29 May 1998 External T.I. 9811105 - INDIAN EMPLOYMENT INCOME & 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:

Is employment income exempt under Guideline 4 when employed in non-commercial activities

Position:

Insufficient facts, may not be exempt if activities not carried on exclusively for the benefit of Indians who for the most part live on reserves.

Reasons:

Organizational letters patent encompass "First Nations members and Aboriginal people across Ontario."

XXXXXXXXXX

Attention: XXXXXXXXXX

May 29, 1998

Dear Sir:

Re: Income Tax Status of Employees

We are writing in response to your April 14, 1998, letter requesting our views on the tax status of the employees of the XXXXXXXXXX. You have advised us that your organization employs status Indians, your organization is resident on a reserve, and the services performed are non-commercial activities for the social and educational development of Indians who for the most part live on reserves. On this basis, you feel your organization qualifies under Guideline 4 of the Indian Act Exemption for Employment Income Guidelines.

The situation that is described involves 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 in respect of the specific transactions described in your letter, we are providing general comments that may be of assistance.

Our Comments

Section 87 of the Indian Act exempts from taxation the personal property of an Indian situated on a reserve. The Courts have determined that, for purposes of section 87 of the Indian Act, employment income is personal property. Consequently, in the case of employment income earned by an Indian, what must be determined is whether the employment income is situated on a reserve. The approach to determining whether income is situated on a reserve is based on the Supreme Court of Canada in Williams (92 DTC 6320). The Supreme Court has directed that all factors connecting income to a reserve must be examined to determine if the income is located on a reserve and, thus, is tax exempt. In your correspondence, you referred to the guidelines developed as a result of this case.

Based on the information you have submitted, you are requesting that employment income paid to status Indians by XXXXXXXXXX be exempt from income tax by virtue of 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.

Requirement a)

Specifically, an “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 a reserve, is asserting that it satisfies the definition because it holds its board of directors meetings on a reserve, it should generally be considered to satisfy the definition where management and control over the organization is legitimately exercised during those meetings.

A review of all the facts surrounding a situation including a review of the minutes of the board of directors’ meetings and resolutions or by-laws passed thereat would be required to conclusively resolve this question of fact.

Requirement b)

As XXXXXXXXXX is not an Indian band or tribal council but a non-profit corporation, 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. Based on the information provided, we cannot determine whether this element of Guideline 4 has been met with respect to XXXXXXXXXX.

The intention of the word "exclusively" is to restrict Guideline 4 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. In this respect, we note that the Letters Patent of XXXXXXXXXX appear to be directed toward only social, cultural, educational or economic development. However, you comment in your correspondence that the mandate of the organization is to “XXXXXXXXXX”. The Letters Patent support this broad definition of the individuals who could benefit from the activities of XXXXXXXXXX. Accordingly, XXXXXXXXXX services do not appear to be restricted for the benefit of status Indians, almost all of whom live on reserve. This suggests that the requirements under b) may not be met.

Requirement c)

In determining whether Guideline 4 applies to a particular Indian employee, the employment duties of the Indian employee would also have to be considered. While the employer may have a non-profit mandate, this does not necessarily mean that all of its activities are non-commercial. In addition, as noted under the discussion of Requirement b), as the Letters Patent are so broad, the duties of employment may not be carried on exclusively for the benefit of Indians who for the most part live on reserve.

Summary

Accordingly, in our view, Guideline 4 may not apply to exempt the employment income of XXXXXXXXXX employees from taxation. If your organization is unable to meet the requirements of Guideline 4, the employment income in question may still be wholly or partially exempted under Guideline 1, 2 or 3, depending on the facts.

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

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