23 April 1999 Internal T.I. 9833137 - STATUS INDIAN, EXEMPT INCOME, SPOUSAL AMOUNT

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: Whether income exempt under paragraph 81(1)(a) of the Act and section 87 of the Indian Act to a status Indian should form part of income for the purposes of the spousal amount or equivalent-to-spouse amount.

Position: Income that is exempt from taxation pursuant to paragraph 81(1)(a) of the Act and section 87 of the Indian Act is not to be included in income when calculating the spousal deduction pursuant to paragraph 118(1)(a) of the Act.

It is a question of fact as to whether an individual is wholly dependent on another for support in a particular case, and it is possible in certain circumstances that a person might be considered wholly dependent notwithstanding that he or she had income. Where the exempt income is significant and received steadily throughout the year, an argument could be made in support of the position that an individual in receipt of paragraph 81(1)(a) exempt income is not wholly dependent on another individual for support.

Reasons: Income that is exempt from taxation pursuant to paragraph 81(1)(a) of the Act and section 87 of the Indian Act is not to be included in income when calculating the spousal deduction pursuant to paragraph 118(1)(a) of the Act. The Income Tax Act is generally specific when the intention is to include income that is exempt pursuant to paragraph 81(1)(a) of the Act in a particular calculation. For example, "earned income" in subsection 63(3) of the Act includes "...all amounts that are included, or that would, but for paragraph 81(1)(a), be included..." and the definition of "compensation" in subsection 147.1(1) of the Act includes the phrase "...or that would be required (to be included in the employee's income) but for paragraph 81(1)(a) of the Act as it applies with respect to the Indian Act." In our view, in the absence of a specific provision which includes paragraph 81(1)(a) exempt income in an income calculation in the Income Tax Act, such income should not be included in the calculation.

With respect to the equivalent-to-spouse amount in paragraph 118(1)(b) of the Act, the term "wholly dependent" is not defined in the Income Tax Act nor is it a term for which a precise legal interpretation can be readily given. Recent relevant jurisprudence indicates that the courts have found that while the expression "wholly dependent" would, at first inspection, seem to indicate that an individual cannot have any income whatsoever, apparently, it is not intended that this strict interpretation of the expression should be employed in the administration of the Act. In addition, the courts have noted that the phrase "at any time in the year", used in paragraph 118(1)(b) of the Act, could refer to intermittent periods during the year and that the phrase "wholly dependent" could relate to those intermittent periods. In our view, it is a question of fact as to whether an individual is wholly dependent on another for support in a particular case, and it is possible in certain circumstances that a person might be considered wholly dependent notwithstanding that he or she had income. Where the exempt income is significant and received steadily throughout the year, an argument could be made in support of the position that an individual in receipt of paragraph 81(1)(a) exempt income is not wholly dependent on another individual for support.

						April 23, 1999

	Charmaine Martin			HEADQUARTERS
	Pacific Regional Office		G. Moore
	708 - 333 Dunsmuir Street	(613) 952-1506
	Vancouver
						11-983313

Whether Exempt Income of a Status Indian is
Considered Income for Other Purposes of the Income Tax Act

We are writing in response to your correspondence of December 8, 1998, regarding whether exempt income of a status Indian should form part of a spouse's or dependant's income when determining the eligibility for the spousal amount and the equivalent-to-spouse-amount, respectively.

As you know, 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 previously determined that, for purposes of section 87 of the Indian Act, the reference to personal property includes employment income. Paragraph 81(1)(a) of the Act codified the common law rule that amounts declared to be exempt from income tax by any other enactment of Parliament shall not be included in computing the income of a taxpayer. Paragraph 1 of IT-379R, Amounts Excluded from Income - Statutory Exemptions and Certain Service or RCMP Pensions, Allowances and Compensation, provides further guidance on the interpretation of subsection 81(1) of the Act and states as follows:

"Subsection 81(1) provides that certain amounts do not constitute income to a taxpayer for any purpose of the Income Tax Act. Paragraph 81(1)(a) specifically provides that amounts which are declared to be exempt from tax by virtue of another Act of the Parliament of Canada, that are not otherwise exempted by virtue of a tax convention or agreement with another country, are not to be included in computing a taxpayer's income... . Where a taxpayer's spouse or dependant is in receipt of these amounts, they are not included in that person's income for the purpose of calculating any personal tax credits (see the current version of IT-513) to which the taxpayer may be entitled, or any personal exemption under former section 109 for taxation years prior to 1988."

With respect to the court case of Douglas Sinclair v. M.N.R., 1991 DTC 960, on his 1984 income tax return, Mr. Sinclair claimed his wife, who was a status Indian, as a dependant for the spousal deduction pursuant to paragraph 109(1)(a) of the Act. The Minister reduced Mr. Sinclair's spousal deduction to zero on the basis that his wife's net income for purposes of the computation included her exempt income. During 1984, the taxpayer's spouse received a pension refund upon her withdrawal from a pension plan. She had been employed previously by a school board resident on a reserve and she resided on a reserve. However, since the pension refund was paid by a payer (Great West Life) resident off reserve, the payment was assessed as taxable income at the time of receipt. By the time the case was heard by the courts, the Indian Remission Order amendment, 1988, was in place. This remission order, paragraph 4, in particular, applied to remit taxes on, inter alia, pension plan payments that were in relation to exempt income. Accordingly, this remission order applied to remit the taxes on the pension refund. The Court found that although the head office of Great West Life, the payer of the pension refund, was off reserve, the funds arose from the school board which is resident on a reserve, and the pension refund was exempt from income tax. However, the court also found that while Mrs. Sinclair might be exempt from tax on the pension refund, Mr. Sinclair had to include her exempt income in the calculation of the spousal deduction. We agree with the outcome of the case with respect to the pension refund, but not for the reasons given by the court. In our view, since the pension payments were taxable at that time and only tax was remitted to Mrs. Sinclair because of the Indian Remission Order amendment, 1988, the pension refund should have been included in the income of Mrs. Sinclair and therefore, taken into consideration in the calculation of Mr. Sinclair's spousal deduction.

In our view, income that is exempt from taxation pursuant to paragraph 81(1)(a) of the Act and section 87 of the Indian Act is not to be included in income when calculating the spousal amount pursuant to paragraph 118(1)(a) of the Act. The Income Tax Act is generally specific when the intention is to include income that is exempt pursuant to paragraph 81(1)(a) of the Act in a particular calculation. For example, "earned income" in subsection 63(3) of the Act includes "...all amounts that are included, or that would, but for paragraph 81(1)(a), be included..." and the definition of "compensation" in subsection 147.1(1) of the Act includes the phrase "...or that would be required (to be included in the employee's income) but for paragraph 81(1)(a) as it applies with respect to the Indian Act." In our view, in the absence of a specific provision which includes paragraph 81(1)(a) exempt income in an income calculation in the Income Tax Act, such income should not be included in the calculation.

We note that with respect to the spousal amount in paragraph 118(1)(a) of the Act, as indicated above, income that is exempt from taxation pursuant to paragraph 81(1)(a) of the Act and section 87 of the Indian Act is not to be included in income when calculating the spousal deduction. Paragraph 118(1)(a) states that "in the case of an individual who at any time in the year is a married person who supports the individual's spouse...". The word "support" is not defined in the Act and therefore, takes its ordinary dictionary meaning. The Concise Oxford Dictionary (8th Edition) defines "support" as to "...provide with a home and the necessities of life..." In general terms, support includes the provision of the basic necessities of life such as food, shelter and clothing but, in our view, support includes both financial and non-financial support. It is a question of fact in each case to determine whether or not the actions or contributions of a particular individual are of such a nature and degree that they could be said to constitute "support" of another person and that a relationship of factual dependency could be said to exist (i.e., reliance on that support). For purposes of the spousal amount, in our view, in the absence of a marriage breakdown, the normal assumption is that the husband and wife are living together and there is mutual support. Also, the omission of the word "wholly dependent" or other similar wording in paragraph 118(1)(a) indicates that the requirement that the individual "support" his or her spouse is not solely based on financial support but would also include non-financial support. Accordingly, the income threshold for the dependent spouse appears to be a narrower financial test in paragraph 118(1)(a) of the Act to determine whether or not one spouse is supported by another for purposes of the married amount.

With respect to the equivalent-to-spouse amount in paragraph 118(1)(b) of the Act, the provision states: "(ii)...and actually supports in that establishment a person who, at that time, is...(B)wholly dependent for support on the individual..." such that the word "support", for purposes of the "equivalent-to-spouse amount", is further clarified. The term "wholly dependent" is not defined in the Income Tax Act nor is it a term for which a precise legal interpretation can be readily given. Recent relevant jurisprudence indicates that the courts have found that while the expression "wholly dependent" would, at first inspection, seem to indicate that an individual cannot have any income whatsoever, apparently, it is not intended that this strict interpretation of the expression should be employed in the administration of the Act. In addition, the courts have noted that the phrase "at any time in the year" used in paragraph 118(1)(b) of the Act could refer to intermittent periods during the year and that the phrase "wholly dependent" could relate to those intermittent periods. In our view, it is a question of fact as to whether an individual is wholly dependent on another for support in a particular case, and it is possible in certain circumstances that a person might be considered wholly dependent notwithstanding that he or she had income. Where the exempt income is significant and received steadily throughout the year, an argument could be made that an individual in receipt of paragraph 81(1)(a) exempt income is not wholly dependent on another individual for support.

R. Albert, C.A.

for Director
Publications and Business Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch