17 May 1993 Internal T.I. 9312367 F - 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.

May 17, 1993

Attention:  Bob Whitefield

Public Affairs

Taxation of Income Earned by a Status Indian

XXXXXXXXXX

This is in response to your memorandum of April 22, 1993, wherein you requested us to respond to the above-noted client in your District concerning his dispute over the taxability of employment income.

As you know, the review and ultimate decisions of cases involving past transactions, including assessing policy in light of the fairness package, is the responsibility of the District Taxation Office. From our review of your letter, attached correspondence and documentation it is not quite clear as to what type of income the client has in fact earned. It seems that he may be a self-employed person and as such his income would be from a business as opposed to employment. Since the District Office is in a better position to determine this important question of fact as well as other related facts such as the situs of the employer or business, as the case may be, and the residence of the client, we can only offer the following comments.

The Indian Remission Order P.C. 1988-787 was effective for 1983 and was renewed each year up to and including the 1992 taxation year. It remitted tax, interest and penalties payable by an Indian on employment income earned on a reserve where the employer was located off a reserve, as well as retirement allowances and pension income in respect of exempt income and training allowances paid to an Indian by a government if the Indian resided on a reserve.

As indicated in the December 30, 1992 memorandum from the Taxation Programs Branch, employment income for duties performed entirely off a reserve is tax exempt if the employer resides on a reserve and the status Indian lives on a reserve. Where the employer is sited off the reserve and the employment duties are performed entirely off a reserve but the Indian lives on a reserve it will be necessary to find other connecting factors to the reserve before the income can be considered exempt. Where the employment duties are performed partially on a reserve and partially off a reserve it will be necessary to determine the approximate pro-rata allocations to each location. In calculating the time spent performing the employment duties on a reserve, travel time to and from the reserve is not included. Where 90% or more of the employment duties are performed on a reserve, or where 33% or more of the employment duties are performed on a reserve and either the employer is located on a reserve or the Indian lives on a reserve, then all of the employment income, including that earned for the duties performed off a reserve, is tax exempt. Where 90% or more of the employment duties are performed off a reserve, then all of the employment income may be taxable if there are no other connecting factors to the reserve. In any other case, employment income for duties performed partially on a reserve and partially off a reserve would have to be prorated to determine the tax exempt part.

The Department's position with regard to business income remains as described in Interpretation Bulletin IT-62. This position will remain until the Jacob Pete, (91 DTC 204) and Constant Charleson, (91 DTC 844) cases are resolved. The position is that business income of an Indian is tax exempt if the permanent establishment of the business is located on a reserve. In determining the location of the permanent establishment of a business, the factors to consider are:

-     the location where the business activities are carried out, which includes where the employees report for work, where transactions with customers are arranged, and where the inventory is located;

-     the location of the head office;

-     the location of the books and records; and

-     the location of the debtors of the business.

Finally, in the determination of whether a taxpayer is an employee in receipt of income from employment, or an independent contractor (ie. self employed) in receipt of income from a business, the courts have basically established four tests that must be applied in order to determine whether a particular contract is a contract of service or a contract for service. Those four tests are:

(a)     TEST OF CONTROL

The objective of this test is to assess if the individual is limited or restricted under a master-servant relationship. It recognizes that in most cases, the degree of control of an employer over his employee is greater than that which is exercised in an independent contractor relationship. For instance, in a master-servant relationship, the master can order or require not only what is to be done, but how and when it shall be done. In contrast, an independent contractor is usually allowed to choose the manner in which the services are performed.

(b)     INTEGRATION TEST

This test acknowledges that work performed by an employee under an employment contract is done as an integral part of the business, whereas under a contract for services, his work, although done for the business, is not integrated into it, but is only accessory to it.

(c)     ECONOMIC REALITY TEST

This test assesses the economic aspects of the relationship between the parties to determine whether the taxpayer is carrying on business for himself or for someone else. The objective of this test is to verify the existence of various factors of an economic nature, and using these facts, attempt to assess the nature of the relationship. Factors to be considered in applying this test include the required investments to be made by the individual, permanency of the relationship, and the skill required by the individual.

(d)     SPECIFIED RESULTS TEST

This test acknowledges that an independent contractor relationship usually involves the undertaking of a specific task after which the relationship ceases and it does not usually require that the undertaking be carried out by a particular individual. In contrast, in an employer-employee relationship, the employee makes himself available to the employer to be used by the employer without reference to a specified result.

Not all of the foregoing tests will be relevant in all cases or have the same degree of importance in all cases and no single test will in all circumstances be viewed as conclusive. However, cases to date have in most instances indicated that the most important test is the test of control. It is necessary to review and analyze carefully the facts of the particular situation to which the above tests are to be applied, and determine whether the relationship is either one of a contract of services or a contract for services. For additional comments on some of the tests to be used in making this determination you may wish to refer to the cases of Wiebe Door Services Ltd. v. M.N.R., (87 DTC 5025) and Moosejaw Flying Fins Inc. v. M.N.R., (88 DTC 6099).

The foregoing should be of assistance to you in solving this dispute and other disputes involving the connection of a status Indian's income to a reserve.

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch