13 May 1999 External T.I. 9912425 - XXXXXXXXXX STATUS INDIANS EMPLOYEES

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 status of various Indian employees of XXXXXXXXXX store in XXXXXXXXXX per cent of a Commercial Complex is on a reserve but a store which is part of the Commercial Complex is entirely off the reserve. Are the employees of the store taxable on their employment income?

Position:

Application of Indian Act Exemption Guidelines.

Reasons:

In this situation, Guidelines 2 and 4 would not apply as the XXXXXXXXXX is not an employer resident on a reserve. In addition, although the lease agreement indicates that part of the Commercial Complex is partly on the reserve, it also indicates that the XXXXXXXXXX store is entirely off the reserve. Accordingly, the employees of the store would not be employees working on a reserve. Therefore, since none of the XXXXXXXXXX store’s employees perform their employment duties on a reserve, Guideline 3 or Guideline 1 and its proration rule do not apply. In the event that there is a public commitment by DIAND to convert this land to reserve land and the boundaries are established, procedures can be undertaken to treat the land as a reserve until it actually becomes a reserve. Comments were also provided based on the assumption that XXXXXXXXXX % of the store was on reserve and employees worked throughout it.

XXXXXXXXXX 	G. Moore
		991242
May 13, 1999

Dear XXXXXXXXXX:

Re: Taxation Status of Status Indian Employees

This is in reply to your correspondence of May 10 and May 11, 1999, in which you requested our comments regarding the taxation of employment income received by status Indian employees.

Further to the telephone conversations of May 10, 1999 (Moore/XXXXXXXXXX) and May 11 and 12, 1999, (Albert/XXXXXXXXXX), as we understand the situation, employees of a store of the XXXXXXXXXX, a publicly-traded company, are status Indians living on a reserve. The store serves the people of XXXXXXXXXX First Nation only.

XXXXXXXXXX

You have asked for our interpretation to determine whether there is sufficient connection to a reserve such that the employees’ income is tax-exempt. The issue is whether the employment income earned by status Indians in their relationship with their employer is personal property “situated on a reserve”. If the income qualifies as personal property “situated on a reserve”, no tax is payable by the employee on the income. If this is the case, then you are asking if there would be any obligation on the XXXXXXXXXX to withhold income tax from income that is exempt from tax.

Our Comments

Written confirmation of the consequences inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature.

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 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 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.

Guideline 1 would apply to exempt all of the income of an Indian if at least 90% of the employment duties are performed on a reserve. When less than 90% 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% of the employment duties are performed on a reserve and the employer is resident on a reserve or the Indian 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; and 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.

In this situation, Guidelines 2 and 4 would not apply as the XXXXXXXXXX is not an employer resident on a reserve. In addition, although the draft lease agreement you submitted indicates that part of the Commercial Complex is to be on the reserve, it also indicates that the XXXXXXXXXX store is entirely off the reserve. If this is the case, the employees of the store would not be employees working on a reserve. Therefore, since none of the XXXXXXXXXX store’s employees perform their employment duties on a reserve, Guideline 3 or Guideline 1 and its proration rule would not apply.

However, you have indicated that, despite the information in the draft lease agreement showing that the store was not to be built on the reserve, XXXXXXXXXX% of the store is, in fact, physically on the reserve and all employees work throughout the store. In a situation such as this, it seems reasonable to accept that XXXXXXXXXX% of the employment duties of the store’s employees will be performed on the reserve and, based on Guideline 1 and its proration rule, that XXXXXXXXXX% of the store’s employees’ employment income will be exempt. However, documentation would have to be provided to demonstrate to the Department that part (i.e., XXXXXXXXXX%) of the store is on the reserve. The determination of whether employment duties are performed on a reserve is a question of fact, which can only be resolved by an examination of all the facts by your Taxation Services Office. XXXXXXXXXX

The draft lease agreement includes provisions in the event that the land on which the XXXXXXXXXX store is located becomes part of the reserve. In the event that there is both a public commitment by the Department of Indian Affairs and Northern Development to convert this land to reserve land and the boundaries of the additional reserve land are established, procedures can be undertaken to treat the land as a reserve until it actually becomes a reserve. It is our understanding that these two requirements have not been satisfied with respect to his land.

Employers are required to withhold source deductions on salary, wages or other remuneration. In the case of employees who are status Indians and whose employment income may be exempt from income tax, including partially exempt, if the employer wishes to be relieved from the obligation to withhold source deductions, we suggest that the employer request individual waivers under the provisions of subsection 153(1.1) of the Act. In addition, the Department will issue general waivers in respect of identifiable groups.

We trust our comments will be of assistance to you.

Yours truly,

R. Albert, C.A.

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