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: Taxation of a Grant received by a Status Indian
Position: Depends on the income categorization of the grant.
Reasons:
Grants provided by the Ontario Arts Council can be classified as one of the following: a) business income taxable under section 9, b) employment income taxable under subsection 5(1), c) scholarship, grants, fellowships and bursaries taxable under 56(1)(n), or d) prescribed prizes which are not taxable.
If the grant is characterized as business income, a determination of the relevant connecting factors would be required to determine whether or not the grant was exempt from taxation.
If the grant is characterized as employment income, it would be exempt from tax when received by a status Indian if any of the Indian Act Exemption for Employment guidelines have been met.
If the grant is characterized as income taxable under 56(1)(n) it will be tax exempt if it is paid to a status Indian under a treaty or agreement between a band and Her Majesty.
XXXXXXXXXX 5-980587
Karen Power, CA
Attention: XXXXXXXXXX
June 29, 1998
Dear Sirs:
Re: Indian Status Income
This is in response to your letter of March 5, 1998 requesting our views on the taxation and reporting of Ontario Arts Council (OAC) grants paid to status Indians.
XXXXXXXXXX
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. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996. 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.
Characterization of Assistance
In order to determine whether grants awarded by the OAC to status Indians are tax exempt, one must first determine the nature of the assistance. Information on the characterization of such amounts may be found in Interpretation Bulletin IT-257R “Canada Council Grants”. A copy of IT-257R is enclosed for your files.
While IT-257R relates specifically to Canada Council grants, the information contained therein will be useful if the OAC provides its grants and prizes to artists in a similar manner to that of the Canada Council and subsidiary agents. Paragraph 2 of IT-257R outlines three major categories under which an award or grant to an artist may be characterized.
The first category includes assistance received by a taxpayer in the course of operating a business or practicing a profession. The assistance is included in income under section 9 of the Income Tax Act (the “Act”). Interpretation Bulletin IT-525R “Performing Artist” discusses factors that identify a self-employed artist earning business income. A copy of IT-525R is enclosed for your files. The Act does not impose a requirement on a payor to prepare an information slip in respect of amounts which are included in the artist’s income as business income.
When a taxpayer receives an amount by virtue of an employee-employer relationship, the award or grant will be included in income as employment income and a T4 slip is required. When the grant is characterized as employment income, paragraph 8(1)(q) will allow a limited deduction of expenses paid for the purpose of earning employment income from certain musical and other artistic activities. Paragraph 4 of IT-257R provides the following example of a grant which would be considered employment income:
“...when, for instance, an artist is selected by the Council for training or development through an arrangement under which the artist is placed under an employer for a small salary or no salary while the Council subsidizes the artist's employment income, the assistance from the Council to the artist, whether paid directly or through the employer, is considered to be received by virtue of the employment, and is therefore taxable in the artist's hands as income from employment.”
The third category includes scholarships, fellowships, bursaries, prizes or research grants, including a grant for the production of an artistic work. In each case, the facts must be examined in order to determine whether the assistance is included in income as a scholarship, fellowship, bursary or taxable prize under paragraph 56(1)(n) of the Act or as a research grant taxable under paragraph 56(1)(o) of the Act. Furthermore, a prize meeting all of the criteria of a prescribed prize as defined in Regulation 7700 of the Act is not included in computing the income of the recipient.
The characterization of XXXXXXXXXX grant is a question of fact, best resolved by a Tax Services Office. Nevertheless, in our view, based on the information provided and our telephone conversation (XXXXXXXXXX/Power) of June 12, 1998, XXXXXXXXXX grant would likely be characterized as employment income and thus taxable under subsection 5(1) of the Act.
Taxation of Employment Income
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.
Guideline 1 would apply to exempt all of the income of an Indian if at least 90% of the employment duties are performed on a reserve. When less than 90% of the duties are performed on a reserve and none of the other guidelines apply, only the portion that is performed on a reserve is exempt (the proration rule).
Guideline 2 would apply to exempt the employment income of employees who live on reserve provided that the employer is in fact resident on a reserve.
