2 November 1998 External T.I. 9809425 - TRAINING BENEFITS RECEIVED BY STATUS INDIANS

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: Taxability of training benefits received by status Indians which are funded by HRDC.

Position: The taxation depends on the stream of funding as well as the connecting factors.

Reasons:

Robert Dewis
Senior Program Officer
Aboriginal Relations Officer				5-980942
Human Resources Development Canada			Karen Power, CA
140 Promenade du Portage Phase IV, 5th Floor	(613) 957-8953
Hull, Quebec
K1A 0J9

November 2, 1998

Dear Mr. Dewis:

Re: Training Benefits Received by Status Indians

We are writing in reply to your correspondence of April 3 and 7, 1998, concerning the taxation of financial assistance received by status Indians. We apologize for the delay in replying.

Specifically, you have requested that we review memos issued by Human Resources Development Canada ("HRDC") concerning the taxation of financial assistance provided under Regional Bilateral Agreements ("RBA"). You have not specifically indicated what types of financial assistance payments are being made, however, we assumed that these include the following:

• tuition fees and the costs of books (paid directly to individual or educational institutions),
• living allowances received while training is taking place,
• child care allowances to cover the cost of child care while the recipient is undertaking training, and
• travel allowances to enable the recipient to travel to and from their schools.

If there are other categories of financial assistance payments which we have not discussed, if requested, we would be pleased to provide you with comments regarding the additional payments at a later date.

Our Comments

It is our understanding that many aboriginal organizations and Indians bands receive funding from HRDC to provide employment training to status Indians. The funding is provided under the terms of a RBA with HRDC.

We have also been advised by Bob Thomas, an HRDC official, that the funding for the RBA's comes from two different streams. A portion of the funding is received under the authority of section 63 of the Employment Insurance("EI") Act and the remaining portion of funding is received from the federal government's Consolidated Revenue Fund ("CRF"), in which the terms and conditions are approved by Treasury Board.

Individuals who receive funding under section 63 of the EI Act must meet one of the following eligibility requirements:

• individuals for whom a benefit program has been established (entitled to regular EI benefits)
• individuals who have had an insurance benefit end in the three years before applying for assistance, and
• individuals who have received maternity or parental leave benefits in a period that began no more than five years before applying for assistance.

Individuals who do not meet these requirements and who received training benefits would be funded from the CRF.

Benefits Funded Under the EI Act:

In our view, training benefits (as described above) provided to individuals which are funded under the EI Act are taxable under paragraph 56(1)(r) of the Income Tax Act. This paragraph was included in Bill C-28, which received Royal Assent on June 18th, 1998. This amendment is retroactive to June 30, 1996, the date of coming into force of the EI Act and Revenue Canada will apply the amendment beginning with the 1997 tax year.

Paragraph 56(1)(r) of the Act subjects to tax various training-related amounts. Specifically, this paragraph includes in a taxpayer's income financial assistance received under Part II of the Employment Insurance Act, as well as similar financial assistance received from a government or government agency under the terms of an agreement with the Canada Employment Insurance Commission. As a result, recipients of financial assistance under Part II EI programs will be taxed regardless of whether the payments have been made directly by the federal government, a province or an organization under a devolution agreement.

When the training benefits are received by status Indians, paragraph 81(1)(a) of the Act and section 87 of the Indian Act may provide a tax exemption if the income is considered 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 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.

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. This position generally applies to regular EI benefits and, consequently, it would apply to the regular EI benefits received by individuals who are eligible for training funding because, as noted-above, a benefit program has been established.

However, the training benefits received by status Indians which are funded by the EI Act are not related to employment income and, in our view, will generally not be connected to a reserve and consequently this assistance will generally not be tax exempt. However, the exemption may apply when the training itself is taken on reserve.

With respect to section 87 and 90 of the Indian Act, the Department's position respecting the tax treatment of education grants is based on reasoning in the case of Deanna Greyeyes v. Her Majesty the Queen, (78 DTC 6043) (F.C.T.D.). Deanna Greyeyes was a status Indian enrolled as a student at the University of Calgary, who while attending the University of Calgary received from the Department of Indian Affairs and Northern Development the sum of $2,339.50 to assist her in her post-secondary education. At all relevant times she was neither living on nor attending classes on a reserve. However, the scholarship was received by Deanna Greyeyes pursuant to an agreement and treaty between her Band and Her Majesty specifically pursuant to an agreement to assist band members in their education in compliance with the obligations of the Federal Government under Treaty No. 6. The court held that the scholarship, by virtue of subsection 90(1) of the Indian Act, was the personal property of an Indian situated on a reserve within the meaning of section 87 of the Indian Act.

Paragraph 90(1)(b) of the Indian Act provides that for purposes of section 87, personal property that was given to Indians under a treaty or agreement between a band and Her Majesty shall be deemed always to be situated on a reserve. As described in Mitchell v. Peguis Indian Band ((1990) 2 SCR 85), in paragraph 90(1)(b) of the Indian Act the words "treaty" and "agreement" take colour from each other and, in our view, an agreement would have to be similar in nature to a treaty.

It is a question of fact whether assistance for education received by a status Indian is received under treaty or agreement between a band and Her Majesty and is exempt or is received under some other program and is taxable. In our view, training benefits funded under the EI Act would not be considered received under a treaty or agreement between a band and Her Majesty and consequently would not be tax exempt by virtue of section 90 of the Indian Act.

Benefits Funded by the CRF

It appears that amounts paid from the CRF stream of funding are not made under the EI Act and, consequently, would not be taxable under paragraph 56(1)(r) of the Act. All benefits paid from this funding stream must be examined on a case by case basis. Without knowing all the circumstances under which training funds are approved or the purpose of the individual payments, we can only advise that benefits purchased with CRF funds may be taxable as bursaries, as explained below.

Paragraph 56(1)(n) of the Act requires the inclusion into income of certain scholarships, bursaries and fellowships, with a $500 exemption. A bursary is defined in Webster's Third New International Dictionary as "a sum or varying amount given or granted to a needy student." In our view, the definition of a bursary is broad enough to encompass almost any form of financial assistance paid to a student to enable the student to pursue his or her education, including a payment based on the means or needs of the student. This can include the value of ancillary assistance such as travel assistance, lodging, books or equipment, dependant care and so on. Income tax is not required to be withheld from such amounts, although a T4-T4A Summary and related T4A Supplementaries are required to be prepared. It will be a question of fact to be determined based on a review of all surrounding circumstances as to whether a particular individual has received a scholarship or bursary that is to be included into the individual's income under paragraph 56(1)(n) of the Act.

A bursary usually applies to education at the post-secondary school level or higher but there are circumstances where bursaries can be awarded for education below the post-secondary school level. Scholarships and bursaries ordinarily assist the student in proceeding towards a degree, diploma, or other certificate of graduation. They may apply to academic disciplines or to trades (such as plumbing or carpentry). Normally, a student is not expected to do specific work for the payer in exchange for a scholarship or bursary.

In our view, the training benefits received by status Indians which are funded under the CRF will generally not be connected to a reserve and consequently this assistance will generally not be tax exempt by virtue of the Indian Act. However, the exemption may apply when the training itself is taken on reserve.

Whether the bursary is received under a treaty or agreement between a band and Her Majesty and consequently exempt from tax by virtue of section 90 of the Indian Act is a question of fact. However, in our view, funding received through a RBA between HRDC and an Aboriginal organization would not be considered to be given under a treaty or agreement between a band and her Majesty.

We trust our comments will be of assistance to you.

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch