13 September 1999 Ministerial Letter 9911998 - INDIAN - XXXXXXXXXX

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.

September 13, 1999

XXXXXXXXXX

Dear XXXXXXXXXX:

The Honourable Martin Cauchon, Minister of National Revenue, has asked me to reply to your letters of April 16 and July 21, 1999, addressed to his predecessor, the Honourable Herb Dhaliwal, regarding status Indian employees working at the xxxxxxxxxx.

As indicated in your letter, there are approximately XXXXXXXXXX status Indians employed by the XXXXXXXXXX. The hospitals in question are located off reserve adjacent to the reserves. In one case, you indicate that the hospital is XXXXXXXXXX from the boundary of the reserve. You also indicate that First Nations employees of these hospitals are required to pay tax on their employment income and you believe that this is unfair since these communities are situated in northern remote locations accessible only by air with a predominantly native population

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 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 the case of Williams V. The Queen, 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 the Williams case and after receiving representations from interested Indian groups and individuals, Revenue Canada 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 incorporating the various connecting factors that describe the employment situations covered by the Indian Act. However, it should be noted that, when applying all the connecting factors, there may be unusual or exceptional circumstances where income may not be taxable even though it does not fall within the Guidelines.

Guideline 1 would apply to exempt all of the income of an Indian if at least 90 per cent of the employment duties are performed on a reserve. When less than 90 per cent of the duties are performed on a reserve and none of the other guidelines apply, only the portion that is performed on a reserve is exempt (the proration rule)

Guideline 2 would apply to exempt the employment income of employees who live on a reserve provided that the employer is in fact resident on a reserve.

Guideline 3 would apply to exempt all of the income of an Indian if more than 50 per cent of the employment duties are performed on a reserve, and the employer is resident on a reserve or the employee lives on a reserve.

Guideline 4 requires that the employer is resident on a reserve. It also requires 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. Also, the duties of the employment must be 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

In your letter, you mention the court case of F Marianne Folster V. The Queen, 97 DTC 5315, and indicate that the situation you described in XXXXXXXXXX is almost identical to that in the Folster case. In the Folster case, the taxpayer was a status Indian employed by Health and Welfare Canada as an Administrator at the Norway House Hospital, situated in Northern Manitoba, and the taxpayer lived on the reserve. The hospital is located off the reserve but 80 per cent to 90 per cent 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 Ms. Folster's duties, being primarily for Indians on reserve, the actual historical circumstances involving the relocation off reserve and her residence, should be given more weight than the actual location of the hospital and employment duties, Given the circumstances, this was enough to exempt the income. Revenue Canada did not seek to appeal the judgment to the Supreme Court because it is the Department's opinion that the case was handled in a manner specific to its unusual facts and circumstances. In our view, this decision would only apply to individuals who are in identical circumstances to Ms. Folster.

In your situation, Guideline 2 would not apply as the hospitals are not employers resident on a reserve. As the hospitals are not on reserves, the employees of the hospitals would not be employees performing their employment duties on a reserve and Guideline 3 or 1 and its proration rule do not apply. We do not have sufficient information to determine if Guideline 4 applies or if the situation you describe in your letter is identical to that in the Folster case. In this regard, I invite you to contact XXXXXXXXXX.

You have indicated that in XXXXXXXXXX, there are applications to extend boundaries of the reserves so that the hospitals are located on the reserve. Matters relating to the designation of reserve land under the Indian Act fall within the responsibility of the Department of Indian Affairs and Northern Development. In the event that there is both a public commitment by the Department of Indian Affairs and Northern Development to convert the land on which the hospitals are located to reserve land and the boundaries of the additional reserve land are established, procedures can be undertaken to treat the land as a reserve, for purposes of section 87 of the Indian Act, until it actually becomes a reserve. It is our understanding that these two requirements have not been satisfied with respect to this land

I trust my comments explain the issues you have raised.

Yours sincerely,

Bill McCloskey
Assistant Deputy Minister
Policy and Legislation Branch

Gwen Moore
June 17, 1999
952-1506