Guideline 3 would apply to exempt all of the income of an Indian if more than 50% of the employment duties are performed on a reserve and the employer is resident on a reserve or the Indian lives on a reserve.
Guideline 4 requires that the employer is resident on a reserve. It also requires 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 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.
We cannot conclusively resolve whether any of the guidelines will apply to exempt XXXXXXXXXX income. However, based on the information you have submitted, it appears that XXXXXXXXXX would not meet the requirements of any of the above guidelines, as his employment duties are performed off reserve and the OAC, the employer, is not resident on reserve.
If, in a particular situation, an individual’s employment income is determined to be exempt from taxation by virtue of the above guidelines, complete the T4 supplementary slip leaving box 14 blank and indicating the following in the footnote area “Non-taxable earnings $______ - Status Indian employee”.
Taxation of Business Income
If, after a review of IT-525R and all of the relevant facts in your situation, you conclude that the grant provided to XXXXXXXXXX should be characterized as business income, the following comments will assist you in your determination of whether such business income is exempt from tax.
One significant factor that serves to connect business income to a location on reserve or off reserve is the location where the activities of the business are carried out. Another significant factor would be the location of the customers of the business. The facts that the taxpayer resided on reserve, and the books and records of the business are kept on reserve are factors to be given less weight than others. These factors are not sufficient to connect the business income to a location on reserve.
As mentioned above, the Act does not impose a requirement on a payor to prepare an information slip in respect of amounts which are included in the artist’s income as business income.
Taxation of Amounts Included Under Paragraphs 56(1)(n) or 56(1)(o)
Student grants, scholarships and bursaries are normally included in income by virtue of paragraph 56(1)(n) of the Act to the extent that the amount received in the year exceeds $500. Scholarships and bursaries may be defined as amounts paid or benefits given to students to enable them to pursue their education.
Grants received in a taxation year to enable a taxpayer to carry on research or any similar work are included in income under paragraph 56(1)(o) of the Act. In order for a grant to be considered a research grant, the terms of the grant must establish that the primary purpose of the grant is to carry out research. Paragraph 56(1)(o) of the Act provides that research grants are required to be included in income to the extent that the grants exceed allowable expenses incurred by the taxpayer in the year for the purpose of carrying on the work.
By virtue of section 87 of the Indian Act, the following property is exempt from taxation, namely:
a) the interest of an Indian or a band in a reserve or surrendered lands; and
b) the personal property of an Indian or band situated on a reserve.
Paragraph 90(1)(b) of the Indian Act further provides that for purposes of section 87, personal property that was given to Indians under a treaty or agreement between a band and Her Majesty shall be deemed always to be situated on a reserve.
In the case of Deanna Greyeyes v. Her Majesty the Queen, (78 DTC 6043) (F.C.T.D.), a scholarship for a Status Indian was held to be exempt from taxation by virtue of paragraph 81(1)(a) of the Act. Deanna Greyeyes was a status Indian enrolled as a student at the University of Calgary, who received a scholarship pursuant to an agreement between her Band and Her Majesty specifically pursuant to an agreement to assist band members in their education in compliance with the obligations of the Federal Government under treaty No.6. The court held that the scholarship, by virtue of subsection 90(1) of the Indian Act, was personal property of an Indian situated on a reserve within the meaning of section 87 of the Indian Act.
In our view, XXXXXXXXXX grant is not the type of scholarship or grant normally included in income by virtue of paragraph 56(1)(n) of the Act. Nor would it have been considered to be paid to him under a treaty or agreement between a band and Her Majesty as reflected in Greyeyes. In addition, based on our understanding of the grant, it does not appear to be a research grant for purposes of paragraph 56(1)(o).
If, in a particular situation, the scholarship or grant is determined to be tax exempt, complete the T4A supplemental slip indicating the amount received in the appropriate box and indicating the following in the footnote area “Non-taxable grant $______ - Status Indian”. In box 38, enter code “14”. Relevant documentation which has helped in the determination that a tax exemption applies to a particular individual should be kept.
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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