25 October 2010 Internal T.I. 2010-0378361I7 - Sabbatical leave - Indian Employee

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: Is the employment income of an Indian exempt from tax if the employee is on sabbatical and has an office on a reserve during this time?

Position: No, the employment income is taxable.

Reasons: Guidelines 2 and 4 are not relevant in this situation. For the purposes of Guidelines 1 and 3, the employee is not performing "duties of employment" while on sabbatical.

October 25, 2010

	XXXXXXXXXX 							Headquarters
									Income Tax Rulings 				  							Directorate
	Attention:  XXXXXXXXXX 					P. Burnley
									(613) 957-2100

									2010-037836

Indian Employee on Sabbatical Leave

This is in response to your inquiry of August 20, 2010, in which you ask for our comments on the taxation of employment income of an Indian (the "Employee") who is taking leave from XXXXXXXXXX (the "University") for a sabbatical.

The information that you have provided to us indicates that the Employee is entitled to take a XXXXXXXXXX month sabbatical leave at XXXXXXXXXX % of his full-time salary after XXXXXXXXXX years of creditable service at the University. He remains an employee of the University and receives all regular payroll benefits, but does not have any XXXXXXXXXX duties while on sabbatical. We understand that the reduced salary during sabbatical is not a result of a deferred salary leave plan as the Employee has received and is expected to receive 100% of his regular salary in years prior and subsequent to the sabbatical. You have also indicated that the Employee had to vacate his office at the University so that a replacement XXXXXXXXXX could use the space and that the Employee will be using an office at his home on a reserve for research and other activities while on sabbatical. The right to apply for and the terms of the sabbatical are included in the Collective Agreement between the University and the University's Faculty Association (the "Collective Agreement"). When the Employee is performing his regular duties of employment at the University, which is not on a reserve, his employment income is taxable. You have indicated that the University believes that the Employee's employment income should be exempt from tax during the sabbatical as the Employee is working out of his office on a reserve during the sabbatical period.

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. 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 income to a reserve must be identified and the significance of each factor weighed, in determining whether that income is situated on a reserve. 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"). You have indicated that the University (the employer) is not resident on a reserve; therefore, Guidelines 2 and 4 are not applicable. Guidelines 1 and 3 may apply in the situation that you have described and are summarized as follows:

• Guideline 1 exempts all of the employment income of an Indian if at least 90% of the duties of employment 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 3 exempts all of the employment income of an Indian if more than 50% of the duties of employment are performed on a reserve and either the employer is resident on a reserve or the Indian lives on a reserve.

Both of these Guidelines require that for the employment income to be exempt, the Employee must be performing duties of employment on a reserve. Despite the argument put forward by the University that the Employee is expected to conduct research and engage in other scholarly activities during the sabbatical period, a sabbatical is considered a leave from duties of employment in order to pursue these activities. This is acknowledged in Article 28 of the Collective Agreement. This view has also been established in various court decisions, particularly The Queen v. Jeromel, 86 D.T.C. 6370 (FCTD), Graham v. The Queen, 87 D.T.C. 660 (TCC), Mitchell v. The Queen, 99 D.T.C. 866 (TCC), and Hoyt v. MNR, 77 D.T.C. 270 (TRB). The University does not mandate or direct the activities during the sabbatical or the manner in which they are carried out. Therefore, during the sabbatical period, the Employee cannot be considered to be "performing duties of employment" on a reserve and his employment income is not exempt from tax under Guidelines 1 or 3.

The same reasoning applies when looking more generally at the factors connecting the income to the reserve (i.e., when applying the full "connecting factors" test). The employment income is not received due to the activities undertaken by the Employee on a reserve while on sabbatical. The employment income is received by the Employee pursuant to a right under the Collective Agreement and despite the fact that he is not performing employment duties while on sabbatical. Consequently, the fact that the Employee will undertake activities on a reserve during the sabbatical period is not directly relevant to whether the employment income is situated on a reserve.

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Mrs. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.

Eliza Erskine
Manager
Non-Profit Organizations and Aboriginal Issues
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch