2006 Ruling 2005-0126281R3 - Taxation of Employment Income of a Status Indian

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: (A) Will employment income earned by a status Indian employee be exempt from income tax pursuant to paragraph 81(1)(a) where the employment duties are performed on reserve? (B) Will employment income earned by a status Indian employee living on reserve, be tax exempt where it is determined that the employer in question is also resident and providing employment training on reserve?

Position: (A) yes (B) yes

Reasons: Under the circumstances, there are sufficient connecting factors to connect the employment income earned to the reserve in both A) and B) above.

XXXXXXXXXX 								2005-012628

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, in which you request an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge your subsequent submissions of XXXXXXXXXX and the information provided during our telephone conversations (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:

(i) in an earlier return of the taxpayer or a related person,

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,

(iii) under objection by the taxpayer or a related person,

(iv) before the courts, or

(v) the subject of a ruling previously issued by the Directorate to the taxpayer or a related person.

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

DEFINITIONS

In this letter, the following terms have the following meanings:

(a) "Board of Directors" means the board of directors of the Entity;

(b) "Canada" means Her Majesty the Queen in right of Canada;

(c) "CRA" means the Canada Revenue Agency;

(d) "Chief" means the Chief of the First Nation;

(e) "Company" means XXXXXXXXXX.;

(f) "Council" means the duly elected council of the First Nation, which consists of the Chief and Councillors;

(g) "Councillor" means a member of the Council;

(h) "Entity" means the XXXXXXXXXX., a corporation solely owned and operated by the First Nation;

(i) "First Nation" means the XXXXXXXXXX;

(j) "Impact Benefit Agreement (IBA)" means an agreement between the First Nation and the Company XXXXXXXXXX. This agreement between the parties includes commitments from the Company regarding training and education, employment and business opportunities, environmental management, social and cultural issues and financial compensation in consideration of First Nation support for the Project;

(k) "Indian Act" means the Indian Act, R.S.C. 1985, c. I-5, as amended, and the regulations made pursuant to that Act;

(l) "Member" or "Members" mean any person whose name appears on the First Nation's "Band List" as defined in the Indian Act and maintained by the Entity in accordance with section 10 of the Indian Act;

(m) XXXXXXXXXX;

(n) "Office" means the head office of the Entity located on the Reserve;

(o) "Project" means the XXXXXXXXXX.

(p) "Reserve" means a reserve as defined in subsection 2(1) of the Indian Act;

(q) "Supply Depot" means the Project handling facility located on the Reserve and also directly adjacent to the Reserve, where supplies will be received XXXXXXXXXX and stored until transported by truck to the Project destination; and

(r) "Training Facility" means a large on-Reserve training centre, owned and operated by the First Nation.

FACTS

1. The First Nation is a "band" within the meaning of this term as defined under subsection 2(1) of the Indian Act.

2. The First Nation has one Reserve, XXXXXXXXXX

3. The First Nation's mailing address is: XXXXXXXXXX. The closest tax services office is the XXXXXXXXXX Tax Services Office. However, the First Nation does not file income tax returns.

4. The First Nation has approximately XXXXXXXXXX Members, approximately XXXXXXXXXX of whom live on the Reserve. Each Member of the First Nation is a status Indian for purposes of the Indian Act.

5. All of the First Nation's offices, along with any facilities under its control, are located on the Reserve. These facilities include:

• band offices,
• primary school,
• maintenance shed,
• fire hall,
• health clinic,
• housing units and mobile homes,
• recreational facilities,
• water treatment plant,
• commercial buildings, and
• healing lodge.

6. The Chief and Council are democratically elected by the Members under band custom and are responsible for governance of the First Nation. They represent the First Nation in all matters.

7. The First Nation maintains a number of programs through funding provided by Indian and Northern Affairs Canada ("INAC") under a Comprehensive Funding Agreement. Some of these programs include:

• band administration;
• expansion, maintenance or modification of public services and works on the Reserve including roadways, water treatment plant, sewer and lift stations;
• expansion, maintenance or modification of existing Reserve fire protection services and fire department;
• expansion, maintenance or modification of the housing program on the Reserve including the funding of construction of new housing, the maintenance of current housing and the operation of a housing authority;
• maintenance, modification or expansion of the education program including the primary and secondary school system, the post-secondary programs, the adult learning centers and any related bussing program. The education committee along with its education director administers a primary education program consisting of a nursery, kindergarten program along with grades one to twelve;
• expansion, modification or support of social service and social assistance programs administered by the First Nation on the Reserve;
• expansion, modification or support of existing recreational activities and facilities on Reserve;
• expansion, modification or support of the justice program including legal services such as restorative justice measures, alternative measures programs, pre-release programs and community training residences;
• medical and health services including community health nursing, community health education, dental services, environmental health services, home and community care, and medical transportation;
• human resources development (employment and training);
• economic development; and
• land use.

8. The First Nation has passed by-laws pursuant to section 81 of the Indian Act. The section 81 by-laws have specific enforcement procedures set out in the by-law itself and pertain to the:

• regulation of unsupervised minors during the late evening and early morning hours;
• observance of law and order for the prevention of disorderly conduct and nuisance;
• regulation of traffic;
• regulation of the consumption of alcohol; and
• regulation of the use of all-terrain vehicles and snowmobiles.

9. The First Nation has entered into a Health Services Transfer Agreement with Her Majesty in right of the Government of Canada on XXXXXXXXXX.

10. The First Nation has been in negotiations with the Company since XXXXXXXXXX with respect to the XXXXXXXXXX to be located approximately XXXXXXXXXX

11. The First Nation and the Company have entered into an Impact Benefit Agreement (the "IBA"). The voting Members of the First Nation ratified the IBA on XXXXXXXXXX.

PROPOSED TRANSACTIONS

12. The First Nation will incorporate the Entity pursuant to Part II of the Canada Corporations Act without share capital. The letters patent and by-laws of the Entity will establish a Board of Directors.

13. The First Nation will be the sole member of the Entity.

14. The Entity will operate for the benefit of the Members to provide training, education, counselling, recruitment, upgrading, employment and other support services. Specifically, the services offered by the Entity will include:

(a) pre-employment training;

(b) career counselling;

(c) aboriginal mentoring programs;

(d) summer and student employment training programs;

(e) on the job training;

(f) education and training programs specifically for the Project;

(g) development of a human resource inventory listing of Members available for employment;

(h) employment opportunities, and

(i) development of a human resource strategy for Members working at the Project.

15. The Entity will employ an aboriginal employment co-ordinator to ensure the above education, training and employment requirements, as required by the IBA, are carried out.

16. Pursuant to the IBA, the Company will be required to provide funding to the Entity for training and employment of Members. Further, the Company will contribute monies to the Entity for the construction of the Training Facility.

17. The Entity, together with several other area Indian bands in the coastal communities XXXXXXXXXX (the "Neighbouring Bands"), will receive both federal and provincial government funding for their employment training efforts to maximize access to employment for the Members and other persons who are members of the Neighbouring Bands.

18. The Board of Directors will consist of representatives from the Council, the Members, employees of the Entity and persons with business and/or human resource expertise. All management-related decisions will be made by the Board of Directors.

19. All meetings of the Board of Directors will be held on the Reserve.

20. The daily business activities of the Entity will operate from the Office. All of the entity's financial records, including the corporate minute book, will be kept and maintained at the Office. All Entity employees will be paid by the Office.

21. As employer, the Entity will be responsible for paying its employees for employment-related services performed at various locations including:

(a) the Office located on Reserve,

(b) the XXXXXXXXXX located off Reserve,

(c) the Supply Depot, facilities located both on Reserve and adjacent to the Reserve, and,

(d) the Training Facility on Reserve.

22. Entity employees working at a location off Reserve will report to the Office to be transported to the appropriate site. Specifically, employees of the Entity working at the XXXXXXXXXX will be transported to the location by road in the winter and by plane the remainder of the year. These employees will be required to work at the XXXXXXXXXX location on a XXXXXXXXXX rotational basis, temporarily residing at a work-camp facility located near the XXXXXXXXXX. Once the XXXXXXXXXX period is complete, these employees will return to the Reserve until their next shift.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the transactions is to provide education, training, work experience and employment to Members as a result of the recently negotiated IBA and Project initiatives.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, we rule as follows:

A. Members who are employees of the Entity and

i. who reside on Reserve, or
ii. who reside off Reserve but perform at least 50% of their employment duties on Reserve,

will be exempt from income tax on all of their employment income from the Entity, pursuant to paragraph 81(1)(a) of the Act and section 87 of the Indian Act.

B. Members who are employees of the Entity but who neither reside on Reserve nor perform at least 50% of their employment duties on Reserve, will be exempt from income tax on the portion of their employment income from the Entity, which relates to employment duties performed on Reserve, pursuant to paragraph 81(1)(a) of the Act and section 87 of the Indian Act.

Comments

We are not providing any confirmation as to whether any particular employee of the Entity will be considered "resident on Reserve" for purposes of determining whether his or her employment income will be considered tax exempt for purposes of Ruling A above. This is a question of fact that must be ascertained for each individual employee. However, where a Member employee is absent from the Reserve for short periods of time while temporarily residing near the XXXXXXXXXX, this will not, in and of itself, mean that the Member resides off Reserve.

Further, for purposes of Ruling B above, it is the general position of the Canada Revenue Agency that when time spent on the reserve is minimal such that it is considered incidental in relation to the Member's employment duties off reserve, this time will not be considered a strong connection to the reserve for purposes of determining a tax-exemption using the Guidelines. Specifically, where a Member's time on reserve is limited to the time spent at the Office while awaiting transportation to an off-reserve location as described in 22 above, this time, in and of itself, will be considered incidental time spent on reserve and hence not qualify for the tax-exemption.

The above advance income tax rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular IC 70-6R5, dated May 17, 2002, and are binding on the Canada Revenue Agency provided the proposed transactions are implemented before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch