25 November 1997 External T.I. 9728635 - INDIAN ACT EXEMPTION - GUIDELINE 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) Indian Organization moving its head office from XXXXXXXXXX reserve to a XXXXXXXXXX reserve. Tax implication for its employees.

Position:

(1) General explanations regarding Guideline 4 given. Comments on potential application of Guideline 2 to employees working off-reserve but residing on a reserve.

Reasons:

(1) Guideline 4 applies to Indian Organizations. Guideline 2 applies to Indians residing on a reserve and working for an employer which also resides on a reserve, regardless of where the duties are performed.

5-972863
XXXXXXXXXX P.-A. Sarrazin

November 25, 1997

Dear XXXXXXXXXX:

Re: Indian Act Exemption for Employment Income

This is in reply to your letter of October 23, 1997, addressed to XXXXXXXXXX, concerning the application of the above-mentioned tax exemption. Your letter has been forwarded to our office for reply.

The employer, XXXXXXXXXX, currently has its head office on a reserve in XXXXXXXXXX and is considering moving it to a XXXXXXXXXX reserve. You wanted to know the tax implications of this move for the XXXXXXXXXX employees of XXXXXXXXXX working off-reserve.

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 approach adopted by the Supreme Court of Canada in the case of Williams v. The Queen, 92 DTC 6320, requires the examination of all factors connecting income to a reserve to determine if the income is situated 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 provided in your letter, it appears that XXXXXXXXXX employees' situation could be covered by Guideline 4. 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 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 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. Assuming that the central management and control of XXXXXXXXXX is located at its head office on a reserve, the requirement that the employer be resident on a reserve would be met.

XXXXXXXXXX is not an Indian band or tribal council; consequently, in order for Guideline 4 to apply, XXXXXXXXXX must be an Indian organization controlled by one or more Indian bands which have reserves or tribal councils representing one or more Indian bands which have reserves. The concept of control in Guideline 4 is the kind that exists where there is power to command and direct. Where a band or tribal council can replace the directors of an organization, the band or tribal council could be said to control the organization. The facts presented do not indicate whether the election of the board of directors of XXXXXXXXXX is undertaken in such a manner that bands or tribal councils control XXXXXXXXXX.

Guideline 4 is restricted to those organizations which are dedicated only to the social, cultural, educational or economic development of Indians living on reserve. It would not be sufficient to have these being only part of an organization's objectives. Guideline 4 is a generous interpretation of the direction provided by the Courts in Williams, so it is appropriate to restrict its application to situations that fit squarely within it. It is not possible for us to make that determination from the information provided in your letter, nor can we determine whether almost all of the Indians served by XXXXXXXXXX must live on reserve.

The employment duties of XXXXXXXXXX employees would also have to be considered to determine if, as required under Guideline 4, they were 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. While XXXXXXXXXX may have a non-profit mandate, this does not necessarily mean that all of its activities are non-commercial.

We would also point out the potential application of Guideline 2 to the above situation, in the event that certain employees of XXXXXXXXXX reside on a reserve. 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.

It is a question of fact whether the requirements of any particular Guideline are satisfied and the Tax Services Offices are better able to resolve these questions of fact. With additional information, you may wish to contact the XXXXXXXXXX.

We trust that these comments will be of assistance.

Yours truly,

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

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