26 May 1998 External T.I. 9809405 - EMPLOYMENT AND CONTRACT INCOME OF INDIANS

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:

Tax Status of various Indian employees and subcontractors of School Board

Position:

Application of Indian Act Exemption Guidelines, employees living off reserve and performing duties of employment off reserve for employer situated off reserve are taxable on employment earnings. School Board Trustee may be taxable, dependent on where duties are performed. Existence of reimbursement of some salary costs by XXXXXXXXXX does not affect tax status.

Subcontracted language teacher’s tax status must be reviewed by examining the nature of the subcontract relationship. Insufficient information

Reasons:

Direct employees not exempt within Indian Act Exemption Guidelines

N. Graham, CA
XXXXXXXXXX 	(613) 957-2136
		980940

Attention:  XXXXXXXXXX 

May 26, 1998

Dear Madam:

Re: Taxation of Employment and Contract Income of Status Indians

We are writing in response to your letter of April 3, 1998, in which you requested our interpretation of whether certain payments made by theXXXXXXXXXX would be taxable to the recipients. You have advised that, in all circumstances, the recipients are status Indians and that the XXXXXXXXXX (the “School Board”) is not resident on a reserve.

You outline three employment situations as follows:

1. Your School Board employs a status Indian as a trustee. You are uncertain whether the employee lives on a reserve. The cost to the School Board of this trustee is fully reimbursed by the XXXXXXXXXX the trustee is appointed to represent.

2. Your School Board employs two educational assistants. The school where they conduct their employment is not on a reserve. The employees do not live on a reserve. A portion of the salary of these two employees is reimbursed by the XXXXXXXXXX

3. Your board employs a native counselor at a school not situated on a reserve. The employee does not live on a reserve. The XXXXXXXXXX reimburses one half of this employee’s salary cost to your board.

You raise one further question, situation 4, concerning a payment you are currently recording as a contract payment. Your board subcontracts with the XXXXXXXXXX for the services of a native language teacher. You advise that the XXXXXXXXXX hired this individual and pays the full salary cost. The payment by your board to the XXXXXXXXXX comprises about one half of the salary of the teacher. You ask that we confirm that your treatment of this payment as contract payment, and not as salary, is correct.

The situations that are described involve actual ongoing transactions involving specific taxpayers; consequently, your questions should be directed to your local Tax Services Office that has the responsibility for determining the tax consequences of completed transactions and their implications to the specific taxpayers. Although we are unable to provide any opinion concerning the specific transactions described in your letter, we have set out general comments that may be of some assistance.

Our Comments

Paragraph 81(1)(a) of the Income Tax Act (the “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 Williams (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 describe the employment situations covered by the Indian Act. We have enclosed a copy of the Guidelines that have been developed, for your reference.

In your correspondence, you have not indicated if the population of students served are Indians who, for the most part, live on reserves. Further, in some situations, you have not disclosed where the individual is resident or where the performance of the employment duties take place. Given these limitations, our comments are as follows.

Situation 1 - School Trustee

In situation 1, you do not provide any information about where the duties of employment are conducted or where the trustee is resident. Guidelines 1 and 3, as well as the proration rule, may provide for full or partial tax exemption of an Indian’s employment income if the employment duties are performed on a reserve. If substantially all the duties are performed on a reserve, Guideline 1 would apply. If more than half of the duties are performed on the reserve and the trustee lives on the reserve, the income could be exempt under Guideline 3.

Guidelines 2 and 4 will not apply to exempt the income as the employer, the School Board, is not resident on a reserve.

Situation 2 - Native Educational Assistants

In this instance, you indicate the employees do not perform their duties of employment on a reserve. Further, neither the employer nor the employee is resident on a reserve. Accordingly, none of the Guidelines apply and the employment income is taxable.

Situation 3 - Native Counselor

The result is the same as in situation 2.

Situation 4 - Native Language Teacher

In this instance, you have indicated that the XXXXXXXXXX is the employer. While the band may have hired and undertaken to pay the salary of this individual, the identity of the employer is a question of fact. If the teacher’s activities are in fact regulated, directed and evaluated by the School Board, and if, in fact, the School Board determines hours of work, work load et cetera, this situation may in substance be similar to those outlined above, where the School Board is the employer and the band is sharing the cost. The Guidelines exempting income from income taxes are not intended to apply when it can reasonably be considered that one of the main purposes for the existence of an employment relationship is to establish a connecting factor between the income in question and a reserve. You have not provided us with sufficient information to comment further on this situation.

We trust that these comments will be of assistance.

Yours truly,

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

Encl.

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