11 June 2007 External T.I. 2007-0233931E5 - Indians - Guideline 4

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 income of an individual exempt from tax under Guideline 4

Position: General comments only, but probably no.

Reasons: Nature of employer does not appear to satisfy requirements of Guideline

XXXXXXXXXX 2007-023393

June 11, 2007

Dear XXXXXXXXXX:

This is in response to your e-mail of April 29, 2007 to the Income Tax Rulings Directorate, requesting our opinion as to whether income you receive from XXXXXXXXXX is exempt from tax. In your view, the income is exempt, on the basis that it is the type of income described in Guideline 4 of the Canada Revenue Agency (CRA)'s Indian Act Exemption for Employment Income Guidelines. You advise that the XXXXXXXXXX requires written confirmation from the CRA if it is to pay you without withholding income tax.

Written confirmation of the tax implications inherent in particular circumstances and involving specific taxpayers are given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Tax Ruling. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office, together with all relevant facts and documentation. However, we are prepared to provide you with the following comments, based on the very general description that you have provided of the income at issue.

A Status Indian's personal property is exempt from tax under paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act if the property is situated on a reserve. Although income is personal property, its intangible nature makes it difficult to determine its location. The Supreme Court of Canada has directed that "connecting factors" must be considered when making such a determination. This analysis requires that the factors that tend to tie the property to a location either on or off a reserve be identified, and that the significance of each of these factors be weighed. If the most significant factors connect the property to a location on a reserve, the income will be tax-exempt.

The Indian Act Exemption for Employment Income Guidelines were developed as an administrative tool to assist taxpayers and CRA employees in working with the very broadly worded tax exemption provided by the Indian Act and the Income Tax Act. Although they do not constitute a definitive test, since they were not designed to address unusual employment situations, they are helpful in identifying exempt income in common employment situations. Thus, as a preliminary note, it must be kept in mind that the Guidelines do not apply to income other than income from employment.

The four Guidelines, which can be viewed on the CRA Web site at www.cra.gc.ca/aboriginals/guidelines-e.html, can be generally summarized as follows:

Guideline 1 exempts all of the employment income of a Status 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 that is performed on a reserve is exempt from tax.

Guideline 2 exempts employment income of Status Indian employees who live on a reserve, provided that the employer is also resident on a reserve.

Guideline 3 exempts all of the income of a Status Indian if two conditions are met-more than 50% of the employment duties must be performed on a reserve and either the employer must be resident on a reserve or the Status Indian must live on a reserve.

Guideline 4 requires that the employer be resident on a reserve. It also requires that the employer be an Indian band that has a reserve, or a tribal council representing one or more Indian bands that 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 Status Indians who for the most part live on reserves. Further, the duties of the employment must be in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on a reserve. These elements must all be satisfied in order for Guideline 4 to apply.

It seems to us that your income from XXXXXXXXXX does not fall within any of the Guidelines. Since you appear to be in agreement that none of Guidelines 1 to 3 are applicable, we will limit our remaining comments to the application of Guideline 4. Based on the description you have provided, it appears that the only requirement of Guideline 4 that may satisfied in your situation is that the students who receive the benefit of the educational activities may, for the most part, live on a reserve. However, as your employer is XXXXXXXXXX, it does not appear that any of the remaining criteria are satisfied.

We hope that these comments are helpful. If your concerns are not addressed by these comments, you may wish to obtain the views of your local Tax Services Office, a list of which is available on the "Contact Us" page of the CRA website at www.cra-arc.gc.ca.

Yours truly,

Robin Maley
Section Manager
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch