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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
The tax treatment of employment insurance ("EI") benefits received by status Indians participating in the following EI programs: a) self-employment program, b) training purchases program, and c) job-creation partnerships program. Under these programs, the claimants continue to receive regular EI benefits, if they are entitled to such benefits at the time of acceptance into the program, and they may also receive supplemental assistance. Individuals who are not entitled to regular EI benefits at the time of acceptance into the program may receive supplemental assistance. For purposes of this letter, it is assumed that the payments under the training purchases program do not qualify for the exception in 56(1)(a)(iv) and that, consequently, they would otherwise be taxable.
Position TAKEN:
1. Regular EI benefits:
They will be exempt from income tax when received as a result of employment income that was exempt from tax. If a portion of the employment income was exempt, then a similar portion of the benefits will be exempt.
2.Supplemental assistance:
a) Self-employment: This assistance would be taxed in the same proportion as the income from the new business to which it relates.
b) Training purchases: This assistance will generally not be exempt.
c) Job-creation partnerships: Taxed in the same proportion as the income from the employment undertaken under the program. In order to establish the tax treatment of this employment income, reference should be made to the Guidelines.
Reasons FOR POSITION TAKEN:
1.Williams (connecting factors) and the Guidelines.
2.a) Connecting factors: This assistance is to enable individuals to start their own business.
b) This assistance will generally not be connected to a location on reserve. It relates to training of individuals who face serious difficulties finding employment; but does not relate to a specific identified employment of the participant.
c) Position taken in other files. The supplemental assistance received under the job-creation partnerships program is connected to the employment undertaken under the program.
Mr. Barry Cameron
Human Resources Development Canada
Human Resources Investment/Program Development
Place du Portage
Phase IV - 4th Floor 5-970297
140 Promenade du Portage M. Azzi
Hull, Quebec
K1A 0J9
July 14, 1997
Dear Sirs:
Re: Status Indians and Employment Insurance Programs
This is in reply to your letters of January 21 and February 7, 1997, wherein you requested our views on the tax treatment of employment insurance ("EI") benefits received by status Indians participating in certain EI programs. The three specific programs to which your enquiry relates are self-employment, training purchases and job-creation partnerships.
Our understanding of the facts is as follows:
1.The following individuals are eligible to receive employment benefits under the three above-noted programs:
-individuals for whom a benefit period has been established (i.e., individuals entitled to regular EI benefits);
-individuals who have had an insurance benefit end in the three years before applying for assistance; and
-individuals who received maternity or parental leave benefits in a period that began no more that five years before they applied for assistance.
2.Self-Employment
The self-employment program provides income support and advice to enable individuals to start their own business. Individuals who are entitled to receive regular EI benefits at the time of acceptance into this program continue to receive the regular benefits for the duration of their entitlement period, and may have their weekly rate "topped-up" to a flat rate. After the regular benefits period is expired, and for the remainder of the self-employment program, the individuals may receive financial assistance; either a flat rate or an amount negotiated with the individual. Individuals who are not entitled to receive regular EI benefits at the time of acceptance into the self-employment program may receive financial assistance for the duration of the program based on their level of need.
3.Training Purchases
Under the training purchases program, Human Resources Development Canada ("HRDC") purchases courses on behalf of individuals who face serious difficulties finding employment. The courses provide skills ranging from basic to advanced skills and do not relate to a specific identified employment of the participant. Individuals who are entitled to receive regular EI benefits at the time of acceptance into this program continue to receive the regular benefits while taking the courses, and for the duration of their regular benefits entitlement period. These individuals may, also receive financial assistance to compensate for additional expenses incurred as a result of the training. Individuals who are not entitled to receive regular EI benefits at the time of acceptance into the training purchases program may receive financial assistance to compensate for additional expenses incurred as a result of the training.
4.Job-Creation Partnerships
The job-creation partnerships program provides employment opportunities for unemployed workers that can lead to long-term employment. Individuals who are entitled to receive regular EI benefits at the time of acceptance into this program continue to receive the regular benefits for the duration of their regular benefits entitlement period, even though they are employed under the program. In addition, during the regular benefits entitlement period, HRDC may agree to top-up the regular benefits to the maximum insurance benefit rate payable. If the regular benefits entitlement period ends during the job-creation partnerships program, HRDC will ensure that the individual continues to receive the same total assistance. Individuals who are not entitled to receive regular EI benefits at the time of acceptance into the job-creation partnerships program are also eligible to receive financial assistance from HRDC.
As previously discussed (Azzi/Cameron), in regards to the training purchases program, certain payments may not be taxable by virtue of the exception contained in subparagraph 56(1)(a)(iv) of the Income Tax Act (the "Act"). As a result of this exception, taxpayers are not required to include in their income EI payments "relating to the cost of a course or program designed to facilitate the re-entry into the labour force of a claimant" under the EI Act. You have requested that, for purposes of this letter, we assume that the payments under the training purchases program do not qualify for this exception and that, consequently, they would otherwise be taxable.
Paragraph 81(1)(a) of the Act and section 87 of the Indian Act provide a tax exemption for an Indian's personal property situated on a reserve. The Courts have determined that, for the purposes this exemption, income is personal property. Consequently, what must be determined is whether the income of an Indian is situated on a reserve.
In determining whether income is situated on a reserve, the approach taken by the Supreme Court of Canada in the case of Williams (92 DTC 6320) must be followed. The proper approach to determining the situs of personal property is to evaluate the various connecting factors which tie the property to one location or another. The Supreme Court indicated that the ultimate question is to determine to what extent each connecting factor is relevant in determining whether taxing the particular kind of property in a particular manner would erode the entitlement of an Indian to personal property situated on a reserve.
Based on the guidance provided in Williams and after receiving representations from interested Indian groups and individuals, the Department identified a number of connecting factors that can be used to determine whether employment income is situated on a reserve. With a view to assisting the Indian community, the Department developed the Indian Act Exemption for Employment Income Guidelines (the "Guidelines"), incorporating the various connecting factors that describe the employment situations covered by the Indian Act. We understand that you have been provided with a copy of the Guidelines.
The Guidelines also provide that employment-related income of a status Indian, such as EI benefits, will usually be exempt from income tax when received as a result of employment income that was exempt from tax. If a portion of the employment income was exempt, then a similar portion of the benefits will be exempt. This position generally applies to regular EI benefits and, consequently, it would apply to the regular EI benefits received while participating in one of the three above-described programs, since these regular benefits would have been received regardless of whether or not the Indian was participating in a program. In order to establish whether any portion of the employment income, which gave rise to the regular benefits, was exempt, reference should be made to the Guidelines.
The tax treatment of the other EI assistance received under the above-noted programs (hereinafter referred to as the "supplemental assistance"; that is, the "top-up" and other financial assistance, excluding regular EI benefits which are taxed as explained above) is as follows:
Self-Employment
In our view, as the supplemental assistance received under the self-employment program is connected to the new business, it would be taxed in the same proportion as the income from the new business. As regards to business income of a status Indian, in our view, one significant factor that serves to connect the income to a location on reserve or off reserve is the location where the activities of the business are carried out. Another significant connecting factor would be the location of the customers of the business. Thus, if all of an Indian's business income was derived from work carried on off reserve and if all of the customers were located off reserve, the business income would generally not be exempt from taxation. If a portion of the work was carried on on reserve, a similar portion of the business income would generally be exempt. Furthermore, while there may be some activities carried on in an office, it is our view that the actual revenue-generating activities would be more significant in determining whether the income from a business is connected to a reserve. Therefore, the fact that an accountant was employed by an Indian to maintain the books and records of the Indian's business in an on reserve office is not, in itself, sufficient to connect the business income to a location on reserve.
Training Purchases
The supplemental assistance received under the above-described training purchases program would, in our view, generally not be connected to a location on reserve. Consequently, this assistance will generally not be exempt.
Job-Creation Partnerships
In our view, the supplemental assistance received under the job-creation partnerships program is connected to the employment undertaken under the program and would therefore be taxed in the same proportion as would the income from this employment. In order to establish the tax treatment of this employment income, reference should be made to the Guidelines.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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