8 December 2010 External T.I. 2010-0380481E5 - Indian - employment income - proration

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: How is the Indian Act exemption calculated with respect to employment income in a specific situation?

Position: Example proration given.

Reasons: Guideline 1 appears to apply to prorate the exemption.

XXXXXXXXXX 								2010-038048
					        			P. Burnley
							   		(613) 957-2100
							       

December 8, 2010

Dear XXXXXXXXXX :

Re: Indian Aeromedical Attendant Employee

This is in response to your letter of September 14, 2010, and further submissions received on September 17 and September 20, 2010, requesting our comments regarding the proration of the Indian Act exemption from income tax as applied to the employment income of an aeromedical attendant. You have indicated that the employee is an Indian as that term is defined in subsection 2(1) of the Indian Act.

The situation outlined in your letter 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. Although we cannot comment on your specific situation, we are able to provide the following general comments, which may be of assistance.

You have stated that the employee does not live on a reserve and works out of one of the employer's XXXXXXXXXX bases, none of which are on a reserve. You provided the following information as an example of a scheduled work day:

• the employee is required to be on-base for XXXXXXXXXX hours;
• he is on stand-by for XXXXXXXXXX of those hours;
• he spends XXXXXXXXXX hours performing duties of employment;
• of the XXXXXXXXXX hours performing duties, XXXXXXXXXX hours is spent on a reserve.

You would like to know how to prorate the exemption on the employment income if the employee earned $XXXXXXXXXX during the day described.

The employee submitted additional information estimating that of the time spent performing duties that are not on a reserve (XXXXXXXXXX hours), XXXXXXXXXX hours is spent flying to the patient and XXXXXXXXXX hours is time spent attending to the patient on board the aircraft. The employee also offered information regarding how the Indian Act exemption was applied to his previous employment income. However, this information did not affect our analysis regarding the application of the exemption to the current employment income.

Paragraph 81(1)(a) of the Income Tax 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. The Supreme Court of Canada, in Williams v. The Queen, 92 DTC 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"). These Guidelines are available on the CRA website.

Guidelines 2 and 4 require the employer to be resident on a reserve for all of the employment income to be exempt from tax. Another requirement of Guideline 4 is that the employer must be an Indian Band, tribal council or other Indian organization. There is nothing in your correspondence to indicate that the employer is resident on a reserve or that it is an Indian Band, tribal council or other Indian organization; therefore, neither of Guidelines 2 or 4 will apply to the employment income.

Where the employer is not resident on a reserve, Guideline 3 requires that the employee live on a reserve for all of the employment income to be exempt. You have indicated that this is not the case, and so Guideline 3 does not apply.

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.

In your example, Guideline 1 will not exempt all of the employment income as less than 90% of the employee's duties of employment are performed on a reserve. However, since it appears that more than an incidental portion of the employment duties are performed on a reserve, it is reasonable to prorate the exemption. Stand-by time, where an employee is required to be available for work, but is not performing duties of employment, is not considered to be time related to a specific location on or off a reserve for purposes of this proration. Therefore, it should not be taken into consideration in establishing the percentage of employment duties performed on a reserve. Since the nature of the employment in this situation is such that travelling to the location of the patient is a necessary part of the job, the time spent in the aircraft going to the location of the patient would be considered time performing duties of employment. Therefore, in the example that you provided, XXXXXXXXXX % of the employee's income can reasonably be considered to be exempt from income tax (XXXXXXXXXX hours of employment duties performed on a reserve out of XXXXXXXXXX hours of employment duties performed).

There may be unusual or exceptional situations where employment income may not be taxable even though it does not fall within one of the Guidelines, or may be taxable even though it appears to fall within one of the Guidelines. The determination of whether there are sufficient connecting factors to situate income on a reserve is always a question of fact. In the situation you have described, it appears that the most significant additional connecting factors are that a tribal council may be awarding the employer the contracts for the XXXXXXXXXX calls on reserves, and that, for the most part, the patients transported from the reserves are Indians. In our view, these factors are not sufficient to connect all of the income of the employee to a reserve and the prorated exemption, as described above, is appropriate.

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