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: 1. Will employment income earned by Indians be exempt from tax where the employees are leased by a company to perform work on territorial lands?
2. What is the responsibility of the employer for withholdings?
Position: 1. The employment income is likely taxable in this scenario.
2. See document.
Reasons: 1. The employment income likely does not fall within the Guidelines.
2. Taxable income earned by an Indian is subject to withholdings.
XXXXXXXXXX 2010-037178
P. Burnley
(613) 957-2100
October 4, 2010
Dear XXXXXXXXXX :
Re: Employment Income Earned by Indians - Leasing Company
This is in response to your facsimile of May 26, 2010, received by our office on June 22, 2010, requesting our comments on the tax treatment of employment income earned by members of a First Nation on traditional or treaty lands and the resulting employer responsibility for withholding federal income taxes, Canada Pension Plan (CPP) and Employment Insurance (EI) contributions. We also acknowledge our related phone conversations (XXXXXXXXXX /Burnley).
The situation outlined in your letter appears to relate to a factual one, involving specific taxpayers. 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 the internet 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. Although we cannot comment on your specific situation, we are able to provide the following general comments, which may be of assistance.
You have indicated that the employees in question (the "Employees") are Indians as that term is defined in subsection 2(1) of the Indian Act, and some likely live on a reserve. You explained that a group wants to create a corporation (the "Employer") that would be owned 49% by non-Indian people (or another corporation) and 51% by the XXXXXXXXXX . The Employer would train the Employees and then lease the Employees to other companies (primarily XXXXXXXXXX companies) to perform XXXXXXXXXX work on projects taking place on First Nation traditional land. The head office of the Employer could be on a reserve, but the training centre for the Employees is not on a reserve.
Paragraph 81(1)(a) of the Income Tax Act (the "Act") together with paragraph 87(1)(b) of the Indian Act exempt from tax personal property of an Indian that is situated on a reserve. Income, including income from employment, has been held by the courts to be personal property for the purposes of section 87 of the Indian Act. Therefore, the employment income of an Indian may qualify for an exemption from income tax if the income is determined to be situated on a reserve. The Supreme Court of Canada, in Williams v. The Queen, 92 D.T.C. 6320, established the general principle that all factors connecting particular income to a reserve must be identified, and the significance of each factor weighed, in determining whether that income is situated on a reserve (the "connecting factors" test).
To simplify the application of this 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.
According to subsection 2(1) of the Indian Act, a reserve "means a tract of land, the legal title to which is vested in Her Majesty, that has been set apart by Her Majesty for the use and benefit of a band". Traditional land or land being claimed in a treaty negotiation is not the same as reserve land; only reserve land or other areas given similar treatment under federal legislation are relevant for the purposes of the tax exemption. Therefore, since the Employees will be training and working on land that is not reserve land, the income will likely not be exempt under Guideline 1 and will be taxable. If an office of the Employer is located on a reserve, and some Employees work at that office on a regular basis, the income of those Employees from employment duties performed at that office may be exempt from tax under Guideline 1. Also, if an Employee performs more than 50% of his or her duties of employment at an office on a reserve and the Employee lives on a reserve, all of the employment income may be exempt from tax under Guideline 3.
Guideline 2, and if an employee does not live on a reserve, Guideline 3, require an employer to be resident on a reserve in order for employment income to be exempt from tax. As indicated in the Guidelines, an employer is generally considered to be "resident on a reserve" if the central management and control of the organization is on a reserve. The place where the board of directors meet and conduct business is generally considered to be the place where central management and control is exercised. However, it may be that the real management and control of an organization is exercised by some other person or group, which can only be determined by reviewing the facts of the situation.
We do not have sufficient facts to determine whether the Employer is resident on a reserve. Generally, this determination can only be made by the Employer's local TSO. In any event, even if an employer is considered to be resident on a reserve, the courts have concluded that an employer's residence on a reserve is a connecting factor that will have minimal weight if the location of the employer has no tangible significance to the reserve. This is particularly true for employee leasing situations. Thus, Guideline 2 (and to a lesser extent Guideline 3) is a reasonable approximation of the connecting factors test in an employee leasing situation only where the location of the employer on a reserve provides direct, significant benefits to the reserve. Consequently, the CRA will generally apply the full connecting factors test, rather than the Guidelines, in determining whether income is situated on a reserve in employee leasing situations.
The determination of whether there are sufficient connecting factors to situate income on a reserve is always a question of fact. Based on the information available to us, it is likely that the income paid by the Employer to most of the Employees would not be sufficiently connected to a reserve to be viewed as situated on a reserve and therefore would be taxable. However, where the duties of an Employee are actually performed on a reserve, the income of the Employee may fall under Guideline 1 or 3.
You have also asked for our comments on the requirements of the Employer to withhold source deductions with respect to the Employees. Under subsection 153(1) of the Act, every person making a payment of salary or wages or other remuneration is required to withhold source deductions. CRA's guide T4001, Employers' Guide - Payroll Deductions and Remittances, provides information for employers in determining which deductions are to be made for Indians. In situations where an employer has determined that the income is taxable, the usual requirements to deduct income tax, CPP contributions and EI premiums apply. Where an employer determines that the income of an Indian is exempt or partially exempt from tax, and the employee requests withholdings to be reduced, the employee must complete a form TD1-IN, Determination of Exemption of an Indian's Employment Income, and the employer must maintain this form on file for the employee. More information regarding payroll deductions for Indians can be found on our Web site.
An employer is always liable for appropriate source deductions with respect to its employees. Consequently, unless an employer is comfortable that employment income of an Indian is wholly or partially exempt from income tax, the employer should generally withhold. If amounts have been withheld and remitted for an employee whose income is later determined to be exempt from income tax, the employee may file an income tax return to claim a refund of the appropriate portion of these amounts.
We trust that these comments will be of assistance.
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
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2010
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2010