTERS
	Sudbury Tax Services Office		P.-A. Sarrazin
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							7-972424

Indian Act exemption for employment income

This is in response to your Round Trip Memorandum dated September 4, 1997. In this Memorandum you were requesting that we determine whether a portion of the employment income of XXXXXXXXXX, who we assume is a Status Indian, could be exempt from income tax.

The employee works as XXXXXXXXXX. The employment duties require this employee to spend 10 days per year on a reserve for which a tax exemption is claimed according to the Proration Rule to Guideline 1. The employment duties also require this employee to perform extra work off the reserve, but still in relation to or as a complement of the work performed on the reserve. Therefore, the employee is claiming an income tax exemption for this extra work, by virtue of the Proration Rule to Guideline 1.

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 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.

The only Guideline which appears to be applicable in this situation is the Proration Rule to Guideline 1. 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.

As the XXXXXXXXXX employee is only performing the extra duties in relation to a reserve and not physically on a reserve, the employment income earned while performing these extra duties cannot be connected to a reserve and thus cannot be exempt from income tax by virtue of the Proration Rule to Guideline 1.

Please note also that, in calculating the time spent performing employment duties on a reserve, travel time to and from the reserve is not included.

We would remind you that a portion of employment income may only be exempt by virtue of the Proration Rule to Guideline 1 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 (example of Mrs. G on page 3 of the Guidelines).

The closer the amount of time spent on reserve is to nil, the greater the likelihood that the time spent on reserve is incidental and taxable. The closer the amount of time spent on reserve is to 10% of total duties, the greater the likelihood that the Proration Rule should apply. Basically, when the time spent on the reserve is minimal it is considered incidental and does not qualify for exemption. For instance, in the past, we have denied exemption for time spent just taking a 5-day cross cultural course on a reserve.

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