25 February 2004 Internal T.I. 2004-0060691I7 - Taxation of Indian employment income (trucking)

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.

Principal Issues: The employees in question are drivers for a trucking company. They are status Indians who reside on a reserve. The employer is a corporation resident on a reserve. The TSO believed that pursuant to Guideline 2 the employment income of these individuals would be tax exempt. XXXXXXXXXX

Position: We recommend application of the Guidelines unless there are compelling factual circumstances that have not been disclosed that would support not doing so.

Reasons: The Guidelines are an administrative tool to facilitate tax planning and tax administration. By their very nature, they are general and may not always result in the same outcome if a connecting factors analysis were done in each and every case. However, they represent a public administrative position that should be applied in the absence of compelling reasons to do otherwise.

			February 25, 2004

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

				2004-006069

Taxation of Indian Employment Income

This is in response to your facsimile of February 5, 2004 regarding the taxation of employment income earned by status Indians. We confirm our conversation of February 10, 2004 (XXXXXXXXXX/Shields) during which you advised that the particular aspect of the fact situation regarding which you would like our comments relates to the income earned by the reserve-resident employees other than the employee who is also the sole shareholder of the company.

We understand that the employer in this situation is a corporation that operates a trucking business (the "Employer"). We further understand from the correspondence provided to us that the Employer is resident on a reserve. We note that residency is a question of fact and confirm that the Income Tax Rulings Directorate has made no determination in this regard. The Employer's business income earning activities occur off the reserve and its customers are located off the reserve. The employees in question are all status Indians who are resident on the reserve (the "Employees"). Certain of the Employees work in the office on the reserve performing functions relating to dispatch, accounting and sales (the "Office Staff"). The other Employees are the Corporation's truck drivers (the "Drivers") who perform their employment duties off the reserve.

As you are aware, in the case of Williams v. the Queen (92 DTC 6320), the Supreme Court of Canada reconsidered the approach to use in determining whether income is situated on reserve. Based on the guidance provided by the Williams case, the CRA identified a number of connecting factors that can be used to determine whether employment income is situated on reserve. In 1994, after a consultation process with representative Indian groups and individuals, the CRA introduced the Indian Act Exemption for Employment Income Guidelines (the "Guidelines"). Although it may be argued that the Guidelines result in a more generous application of the tax exemption on employment income than would the connecting factors test as applied by the courts on a case-by-case basis, the courts have also confirmed that taxpayers need to be able to plan their affairs. Accordingly, viewed with due regard for the objective of the Guidelines, and the manner in which they were designed to be used, the Guidelines can still be seen as an important administrative tool for taxpayers and for CRA employees to be able to work with the very broadly worded tax exemption provided by the Act and the Indian Act.

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"). The Proration Rule to Guideline 1 may apply to exempt the portion of the employment income that relates to the employment duties performed on a reserve.

Guideline 2 would apply to exempt the employment income of status Indian employees who live on a reserve provided that the employer is also resident on a reserve. As stated in the Guidelines, an employer is resident on a reserve if the reserve is the place where the central management and control over the employer organization is actually located. 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. Generally, management and control is exercised at the principal place of business but it is recognized that this function may be legitimately exercised at a place other than the principal administrative office of the organization. There must be sufficient control exercised from a reserve in order for the organization to be considered to be resident there. The fact that annual meetings are held on a reserve does not, in and by itself, mean that the organization is controlled from a reserve as it is a question of fact as to whether central management and control is exercised during those meetings which are held on the reserve.

Assuming the Employer is resident on a reserve as indicated in the correspondence, it would appear that the employment income of the Office Staff described in your fact situation would be tax exempt pursuant to either Guideline 1 or Guideline 2. It is our opinion that the Drivers would fit within Guideline 2 and that their employment income would be tax exempt.

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 Canada Revenue Agency'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.

Roxane Brazeau-LeBlond, C.A.

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