5 May 1998 Internal T.I. 9812220 - FIRST NATIONS WORKSHOP - INDIAN TAXATION

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.

FIRST NATIONS WORKSHOP
Pacific Region
May 4 - 5, 1998

Paper presented by Roberta Albert

Introduction

The Income Tax Rulings & Interpretations Directorate is part of the Policy and Legislation Branch. (refer to organization chart) I work in the Business,Property and Employment Income Section I, which is part of the Business and Publications Division. There are four divisions within the Income Tax Rulings and Interpretations Directorate, which is one of nine directorates within the Policy and Legislation Branch. Suzanne Leclair is from the GST Rulings and Interpretations Directorate, Neil Mitchell is from the Policy and Intergovernmental Affairs Directorate.

The Income Tax Rulings & Interpretations Directorate plays a consultative role in the Department. Our primary role is to interpret the provisions of the Income Tax Act and related statutes, including the Indian Act (as it relates to income tax matters), to establish Revenue Canada's interpretative policy.

As the name of our Directorate indicates, we provide rulings and interpretations. The rulings that we supply are advance income tax rulings that are provided to taxpayers or their representatives, and they provide written confirmation with respect to proposed transactions as to how the Department will apply specific income tax provisions. Rulings are provided on a fee-for-service basis. We also provide written interpretations and verbal consultations to both internal and external clients, dealing with specific provisions of the Income Tax Act. A lot of our workload comes from within the Department -- from Tax Services offices, Taxation Centres and other Headquarters functions. Last year, we handled about 800 written requests from internal clients, which represents approximately 30% of all written requests we received. We also had 4,000 telephone calls from within the Department, representing approximately 25% of this type of workload.

EMPLOYMENT INCOME OF INDIANS

The Department's position on the taxation of Indians was, until 1983, contained in Interpretation Bulletin IT-62 (cancelled July 15, 1995 by the Special Release to IT-397R). The bulletin stated that it was considered that the intention of the Indian Act was to not tax Indians on income earned on a reserve.

Salary and wages were, in the Bulletin, considered to be earned where the services were performed. However, in 1983, the Supreme Court of Canada in the Nowegijick case (83 DTC 5041) said that employment income was a simple debt and that the location of the debt, which was determined by the location of the debtor, determined whether the property was on reserve.

As this implied that Indians working on a reserve for an employer sited off reserve would be taxable, which was not appropriate in policy terms, the Departments of Indian Affairs and Northern Development ("DIAND") and Finance sponsored the Indian Remission Order. This Order remitted tax on employment income earned on a reserve as well as retirement allowances and pension income in respect of exempt income and training allowances from a government when the Indian resided on reserve.

The Remission Order was originally in effect for 1983 and was renewed three times to extend to 1992.

Williams Case

The Supreme Court's decision in Williams (92 DTC 6320) called into question the conclusions drawn from the earlier Nowegijick case. In Williams, the taxpayer's employer was located on reserve, as were his duties of employment. After being laid off, he received enhanced UI benefits as a result of a job creation project on a reserve. The taxpayer was assessed on the basis that the debtor with respect to the UI payments, the federal Crown, was located off reserve. The Court rejected the situs of the debtor test derived from the Nowegijick case as the sole test for determining whether or not a particular property was on reserve, saying that "any overly rigid test which identified one or two factors as having controlling force ... would be open to manipulation and abuse." Instead, the Court recommended the following approach:

(a) analyze the matter in terms of categories of property and types of taxation;

(b) identify the various connecting factors (i.e. factors connecting the property to a location on or off reserve); and

(c) determine the weight to be given to the connecting factors in light of three considerations:

(i) the purpose of the exemption under the Indian Act (which is to ensure that the property of an Indian on reserve would not be eroded through taxation by government -- its purpose is not to confer a general economic benefit on Indians),

(ii) the type of property in question (income), and

(iii) the nature of taxation of the property (tax on income).

Consultations

After the Williams decision was released, our Department entered into inter-departmental consultations to determine the effect of the case. One significant conclusion reached was that the old Remission Order need not be renewed again because the various types of income to which the old Remission Order applied are now considered exempt. However, another Remission Order was put in place to refund income taxes paid by Indians on unemployment insurance benefits received from 1985 to 1991 that should have been exempted pursuant to the Williams decision.

