20 September 1999 External T.I. 9919025 - INDIAN ACT EXEMPTION 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: Whether the tax status of an employer's business income affects the tax status of an Indian employees employment income.

Position: No.

Reasons: An employee of an Indian sole proprietor should determine the tax status of their employment income using the Indian Act Exemption for employment income Guidelines. The tax status of the employment income is independent of the tax status of the proprietorship's business income..

1999-000280
XXXXXXXXXX Karen Power, CA
(613) 957-8953
Attention: XXXXXXXXXX

September 20, 1999

Dear Sirs:

Re: Indian Act Income Tax Exemption

We are writing in reply to your letters of July 9, 1999, and August 19, 1999, in which you requested our comments regarding the taxation of employment income received by status Indians.

Your letter refers to an excerpt from our June 1, 1999 Technical Interpretation document number 9911575. Items which are underlined and in italics are your insertions. The excerpt reads as follows:

“While there may be some administrative activities carried out on reserve, it is our view that the actual revenue generating activities would be more significant in determining whether business income is connected to a reserve. For example, if a bookkeeper Ms. B or Mrs. D were employed to maintain the books and records in an on reserve office of a self-employed Indian /or corporation resident on reserve? who 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 be to a location on reserve." We assume that the employer's off reserve activity is now the determining factor in the taxation of the bookkeeper's employment income?

You have also formulated several examples on which you request our comments. These examples were formulated based on your interpretation of the December 15, 1993 Indian Act Exemption for Employment Income Detailed Guidelines and our comments found in document number 9911575. Your examples are as follows:

1. Ms. B and Mrs. D are non taxable when they are:

• status Indian,
• resident on reserve,
  • employed by a corporation or Indian (proprietorship) resident on reserve, and whose business activity is on reserve, and
  • performing services on or off reserve.

2. Ms. B and Mrs. D are non taxable when they are:

• status Indian,
• resident on reserve,
  • employed by a corporation resident on reserve, but whose business activity is off reserve, and
  • performing services on or off reserve.

3. Ms. B and Mrs. D are taxable when they are:

• status Indian,
• resident on reserve,
  • employed by an Indian proprietorship who is resident on reserve, but whose business activity is off reserve, and
  • performing services on or off reserve.

4. Ms. B and Mrs. D are nontaxable when they are:

• status Indian,
• resident or non-resident on reserve,
  • employed by an Indian proprietorship who is resident on reserve, but whose non-commercial activity is on or off reserve, and
  • performs non-commercial services to aboriginal persons on or off reserve.

5. Ms. B and Mrs. D are nontaxable when they are:

• status Indian,
• not resident on reserve,
  • employed by an Indian (social, cultural, educational or economic development) Entity who is resident on reserve, but whose non-commercial activity is on or off reserve, and
  • performs non-commercial services to aboriginal persons on or off reserve.

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 and are not binding on the Department.

Employment Income

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 referen~e to personal property includes employment income. In Williams (92 DTC 6320), the Supreme Court of Canada reconsidered the approach to use in determining whether income is situated on a reserve. The proper approach in determining the situs of personal property is to evaluate the various connecting factors which tie the property to one location or another.

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 1994 Guidelines for your files.

Guideline 1 will apply to exempt all of the income of an Indian if at least 90% of the employment duties are performed on a reserve regardless of where the employer is resident. 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 will apply to exempt all of the employment income of employees who live on reserve provided that the employer is in fact resident on a reserve. The condition that the "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.

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 reserve.

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.

Business Income

Our comments provided in technical interpretation document number 9911575 relate to the taxation of business income of status Indians. As stated in our letter, Henry Southwind (98 DTC 6084) is the leading case dealing with the business income of an Indian. The courts considered two main factors to connect business income to a location on or off a reserve. These factors where the location of the revenue generating activities and the location of the business customers.

A corporation is not an Indian and consequently is not itself exempt from taxation pursuant to section 87 of the Indian Act. Thus our comments related to the taxation of business income do not apply to corporations.

The comments provided in document 9911575 are not intended for use in determining the tax status of an individual's employment income. An employee of an Indian sole proprietor should determine the tax status of their employment income using the Guidelines described above. The tax status of the employment income is independent of the tax status of the proprietorship's business income

Recent Jurisprudence

Your letter requests that we provide you with comments on the above examples in light of the following recent court decisions:

FCTD June 9, 1999 - Shilling v. The Queen, and TCC July 20, 1999 Monias et al v. The Queen.

The Department has recently appealed the Shilling case and has not yet issued a response to the Monias decision. Accordingly, our position with respect to employment income earned by a status Indian remains unchanged.

Comments on Examples

Example 1 - Guideline 2 would apply to exempt Ms. B and Mrs. D from tax as they reside on reserve and their employer is resident on reserve. Whether the employer's business activity takes place on reserve would not be a determining factor in this example.

Example 2 - The same comments as provided in example 1 would apply.

Example 3 - Guideline 2 would once again apply to exempt Ms. B and Mrs. D's employment income as they reside on reserve and their employer is resident on reserve

Example 4 - If Ms. B and Mrs. D are resident on reserve, Guideline 2 would apply as in examples 1 through 3. If Ms. B and Mrs. D are not resident on reserve, Guideline 1 could apply to exempt the employment income if Ms. B and Mrs. D perform at least 90% of their duties of employment on a reserve, Guideline 3 could apply if more than 50% of their duties of employment are performed on reserve as their employer is resident on reserve. The non-commercial activities of the proprietorship need not be considered. Guideline 4 would not apply to Ms. B and Mrs. D when they are not resident on reserve as their employer is not 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.

Example 5 - Guideline 4 could apply to exempt Ms. B and Mrs. D's employment income if the employer's non-commercial activities are carried on exclusively for the benefit of Indians who for the most part live on reserves.

We trust our comments will be of assistance to you.

Yours truly,

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch