2 May 1996 External T.I. 9614365 - INDIANS - EMPLOYMENT INCOME FOR RETROACTIVE PERIOD

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:

Whether, in the given fact situation, a portion of the employment income of an Indian for the retroactive period he was not working should be exempt from income tax.

Position: Yes.

Reasons:

Throughout the years that the Indian was employed by the employer, his income was determined to be 50% exempt from income taxes since he did 50% of his employment duties on reserve. If he had performed services during the retroactive period, those services would similarly been 50% exempt.

One should not generalize from the facts of this case.

									961436
XXXXXXXXXX							J.D. Brooks

Attention: XXXXXXXXXX

May 2, 1996

Dear Sirs:

Re: XXXXXXXXXX

This letter is in reply to your letter of April 10, 1996 in which you requested our opinion regarding the extent to which the salary income of one of your employees, XXXXXXXXXX should be exempt from taxation.

We understand that XXXXXXXXXX is a status Indian and has worked for years for XXXXXXXXXX throughout which time he performed about 50% of his employment duties on reserve and the remainder off reserve. Accordingly, you have historically treated 50% of his income as being exempt from taxation.

XXXXXXXXXX

In calculating the employment income payable to XXXXXXXXXX for the reinstatement period of XXXXXXXXXX all of the employment income was treated by XXXXXXXXXX as being taxable since he did not actually perform any services on reserve. With respect to his severance payment, XXXXXXXXXX treated 50% of the payment as being exempt since this reflected his historical employment situation with XXXXXXXXXX

Our Comments

The treatment afforded XXXXXXXXXX with respect to the taxability of his usual employment income is consistent with the proration rule contained in the Indian Act Exemption for Employment Income Guidelines (the "Guidelines") issued by the Department in June of 1994. This rule provides for an exemption for employment income to the extent the employment duties are performed on a reserve, and it applies where another guideline does not exempt the employee's entire employment income. If XXXXXXXXXX had lived on a reserve and had performed more than 50% of his employment duties on a reserve, his entire employment income from XXXXXXXXXX would have been exempt under Guideline 3.

Your application of the proration rule with respect to the reinstatement period was reasonable given that XXXXXXXXXX did not perform any services on reserve during that period. However, one might also consider what XXXXXXXXXX employment duties would have been if he had not been dismissed throughout the reinstatement period. If, contrary to the facts, XXXXXXXXXX had been reassigned throughout the reinstatement period to a position which required him to perform all of his duties off reserve, it is our view that normally none of his employment income for the reinstatement period would have qualified for exemption even if he were reinstated to his former position since he would have actually performed all of his duties off reserve for that period. In the actual facts, there was no reassignment of duties and, had he maintained his usual employment position, he would have performed 50% of his duties on reserve and thus 50% of his employment income would have been exempt. Accordingly, in our view, 50% of XXXXXXXXXX employment income earned during the reinstatement period should be exempt.

It is not possible to provide general direction as to what portion should be exempt in other scenarios because each would be a question of fact. For instance, if the location where an employee performed his duties varied from time-to-time and year-to-year, perhaps none of the employment income for a reinstatement period would be exempt. However, we would be willing to consider the facts of other situations and provide our views.

With respect to the severance pay, it would be exempt to the same extent that the employee's income was exempt. If XXXXXXXXXX employment income was 50% exempt throughout his employment with XXXXXXXXXX 50% of his severance pay would be exempt. This is consistent with the comments in the Guidelines concerning employment-related income.

Our comments herein are based on the facts presented and, although we have no reason to doubt them, should not be considered as confirmation of our acceptance of them. We trust that our comments are of assistance.

Yours truly,

R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch