8 July 2003 Internal T.I. 2003-0025957 - TAXATION OF INDIAN EMPLOYMENT INCOME

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Was an Indian's employment income taxable?

Position: Question of Fact

Reasons:

General information provided. Very few details were provided with which to make a determination. We would have to assume that the individual is a status Indian since this is not stated anywhere. The memo indicates that the taxpayer claims to live on a reserve and that his employer was resident on reserve. - if so, Guideline 2 may apply to exempt the employment income which would in turn make his EI benefits tax exempt.

				July 8, 2003

	REGINA TSO		HEADQUARTERS
				Income Tax Rulings
	Attention:  Colleen Rodenbush			  Directorate
				Renée Shields
(613) 948-5273

				2003-002595

XXXXXXXXXX (the "Taxpayer") - Taxation of Employment Income

This is in response to your memorandum of June 19, 2003 seeking our comments regarding whether the Taxpayer's employment income from a particular employer was taxable. We note that Human Resources Development requires the information in order to determine whether the Taxpayer's employment insurance benefits related to this employment should be tax-exempt.

Paragraph 81(1)(a) of the Income Tax Act (the "Act") and section 87 of the Indian Act provide a tax exemption for a status Indian's personal property situated on reserve. The courts have previously determined that, for purposes of section 87 of the Indian Act, the reference to personal property includes employment income. In Williams (92 DTC 6320), the Supreme Court of Canada reconsidered the approach to use in determining whether income is situated on reserve. The proper approach in determining the situs of personal property is to evaluate the various connecting factors which tie the property to one location or another.

With a view to assisting the Indian community, the Canada Customs and Revenue Agency ("CCRA") 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. With respect to employment-related income, the Guidelines provide that employment insurance benefits will be exempt 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 these amounts will be exempt. Accordingly, in order to determine if a status Indian's EI benefits are exempt from income tax, one has to determine if the employment income that created the EI entitlement was exempt from income tax.

Guideline 1 would apply to exempt all of the income of a status Indian if at least 90% of the employment duties are performed on a reserve. When less than 90% of the duties are performed on a reserve and none of the other guidelines apply, only the portion that is performed on a reserve is exempt from tax (the proration rule).

Guideline 2 would apply to exempt the employment income of status Indian employees who live on reserve provided that the employer is resident on reserve.

Guideline 3 would apply to exempt all of the income of a status Indian if more than 50% of the employment duties are performed on a reserve and the employer is resident on a reserve or the status Indian lives on reserve.

Guideline 4 requires that the employer be resident on a reserve. It also requires that the employer is an Indian band which has a reserve, or a tribal council representing one or more Indian bands which have reserves, or an Indian organization controlled by one or more such bands or tribal councils, if the organization is dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves, and that the duties of the employment are in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on reserve. These elements must all be satisfied in order for Guideline 4 to apply.

We note that apart from the boxes checked off by the Taxpayer on his application for exemption of his EI benefits, the documentation provided to us does not provide confirmation that the Taxpayer is a status Indian resident on a reserve, nor that the employer's residence has been conclusively determined. If the Taxpayer is a status Indian residing on a reserve and the employer is resident on a reserve, the income from this employment will likely be exempt from tax under Guideline 2. The employer should have a Form TD1-IN, "Determination of Exemption of an Indian's Employment Income" on file.

We note that residency is a question of fact and with respect to the residency of an employer, we draw your attention to the definitions in the Guidelines:

"Employer is resident on a reserve," means that the reserve is the place where the central management and control over the employer organization is actually located.

Note

The central management and control of an organization is usually considered to be exercised by the group that performs the function of a board of directors of the organization. However, it may be that the real management and control of an organization is exercised by some other person or group. Generally, management and control is exercised at the principal place of business but it is recognized that this function may be legitimately exercised in a place other than the principal administrative office of the organization. It is a question of fact where the central management and control is exercised.

We trust that these comments will be of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CCRA's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Mickey Sarazin, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch