16 April 1998 Internal T.I. E9732407 - Indian Act Income Tax Exemption

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 employment income is exempt under the “Indian Act Exemption for Employment Income” guidelines.

Position:

The employment income of Revenue Canada and Customs employees would not be tax exempt during training at a XXXXXXXXXX college whose head office is located on reserve.

Reasons:

None of the employment duties are performed on reserve and the employer is not resident on reserve, therefore none of the guidelines are applicable.

		April 16, 1998

	XXXXXXXXXX  Tax Services Office	HEADQUARTERS
		Karen Power, C.A.
(613) 957-8953
	Attention:  XXXXXXXXXX
		973240

Indian Act Income Tax Exemption

This is in reply to your Interoffice memo of November 26, 1997 concerning the tax status of employment income of Revenue Canada instructors and new Customs recruits. The issue is whether these individuals qualify for exemption under the guidelines in Revenue Canada’s publication “Indian Act Exemption for Employment Income”. We apologize for the delay in replying.

Our understanding of the facts is as follows:

1. XXXXXXXXXX

Our comments

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 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 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.

Based on the information you have provided us, none of the employment duties during the training are performed on a reserve which precludes the application of Guideline 3 and Guideline 1 and its proration rule. In addition, Guideline 2 and Guideline 4 will not apply as the Revenue Canada instructors and the Customs recruits are employees of the Federal Government which is not an employer resident on reserve. Accordingly, in our view, the employment income of both the Revenue Canada employees and the Customs recruits will be taxable throughout the duration of the training at XXXXXXXXXX.

Guideline 4 could apply, if in fact, the Revenue Canada employees are actually employed by the XXXXXXXXXX during the training. It would be necessary to review the contract of employment to determine if such an employer/employee relationship exists. Furthermore, XXXXXXXXXX would need to meet all of the elements of Guideline 4 and we have not been provided with enough detail to comment on these elements.

Roberta Albert, C.A.

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

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