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.
Principal Issues: Will income earned by an Indian real estate agent be taxable if the Indian is an employee? Will it be taxable if the Indian is self-employed?
Position: Income may be taxable in each situation.
Reasons: Guideline 1, 2 or 3 may apply. If a full exemption is not available a proration may be claimed for income earned from duties completed on a reserve. However, for business income (self-employed) generally we look to the location of the house being sold as the location where the income-earning activities take place.
XXXXXXXXXX
2010-039020
L. Zannese
(613) 957-2747
March 29, 2011
Dear XXXXXXXXXX :
Re: Real Estate Income-Indian Act Exemption
This is in response to your email correspondence dated December 14, 2010, in which you ask whether income you will earn from working as a real estate agent will be taxable. We also acknowledge our telephone conversation of January 30, 2011 (XXXXXXXXXX /Zannese).
The situation outlined in your correspondence appears to relate to a factual one, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings". This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on our website at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views.
As explained in our telephone conversation, we cannot provide you with a definitive answer as to whether the income described above will be exempt from tax, as this is a determination that can only be made by your local TSO after all the facts have been reviewed. Although we cannot comment on your specific situation, we are able to provide the following general comments, which may be of assistance.
Paragraph 81(1)(a) of the Income Tax Act, together with paragraph 87(1)(b) of the Indian Act, exempt from tax certain income of Indians. An Indian is defined in subsection 2(1) of the Indian Act as a person who is registered as an Indian or entitled to be registered as an Indian. Paragraph 87(1)(b) of the Indian Act states that "the personal property of an Indian or a band situated on a reserve" is exempt from taxation. The courts have determined that income from employment is personal property for purposes of section 87 of the Indian Act. The Supreme Court of Canada, in Williams v. The Queen, 92 D.T.C. 6320, concluded that the determination of whether income is situated on a reserve, and thus exempt from tax, requires identifying the various factors connecting the income to a reserve and weighing the significance of each such factor.
You advise that you will be completing your studies to acquire a real estate license. You have the option of taking a position with an established real estate agent, and earning employment income, or of establishing your own office, in which case you will earn business income. You reside on a reserve and have an office inside your home from which you will work on occasion. The real estate company you plan to work with has an office on a reserve. You estimate that over 90% of your telephone calls will be handled either through your home office or the real estate office. All correspondence will originate from your home office. You plan to maintain a log of the duties that are completed on a reserve and you are confident that most of your working activity will be completed on a reserve. Most of the homes that you will be selling will be located off-reserve.
The courts have established relevant connecting factors for various types of income. Thus, the factors relevant when determining whether employment income is exempt will not necessarily be the same as those for business income. As a result, we will discuss each source of income separately.
Employment Income
To simplify the application of the connecting factors test to common employment situations, the CRA, together with other government departments and interested Indian organizations, developed the Indian Act Exemption for Employment Income Guidelines (the "Guidelines"). The Guidelines that may apply in the situation that you have described can be summarized as follows:
- Guideline 1 exempts all of the employment income of an Indian if at least 90% of the employment duties are performed on a reserve. When less than 90%, but more than an incidental proportion, of the duties are performed on a reserve, and none of the other Guidelines apply, only the portion of income that is earned from duties performed on a reserve is exempt from tax.
- Guideline 2 exempts all of the employment income of an Indian who lives on a reserve, provided that the employer is also resident on a reserve.
- Guideline 3 exempts all of the employment income of an Indian if more than 50% of the employment duties are performed on a reserve and either the employer is resident on a reserve or the Indian lives on a reserve.
In your situation, you will qualify for a full exemption from tax if you complete 90% or more of your employment duties from a location on a reserve. A record of duties completed on a reserve should be maintained to support a claim for this exemption. When recording time spent completing duties on a reserve it is only duties completed in accordance with a contract of employment that are taken into account. Commuting time to and from work, along with stand-by time, are not considered time spent completing duties on a reserve. Given the nature of the duties completed by a real estate agent (e.g., hosting open houses, showing houses, meeting with clients), and the fact that many of the homes being sold are located off-reserve, it seems likely that the 90% rule will not be met.
If your employer is found to be resident on a reserve, then Guideline 2 may apply, as you also reside on a reserve. When determining whether a particular employer is resident on a reserve, we review where the control and management of the employer is exercised. If control and management of the employer is exercised from a reserve then the employer will be resident on a reserve. It is a question of fact whether any employer is resident on a reserve. If your employer is found not be resident on a reserve, then Guidelines 2 will be of no assistance to you. However, you may still qualify for a full exemption if you complete more than 50% of your employment duties on a reserve, as you reside on a reserve (Guideline 3). If you do not qualify for a full exemption from tax, but do complete some of your duties of employment on a reserve, you may be able to prorate the exemption (i.e., claim a partial exemption). In order to support a claim for a partial exemption you would need to provide proof as to which duties of employment were completed on a reserve.
Business Income
The leading court case with respect to the taxation of business income earned by an Indian is Southwind v. The Queen, 98 DTC 6084 (FCA). In Southwind, the Federal Court of Appeal endorsed consideration of certain factors that would be relevant in determining where business income is situated. These factors were: the location of the business activities, the location of the customers, the location where decisions affecting the business are made, the type of business and nature of work, the place where payment is made, the degree to which the business is in the commercial mainstream, the location of a fixed place of business and the location of books and records and, finally, the residence of the business owner. The listed factors were not necessarily of equal significance. In addition to the factors set out in Southwind, the courts have also considered the location of a business' suppliers.
The key factor in determining whether an Indian's business income is tax-exempt is the location of the income-earning activities of the business. In the case of a real estate agent, the income earned is generally derived from a commission earned from the sale of a home. Although a real estate agent may complete other duties with respect to a sale, these are not billed separately from the commission, and thus the location of these activities is of less relevance.
In our view, the location of the home being sold is the location where the income-earning activities of a real estate agent take place. Thus, commissions earned from the sale of a home located on a reserve would generally be exempt from tax, while income earned from the sale of a home located off-reserve would be taxable.
However, if an Indian real estate agent had a contract in which specific tasks were billed separately on a per hour or per task basis, then a partial exemption for income earned from completing specific tasks on a reserve might be available. In this case, a specific accounting would have to be maintained of the tasks completed on a reserve and the resulting income earned. Any expenses incurred to earn the tax-exempt income would not be available to reduce taxable income. As well, it is our position that general bookkeeping and other administrative tasks completed on a reserve are not considered when determining income earned from business activities completed on a reserve.
Once you have decided whether to become employed or self-employed, your local TSO may be able to assist you in determining whether your income is fully or partially exempt from tax. At that time, we would be pleased to help you to find an appropriate contact within your local TSO. We trust that our general comments, above, are of assistance to you.
Yours truly,
Eliza Erskine
Manager
Non-Profit Organizations and
Aboriginal Issues Section
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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