This new Remission Order also provided a reasonable period of transition for taxpayers who may have arranged their affairs on the basis of the Nowegijick case and who may be negatively affected by the application of the Williams case. This order was effective until the end of 1993, extended to 1994 for an office or employment that was held continuously since before 1994. It remitted tax on salaries and wages received by an Indian from an employer situated on reserve where such salaries and wages would have been exempt prior to the Williams decision. An example of such a situation would be employees who worked for agencies situated on reserve but performed their services off reserve.

The Indian Act Exemption for Employment Income Guidelines.

In summary, salary and wages were considered, until 1983, to be earned where the services were performed. The Nowegijick case changed this understanding, turning the focus to the residence of the employer. In Williams, the Supreme Court stated that "the location of the employment must be re-examined."

In order to implement the direction provided by the Court, considerable representations from Indian groups and individuals and other interested parties were considered. This culminated in creation of the Indian Act Exemption for Employment Income Guidelines.

Guideline 1, 2, and 3

Employment income of an Indian will generally be exempt when:

1. at least 90% of duties are performed on a reserve,

2. an Indian lives on reserve and their employer is resident on a reserve,

3. 50% or more of the duties are performed on a reserve and either the employee or the employer is resident on a reserve.

Where less than 90% of the duties are performed on a reserve, and no other Guidelines apply, the exemption can be prorated based on the portion of the income related to the duties performed on a reserve.

Guideline 4

Employment income of an Indian will generally by exempt when:

- the employer is resident on a reserve; and

- the employer is: an Indian band which has a reserve, or a tribal council representing one or more 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

- the duties of 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.

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. All three elements of the Guideline must be satisfied in order for the Guideline to apply.

As stated in the Guidelines, an employer is resident on a reserve if "the reserve is the place where the central management and control over the employer organization is actually located. The central management and control or an organisation is usually considered to be exercised by the group that performs the function of the board of directors of the organization. However, is 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 at a place other than the principal administrative office of the organization." Where an organization which would otherwise not be considered to be resident of a 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.

Numerous court cases have established that the residence of a corporate employer is the place where the employer exercises control and management. The most notable of these cases is De Beers Consolidated Mines Ltd. v. Howe (1906) A.C. 455.

There must be sufficient control exercised from a reserve in order for the organization to be considered to be resident there. In practical terms, it is recognized that this is a question of fact.

The fact that an annual meeting of an organization is held on a reserve does not necessarily mean that the organization is controlled from reserve. We have previously said that the location of the residence of the individual board members is not a determining factor.

While one might anticipate that an organization, if it were to hold its board meetings on reserve, would hold its meetings on the reserve(s) that control it, there is no such requirement.

It is our view that one should consider the residence of the employer on an annual basis. If there is a change in the residence throughout a year and the exemption of the employee's income rests on the employer's residence, it would be appropriate to prorate the employee's exemption for that year.

The second element of Guideline 4 includes that the employer 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 exits 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 reason for the requirement that an Indian organization must be controlled by one or more bands that have reserves is that "bands that have reserves" establish a connection to reserves, and it is the property (including income) of an Indian on a reserve that is exempt from taxation.

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.

The employment duties 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 the employer may have a non-profit mandate, this does not necessarily mean that all of its activities are non-commercial.

Some other issues that we have dealt with concerning employment income involve:

1. The guidelines apply when an employee is required by the contract to perform their duties of employment on reserve. Our view that an employee must be required by an employer to perform their duties on a reserve in order to fall within the employment guidelines is similar to an employee being required by their employer to maintain an office in the home in order for expenses related to it to be deductible. In maintaining a uniform application of the exemption, we need to parallel when possible with our positions for purposes of the Income Tax Act. This is similarly the Department's position when we are dealing with telework situations, in that, in a teleworking situation, once an agreement for teleworking is entered into, the employee is required to perform their duties of employment at home and this may be on a reserve.

The guidelines do not exempt income when an employee works at home because they want to work there for convenience.

We are often asked whether short periods of time on reserve qualify for exemption. It will always be a question of fact as to whether income can be considered to be situated on a reserve but where one's duties are always carried out in a certain location and one spends just some incidental time on a reserve, in our view, there is not a strong connection to a reserve. The closer the amount of time spent on reserve is to nil, the greater the likelihood that the time spent on reserve is incidental and taxable. The closer the amount of time spent on reserve is to 10% of total duties, the greater the likelihood that the proration rule should apply. Basically, when time spent on the reserve is minimal it is considered incidental and does not qualify for exemption.

2. Government exchange programs - it is our understanding that, under the government's interchange programs, the interchange arrangement does not affect the employer-employee relationship that existed prior to the interchange. Rather, the employee's services are contracted to another person for a specified time. Thus, if an Indian employed by a third party were to enter into an interchange arrangement with the federal government, that Indian would continue to be employed by the third party. Similarly, if an Indian employed by the federal government were to enter into an interchange arrangement with a third party, that Indian would continue to be employed by the federal government. In one case, we expressed the view that the government Indian's employment income was not exempt even though that Indian was under contract to perform services for an organization described in Guideline 4.

3. We have looked at several situations involving Indian teachers who have been employed by a school board to provide support services to Indian students at a school off reserve. An Indian band has entered into to a contract with the school board to provide the funding for this teacher. However, we have looked at who the actual employer is and said that these teachers earn taxable employment income.

4. We have had many taxpayers refer to the case of Marianne Folster 97 DTC 5315 as support that working close to a reserve should be considered for exemption. In the case of Marianne Folster, the taxpayer was a status Indian employed by Health and Welfare Canada, as an Administrator at the Norway House Hospital situated in Northern Manitoba. The taxpayer lived on the reserve. The Hospital is located off reserve but 80% to 90% of the patients are status Indians, who resided on the Norway House Indian Reserve. At one time, the Hospital was situated on the Reserve, however, due to a fire in 1949, the Hospital was rebuilt adjacent to, but off the reserve.

The Federal Court of Appeal determined that the income was exempt. After consideration of the connecting factors, the Court found that the performance of her duties, being primarily for the Indians on reserve, the actual historical circumstances involving the relocation off reserve and Ms. Folster's residence should be given more weight than the actual location of the hospital and employment duties and were enough to exempt the income. The Department did not seek to appeal the judgment to the Supreme Court because we are of the opinion that the case was decided in a manner specific to its unusual facts and circumstances. As a result, the decision is not precedent setting.

The Guidelines do note that there may be unusual or exceptional circumstances where the income may not be taxable even though it does not fall within one of the guidelines.

5. With respect to Guideline 4, the Department had felt that organizations would be holding boards of directors meetings on reserve to ensure that the employees of otherwise eligible organizations would earn tax-exempt income. However, its clear that some entities are having difficulty meeting this element of Guideline 4. Some entities have represented to the Department that this element of Guideline 4 should be removed or that we accept something other than we currently do. Two cases were heard before the Courts on this issue - Awasis Agency of Northern Manitoba in December 1997 and Manitoba Indian Education Authority in January 1998 and we are awaiting the decision of the Courts on this issue. Until the decisions are rendered, which we expect to be this summer, the status quo should be maintained.

Finally, the employment guidelines 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. And the Guidelines also note that there may be circumstances where income may be taxable even though it appears to fall within one of the guidelines.

INVESTMENT INCOME OF INDIANS

Before Williams, one of the Department's positions on investment income was that interest earned on a bank account located on reserve was exempt.

However, based on Williams, in our view, the location of a savings account on a reserve would not, in and by itself, be sufficient to exempt the interest income earned thereon. Where a bank account is considered to be situated at a location on reserve, this in one factor to weigh in determining whether interest earned on deposits in that account is exempt from taxation. There could be other factors that would connect the income to a location off reserve.

In 1996, the issue of the taxability of investment income was considered by the Tax Court of Canada in the combined cases of Arnold, Laura and R. Mark Recalma v. Her Majesty the Queen (94-1971, 1972, 1973(IT)G).

In Recalma, the court considered the taxability of income earned by an Indian living on reserve, from investments purchased from an on reserve branch of a bank. It should be noted that the nature of the property in question was the income of the investments and not the investments themselves. The court had to determine if the investment income was situated on a reserve. This determination required the review of all relevant connecting factors and consideration as to how much weight should be given to each factor. The following were considered in determining the situs of the investment income:

a) the residence of the taxpayer;

b) the origin or location of the capital used to buy the securities;

c) the location of the bank branch where the securities were bought;

d) the location where the investment income is used;

e) the location of the investment instruments;

f) the location where the investment income payment is made: and

g) the nature of the securities and in particular:

I) the residence of the issuer;

II) the location of the issuer's income generating activity from which the investment is made; and

III) the location of the issuer's property in the event of a default that could be subject to potential seizure.

While the court considered all of these factors it place considerable weight on (g)(II) - the location of the income generating activity of the issuer of the securities. In Recalma, the income in question was interest from banker's acceptances and income from mutual fund units. Basically the court concluded that income from these investments started with companies off reserve and was passed through the bank on reserve to the taxpayers. It was held that the investment income was not personal property situated on a reserve. The court concluded that in making these investments the taxpayers chose to invest in the economic mainstream of normal business conducted off reserve.

In our view, the decision supports the position that income earned in the economic mainstream is so strongly connected to a location off reserve that it will generally outweigh other factors that may indicate the income is connected to a location on reserve.

This decision was appealed and the decision, which confirmed the original decision, was rendered on March 27, 1998.

As a result, while the determination in any situation would involve a review of all relevant connecting factors and consideration as to how much weight should be given to each factor, the major determining factor is the source of the income. Based on the Recalma decision, unless the income can be identified as exclusively generated on the reserve, in our view, the income is not exempt.

BUSINESS INCOME OF INDIANS

Southwind is the leading case dealing with business income of Indians. The case concerns income earned from logging, where a status Indian lived on reserve and said that he had an office on reserve. However, all his income earning activities were carried out off reserve and his sole customer was off reserve. The Tax Court decided that his income from this logging activity was taxable and the taxpayer appealed this decision. The Federal Court of Appeal rendered its decision on January 14, 1998, confirming the Tax Court's decision.

In reaching its decision, the Court used two main connecting factors, namely the location where the services were performed and the location of the sole customer of the Indian. In the decision, Justice Linden stated:

"Although Morrell Logging is not the appellant's employer, the significance of its off-reserve location lies in that Morrell Logging was the appellant's only customer and debtor in the taxation year. The nature of the appellant's business income must be determined, in part, by reference to the source from which that business income is received. In this respect, the appellant's situation is distinguishable from Nowegijick, where the debtor employer was located on a reserve. Moreover, all of the services performed by the appellant were done off the reserve, a very significant feature of this case."

In our view, one significant factor that serves to connect business income to a location on reserve or off reserve is the location where the activities are carried out. Other significant connecting factors would be the location of the company's customer's, as well as, in the case of a delivery service business, the location of the origin and the destination of trips. Accordingly, if all trips were to originate at a location off reserve and terminate at a location off reserve and the customers were off reserve, the business income would generally not be exempt from income taxation. If a portion of the revenue-generating activities were carried out on reserve, a similar portion of the business income may be exempt.

While there may be some activities carried on in an office located on reserve, it is our view that the actual revenue-generating activities would be more significant in determining whether the business income is connected to a reserve. Thus, for example, if a bookkeeper were employed by an Indian contractor to maintain the books and records of the business in an on-reserve office, but the contractor performed all of the actual revenue-generating activities off reserve, the business income would be more connected to a location off reserve than it would to a location on reserve.

The following are a few situations which we have dealt with regarding business income:

Fisherman

One significant factor that serves to connect business income to a location on reserve or off reserve is the location of the customers of the business. Another significant connecting factor would be the location where the activities are carried out. In the case of a fishing business, however, in our view, the actual revenue-generating fishing activities would be more significant in determining whether income is connected to a reserve. While there may be some activities carried on in an office located on reserve, it is our view that the actual revenue-generating fishing activities would be more significant in determining whether the business income is connected to a reserve. Thus, the fact that a bookkeeper was employed by an Indian fisherman to maintain the books and records of the business in an on reserve office is not, in itself, sufficient to connect the business income to a location on reserve. We have also noted that the limited weight that the on reserve location of a customer would otherwise carry as a connecting factor will not be recognized if it can reasonably be considered that one of the main purposes for the location of the customer on reserve is to serve as a connection between the fishermen's business income and a reserve, by acting as an intermediary between the fishermen and the actual fish buyers who are located off reserve.

Trucker

In the case of a trucker, in addition to the above-noted significant connecting factors, the location of the origin and the destination of the trips would be a significant factor. Accordingly, if all trips originated at a location off reserve and terminated at a location off reserve and the customers were off reserve, the business income would generally not be exempt from income taxation. If a portion of the activities were carried out on reserve, a similar portion of the business income would generally be exempt. Again, the fact that a bookkeeper was employed to maintain books and records in an on reserve office is not, in itself, sufficient to connect an Indian trucker's business income to a location on reserve.

Bookkeeping Service

As indicated above, significant factors that serve to connect business income to a location on or off reserve are the location of the business' customers and the location where the activities are carried out. Therefore, if all of an Indian bookkeeper's business income was derived from customers located off reserve and all of the bookkeeping work was carried on off reserve, the business income would generally not be exempt from taxation. If a portion of the bookkeeping activities were carried on on reserve, a similar portion of the business income would generally be exempt.

				STATUS OF FIRST NATIONS 

The status of Indian Bands or First Nations was mainly of concern in the past with respect to the issuance of charitable donation receipts. However, the case of Otineka and the possibility of tax exemption for First Nation owned corporations has resulted in many more questions concerning the status of First Nations.

In order to be able to issue receipts for purposes of section 110.1 and 118.1 of the Act, a First Nation would have to qualify as a Canadian municipality. The Tax Court of Canada in the 1994 case of Otineka Development Corporation Limited and 72902 Manitoba Limited v. Her Majesty the Queen (94 DTC 1234; (1994) 1 CTC 2424) determined that in certain circumstances a First Nation could qualify as a Canadian municipality. Nonetheless, since 1977, the Department has administratively considered those First Nations that qualify for exemption under paragraph 149(1)(c) of the Act on the basis of being a "public body performing a function of government in Canada", to be regarded as Canadian municipalities for purposes only of issuing receipts under section 110.1 and 118.1 of the Act.

It is a question of fact as to whether a First Nation may be considered to be a public body performing a function of government in Canada. Generally, it is our view that an Indian band will qualify for exemption under paragraph 149(1)(c) of the Income Tax Act as "public body performing a function of government in Canada" if it has passed bylaws under both sections 81 and 83 of the Indian Act. The Department also considers First Nations that had reached as advanced stage of development as was formerly required by section 83 of the Indian Act to be performing a function of government. First Nations that do not meet these requirements can be considered on a case-by-case basis. To date, we have favourably considered situations where First Nations have been involved in negotiating Treaty Land Entitlements and where a First Nation provided elementary and secondary education in band operated schools.

Although paragraph 149(1)(c) exempts from taxation both a public body performing a function of government as well as a Canadian municipality, a corporation owned by a public body performing a function of government is taxable whereas a corporation owned by a Canadian municipality is exempt by virtue of paragraph 149(1)(d).

Having passed bylaws under sections 81 and 83 of the Indian Act would not be sufficient to have the First Nation considered to be a municipality for purposes of either paragraph 149(1)(c) or (d) of the Income Tax Act. In order for a First Nation to be considered to be a municipality, it would have to fit within the facts of the Pas Band in the Otineka case (94 DTC 1234).

In Otineka, the Tax Court of Canada concluded that, since there is no definition of a "Canadian municipality" in the Act, the term must be given its ordinary meaning and is not to be solely determined by the provincial legislation governing municipalities. (A Quebec judge in a 1996 capital tax decision of Tawich disagreed with this position but until, and if, a higher Federal Court looks at this issue, the Department will follow the Otineka decision.) In the Court's views the powers conferred under the Indian Act and their exercise by The Pas Indian Band created a form of self-government that is an essential attribute of a municipality. In that case, the band had passed by-laws to regulate water, garbage disposal, weed control, domestic animal control, law and order, housing and many others. It also provided services to band members such as education, health care, social services, employment and training, counselling and economic development. The First Nation had passed bylaws under both sections 81 and 83 of the Indian Act and it provided considerable services to its members. The band held shares in a corporation that owned and operated a shopping mall on the reserve, and the band also held shares in a second corporation that owned and operated a building supply business located on the reserve. As a comment, in 1996, one representative on a file that we were dealing with suggested that only about 60 to 70 bands have passed bylaws under both sections 81 and 83 of the Indian Act so that not that many bands could be considered to be a Canadian municipality. However, we understand that many First Nations are now considering themselves to be Canadian municipalities and that corporations that they own are filing as exempt municipal owned corporations. (A tribal council would not be considered to be a municipality since a tribal council does not pass bylaws under sections 81 and 83.)

It would be ideal if we could look to certain by-laws as determinative of a First Nations status but the court said that if the First Nation is "a community having and exercising powers of self government and providing the type of service customarily provided by such a body", then it can be considered to be a municipality. Accordingly, each case is a question of fact.

If, as a result of Otineka, a First Nation qualifies as a Canadian municipality and paragraph 149(1)(d) applies to band owned entities, one must consider the timing of the application of subsection 149(10) of the Act. Subsection 149(10) applies when a corporation becomes or ceases to be exempt from Part I tax and deems a disposition and reacquisition of assets held by a corporation at fair market value. Regardless of the structure, if the corporation's status changes, subsection 149(10) applies. In our view, band owned corporations would have become exempt from Part I tax no sooner than at the start of the taxation year that includes January 28, 1994, being the time of the decision in Otineka, since prior to that time the corporation was considered to be taxable. (If the 1994 T2 return is not under objection or appeal, the taxpayer would be constrained by the status claimed on filing, and the time of the change in status would therefore occur on the first day of the 1995 fiscal year. Thus, subsection 149(10) would apply on the first day of its 1995 fiscal year and its income would be exempt throughout 1995 and subsequently.)

Recent amendments have been proposed in Bill C-28 for municipal corporations exempt by virtue of subsection 149(1)(d). The amendments were made to clarify the scope of the exemptions. Of particular interest in these amendments is new paragraph 149(1)(d.5), subject to new subsection 149(1)(1.2), which now includes a geographical restriction to ensure that the tax exemption for a municipal subsidiary corporation applies only where no more that 10% of its income is earned from activities carried on outside the geographical boundaries of the municipalities owning the shares of capital of the corporation.

New subsection 149(1)(1.2) excludes certain income from the determination of whether more that 10% of the income of a corporation, etc, to which that new paragraph 149(1)(d.5) applies is derived from activities carried on outside the geographical boundaries of the municipality or municipalities that own the corporation. Specifically, income derived from activities carried on pursuant to an agreement in writing with Canada, a province, or a municipality, within its geographic boundaries, are not included in the determination.

				YUKON UMBRELLA AGREEMENT 

According to the Indian Act, a reserve 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, except for certain provisions of the Indian Act, includes designated lands.

Land set aside is not a reserve. However, it may be treated as a reserve by a Remission Order. In particular, a Remission Order cited as the "Income Tax Remission Order (Yukon Territory Lands)", treats lands in the Yukon Territory that are reserved or set aside by notation in the property records of the Department of Indian Affairs and Northern Development as a reserve since the end of 1984. This Remission Order which remits taxes payable under the Income Tax Act will remain in effect until the end of the third calendar year after the calendar year in which the Yukon First Nations Self-Government Act comes into force. The Remission Order will be in place effectively until the end of 1998.

The Taxation Principles of the Yukon Comprehensive Land Umbrella Final Agreement are set out in Article 20.6.0. as follows:

20.6.1 As of the effective date of Settlement Legislation, section 87 of the Indian Act, shall not apply to:

20.6.1.1 the interest in a Reserve or surrendered land in the Yukon on any Indian, Yukon First Nation or Band;

20.6.1.2 the personal property situated on a Reserve in the Yukon of any Indian, Yukon First Nation or Band;

20.6.1.3 the personal property situated on a Reserve outside the Yukon of a Yukon First Nation or a Yukon Indian Person resident in the Yukon, and the residency shall be defined in the regulations established pursuant to 20.6.3.

Basically, the section 87 exemption ends on December 31, 1998 and any amounts received after that date will not be subject to section 87 of the Indian Act, and thus not section 81 of the Income Tax Act. There will be no proration of amounts received after December 31, 1998 for periods relating to exempt income earned before that date. For example, pension income and EI received after December 31, 1998 will be taxable when received regardless of the tax status of the employment income to which these amounts relate. We have issued a memorandum, dated April 29, 1998, to the Pacific Region, Regional Operations, which answers many specific questions regarding the income tax status of Yukon First Nation members after the implementation of the Umbrella Final Agreement.

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