16 December 1999 External T.I. 9926845 - TAXABLE BENEFITS RECEIVED BY STATUS INDIANS

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: Taxability of training benefits received by Aboriginal clients which are funded by HRDC.

Position: Taxable under paragraph 56(1)(r) of the Act.

Reasons: Benefits funded under the EI Act will generally be taxable under 56(1)(r) of the Act. If the training takes place on reserve, the connecting factors may exempt the benefits of status Indians from taxation pursuant to section 87 of the Indian Act.

		5-992684
XXXXXXXXXX 	Karen Power, CA
(613) 957-8953
Attention:  XXXXXXXXXX 

December 16, 1999

Dear Sirs/Madam:

Re: Training Benefits Received by Off-reserve Aboriginal Clientele

We are writing in reply to your letter of September 16, 1999, which was forwarded to us for reply by the XXXXXXXXXX Taxation Service Office, concerning the taxation of training benefits received by aboriginal clients. We also acknowledge receipt of your correspondence of November 19, 1999, providing us with further information.

You have provided us with the following information:

1. XXXXXXXXXX has taken over the funding and service delivery from Human Resources Development Canada ("HRDC") for off-reserve aboriginal clientele effective XXXXXXXXXX.

2. XXXXXXXXXX will provide funding for eligible clientele in the form of living allowances and/or tuition and Employment Insurance top-ups on existing claims to allow the clients to return to school (usually for upgrading).

3. The criteria for eligibility are as follows:

• the individual must be an off-reserve Aboriginal person;
• the individual must be unemployed and eligible for EI or EI reachback;
• case managers must make recommendation for the client to attend school to either retrain or upgrade education levels in order to secure suitable employment in the future;
• individuals are only allowed to apply for one year of funding; and
• students who have recently graduated from school are only entitled to apply for tuition and books for school.

4. The service is comparable to programs offered by HRDC for clients who are interested in retraining. The only difference between XXXXXXXXXX program and HRDC's program is that XXXXXXXXXX physically administers the funding directly to the clients.

You have asked the following questions relating to the above situation:

A) What types of information returns have to be given to the clients from XXXXXXXXXX?

B) Are withholdings required to be withheld on the above noted payments?

C) Are the client's eligible to claim the monthly education amounts on their personal tax returns?

Our Comments

It is our understanding that many aboriginal organizations and Indians bands receive funding from HRDC to provide employment training to status Indians. The funding is provided under the terms of a Regional Bilateral Agreement ("RBA"), sometimes referred to as Post Pathways, with HRDC.

We have also been advised by an HRDC official that the funding for the RBA's comes from two different streams. A portion of the funding is received under the authority of section 63 of the Employment Insurance Act ("EI Act") and the remaining portion of funding is received from the federal government's Consolidated Revenue Fund ("CRF"), in which the terms and conditions are approved by Treasury Board.

Individuals who receive funding under section 63 of the EI Act must meet one of the following eligibility requirements:

• individuals for whom a benefit program has been established (entitled to regular EI benefits)
• individuals who have had an insurance benefit end in the three years before applying for assistance, and
• individuals who have received maternity or parental leave benefits in a period that began no more than five years before applying for assistance.

Individuals who do not meet these requirements and who received training benefits would be funded from the CRF. It would appear from the information you have provided us that all clients of XXXXXXXXXX must meet the EI eligibility requirements, therefore, we will limit our comments to benefits funded under the EI Act.

Benefits Funded Under the EI Act:

In our view, training benefits (including tuition, allowances & books) provided to individuals which are funded under the EI Act are taxable under paragraph 56(1)(r) of the Income Tax Act. This paragraph was included in Bill C-28, which received Royal Assent on June 18th, 1998. This amendment is retroactive to June 30, 1996, the date of coming into force of the EI Act and the Canada Customs and Revenue Agency will apply the amendment beginning with the 1997 tax year.

Paragraph 56(1)(r) of the Act subjects to tax various training-related amounts. Specifically, this paragraph includes in a taxpayer's income financial assistance received under Part II of the Employment Insurance Act, as well as similar financial assistance received from a government or government agency under the terms of an agreement with the Canada Employment Insurance Commission. As a result, recipients of financial assistance under Part II EI programs will be taxed regardless of whether the payments have been made directly by the federal government, a province or an organization under a devolution agreement.

You have not provided us with sufficient detail with respect to the nature of the Employment Insurance top-ups. In our view, if these top-up payments are paid under Part II of the EI Act they would be taxable under paragraph 56(1)(r) as discussed above. However, if the top-ups are paid under Part I, VIII or VIII.1 of the EI Act, they would be taxable under subparagraph 56(1)(a)(iv) of the Act as regular Employment Insurance.

When the training benefits are received by status Indians, paragraph 81(1)(a) of the Act and section 87 of the Indian Act may provide a tax exemption if the income is considered an Indian's personal property situated on a reserve. The Courts have determined that, for the purposes this exemption, income is personal property. Consequently, what must be determined is whether the income of an Indian is situated on a reserve.

In determining whether income is situated on a reserve, the approach taken by the Supreme Court of Canada in the case of Williams (92 DTC 6320) must be followed. The proper approach to determining the situs of personal property is to evaluate the various connecting factors which tie the property to one location or another. The Supreme Court indicated that the ultimate question is to determine to what extent each connecting factor is relevant in determining whether taxing the particular kind of property in a particular manner would erode the entitlement of an Indian to personal property situated on a 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 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.

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. This position generally applies to regular EI benefits and, consequently, it would apply to the regular EI benefits received by individuals who are eligible for training funding because, as noted-above, a benefit program has been established.

However, the training benefits received by status Indians which are funded by the EI Act are not related to employment income and, in our view, will generally not be connected to a reserve and consequently this assistance will generally not be tax exempt. However, the exemption may apply when the training itself is taken on reserve.

Paragraph 90(1)(b) of the Indian Act provides that for purposes of section 87, personal property that was given to Indians under a treaty or agreement between a band and Her Majesty shall be deemed always to be situated on a reserve. As described in Mitchell v. Peguis Indian Band ((1990) 2 SCR 85), in paragraph 90(1)(b) of the Indian Act the words "treaty" and "agreement" take colour from each other and, in our view, an agreement would have to be similar in nature to a treaty. It is a question of fact whether assistance for education received by a status Indian is received under treaty or agreement between a band and Her Majesty and is exempt or is received under some other program and is taxable. In our view, training benefits funded under the EI Act would not be considered received under a treaty or agreement between a band and Her Majesty and consequently would not be tax exempt by virtue of section 90 of the Indian Act.

Questions A & B:

Income tax is required to be withheld from amounts taxable under paragraph 56(1)(r) of the Act, and these amounts should be reported on a T4A Summary and related T4A Supplementaries. In addition, the educational institutions should issue Form T2200 or T2202A to students who are enrolled in a qualifying program, whether or not it is actually the student who paid the tuition.

We are not able, at this time, to provide you with comments on whether Canada Pension Plan ("CPP") or Employment Insurance ("EI") premiums are required to be withheld from amounts taxable under paragraph 56(1)(r) of the Act. We have forwarded your request to the CPP/EI Eligibility Division so that they may provide you with comments regarding the CPP/EI withholding requirements.

Question C:

In order for students to claim the education credit under subsection 118.6(2) of the Act, they must be enrolled in a "qualifying education program" as defined in subsection 118.6(1) of the Act. In general, the credit is not available to a student who receives any allowance, benefit, grant or reimbursement for expenses (other than as a scholarship, fellowship or bursary, prize for achievement in a field of endeavour ordinarily carried on by the student or loan granted in accordance with the Canada Student Loans Act or Student Loans and Scholarships Act of the Province of Quebec) from a person with whom the student is dealing at arms length. In our view, the training assistance received by the individuals described above, under Part II of the EI Act will normally be considered allowances or benefits for the purposes of section 118.6 of the Act and the recipients would not be eligible for the education tax credit.

We have also provided you with comments with respect to the tuition tax credit. Under subparagraph 118.5(1)(a)(iii.1) of the Act, an individual may be prevented from claiming the tuition tax credit for tuition fees in respect of which the individual was entitled to receive a reimbursement or any form of assistance under a program of Her Majesty in right of Canada or a province designed to facilitate the entry or re-entry of workers into the labour force. However, this is not the case if the reimbursement or assistance is included in the individual's income. In our view, provided all of the other requirements of section 118.5 have been, an individual receiving training assistance which is taxable under paragraph 56(1)(r) of the Act would be entitled to claim the tuition credit.

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