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 treatment of employment income of a status Indian.
Position TAKEN:
Guidelines 1 to 3 cannot apply to exempt any portion of the employment income.
General comments provided on Guideline 4.
Reasons FOR POSITION TAKEN:
The Indian did not perform any employment duties on a reserve and did not live on a reserve.
We were not provided with sufficient information to establish whether Guideline 4 can apply.
XXXXXXXXXX 5-990373
M. Azzi
Attention:XXXXXXXXXX
April 14, 1999
Dear Sirs:
Re: Status Indian - XXXXXXXXXX
This is in reply to your letter of February 11, 1999, wherein you requested our views on whether any of the income received in 1996 and 1997 by the above-noted status Indian qualifies for the tax exemption provided under the Indian Act.
We understand that in 1996, XXXXXXXXXX received employment income from 4 employers, while in 1997 he received employment income from 3 employers and Employment Insurance (“EI”) benefits. It is also our understanding that throughout both years, XXXXXXXXXX did not live on a reserve and none of his employment duties were performed on a reserve.
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 income is personal property. Therefore, what must be determined is whether the 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 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. We have enclosed a copy of the Guidelines for your information.
Since XXXXXXXXXX did not perform any employment duties on a reserve and did not live on a reserve during 1996 and 1997, Guidelines 1 to 3 cannot apply to exempt any portion of his employment income for those years. As regards Guideline 4, we have not been provided with sufficient information to establish whether it can apply to any of the employment income received during 1996 and 1997; however, we can offer the following general comments which should be of assistance.
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.
The term "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 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.
Where the employer is not an Indian band or tribal council, in order for Guideline 4 to apply, 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 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.
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.
One of the requirements of Guideline 4 is that an organization must be dedicated exclusively to the development of Indians "who for the most part live on reserves." That is, almost all of the Indians in the population served by the organization must live on reserve. Guideline 4 recognizes that there will be situations where an Indian works for an organization which is dedicated exclusively to the development of Indians on reserves, and the work may require the Indian to live away from the reserve. Although the employee's residence would not be a factor which connects the Indian's employment to the reserve, it is appropriate, under the circumstances laid out in Guideline 4, to recognize a connection since the employee is working for the benefit of Indians on reserve. However, if the population served by the organization was not comprised almost entirely of Indians who live on reserve, this latter connection would not exist.
In addition, to determine whether Guideline 4 applies to a particular Indian employee, the employment duties of the Indian employee would also have to be considered, in order to establish whether they 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. While the employer may have a non-profit mandate, this does not necessarily mean that all of its activities are non-commercial. As a general rule, a commercial activity entails the provision of services or the creation of a product to be provided to others for compensation. On the other hand, an example of a non-commercial activity would be a governmental or quasi-governmental activity.
Finally, it should be noted that the Guidelines also provide that employment-related income of a status Indian, such as EI benefits, will usually be exempt from income tax when received as a result of employment income that was exempt from tax. If a portion of the employment income was exempt, then a similar portion of the benefits will be exempt. Accordingly, in order to establish whether any portion of EI benefits is exempt, you must first establish (as explained above) whether the employment income, which gave rise to the EI benefits, was exempt.
We trust that these comments will be of assistance.
Yours truly,
Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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