9 March 1998 External T.I. 9726965 - INDIAN ACT EXEMPTION

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 status Indian employees of a corporation are exempt from income tax.

Position:

Question of Fact

Reasons:

..If the employer reside on a reserve and the status Indians live on a reserve guideline 2 would exempt their employment income. No details on reserve application were provided.

5-972696

XXXXXXXXXX Karen Power, C.A.

Attention: XXXXXXXXXX

March 9, 1998

Dear Sirs:

Re: First Nations and Canadian Taxation

We are writing in response to your letter of September 2, 1997, which was forwarded to us to reply by the XXXXXXXXXX Tax Services Office, wherein you requested our views on whether the employment income received by certain status Indians employed by your corporation would be exempt from tax. We also acknowledge our telephone conversation (XXXXXXXXXX/Power) during which you provided additional information. We apologize for the delay in responding.

XXXXXXXXXX

You have indicated that the company's head office is, in fact, the place where the central management and control over the business is actually located. The vice-president of Operations is employed at head office and controls major decision making, personnel requirements, XXXXXXXXXX, special project planning, etc. Head office functions include all accounting functions including XXXXXXXXXX and accounts receivable, accounts payable functions (including cheque signing authority), all payroll functions, forecasting and budgeting, etc. All major decisions must be approved by your CFO, President, and Board of Directors. As well capital expenditures must be approved by the aforementioned. The Company employs status Indians residing both on and off the reserve.

Our Comments

The particular circumstances in your letter on which you have asked for our views appears to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R3, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. However, as you had submitted your request to your tax services office and they have forwarded it to us for reply, we are prepared to offer the following 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 previously determined that, for purposes of section 87 of the Indian Act, the reference to personal property includes employment income. In Williams (92 DTC 6320), the Supreme Court of Canada reconsidered the approach to use in determining whether income is situated on a reserve. The proper approach in determining the situs of personal property is to evaluate the various connecting factors which tie the property to one location or another.

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.

In our view, none of the Guidelines will apply to exempt the employment income of the status Indians living off reserve, as less than 50% of their duties are performed on reserve and the Company activities are commercial in nature.

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

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". You have indicated that the owners of the land upon which the Company's head office was located had applied to have the land designated as reserve land.

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 above facts, Guideline 2 could apply to exempt the employment income of status Indians living on reserve from income tax, if in fact, the Company's building becomes situated on a reserve as defined for purposes of the Indian Act and the central management and control over the organization takes place at this location. Where the central management and control of an organization takes place is a question of fact, generally determined during an audit performed by a District Taxation Office. A review of all of the facts surrounding a situation including the minutes of the meetings of the board of directors and of the resolutions or by-laws passed during those meetings would be required to conclusively resolve this question of fact. However, until such time that the requirements of Guideline 2 are met, the employment income of those employees living on reserve would be taxable. We would be pleased to provide further comments as the reserve application noted-above progresses.

We trust our comments will be of assistance to you.

Roberta Albert, C.A.

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

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