9 September 2004 External T.I. 2004-0073051E5 - Taxation of status 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.

Principal Issues: Would the employment income of status Indian employees of a remote store be tax exempt?

Position: Question of fact

Reasons: The TSO would have to determine whether any of the Guidelines are met, and if not, whether the "extenuating factors" analysis applicable to the donut stores or remote adjacent stores supports an exemption.

2004-007305
XXXXXXXXXX Renée Shields
(613) 948-5273
September 9, 2004

Dear XXXXXXXXXX:

Re: Employment Income of Employees of the XXXXXXXXXX

This is in response to your letter of April 16, 2004 inquiring about the taxation of employment income of status Indian employees of the XXXXXXXXXX.

The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, Advanced Income Tax Rulings, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advanced Income Tax Ruling. The Information Circular and any other publications referred to herein can be accessed on the Canada Revenue Agency ("CRA") website at the following internet address: http://www.cra-arc.gc.ca. Notwithstanding the foregoing limitation, we can provide certain general, non-binding comments, which may be of assistance.

A status Indian's personal property is exempt from tax pursuant to paragraph 81(1)(a) of the Income Tax Act (the "Act") and section 87 of the Indian Act if that property is situated on a reserve. Although income is personal property, its intangible nature makes it difficult to determine its location. In the case of Williams v. the Queen, the Supreme Court of Canada created the connecting factors test to assist in this determination. The test requires identification of various connecting factors that tie the property to a location either on or off a reserve and a weighing of the significance of each such factor. To simplify applying the connecting factors test to a status Indian's employment income, the CRA developed the Indian Act Exemption for Employment Income Guidelines (the "Guidelines").

Your letter addressed to the Income Tax Rulings Directorate states that none of the Guidelines apply to the situation at hand. However, we note that your subsequent July 9, 2004 letter addressed to the Saskatoon Tax Services Office suggests that Guideline 2 may apply to exempt the income of your client's employees. Guideline 2 exempts the employment income of a status Indian who lives on a reserve provided that his or her 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 reserve. Whether an employer is resident on a reserve is a question of fact for the TSO to determine.

Because the Guidelines were developed as an administrative tool, they do not necessarily constitute a definitive test. It is acknowledged that occasionally there may be unique situations in which additional connecting factors are relevant and may be given significant emphasis.

As an example of such a unique situation, we have previously commented that where each of the following connecting factors exist, we would consider that extenuating circumstances support a tax exemption of a reserve-resident status Indian's employment income:

a) the employer's business is surrounded by a reserve,

b) the employer's business is located in an extremely remote area that is far from an urban center, meaning a significant distance from a community with ample amenities

c) the employer's business is historically connected to the surrounding reserve, meaning it existed prior to the reserve and was influential in the development of the community that became the reserve;

d) at least 90% of the employer's business is with status Indian residents of the reserve, and

e) the employer's business is an integral source of supplies and the necessities of life (food and shelter materials) to the residents of the surrounding reserve. An analysis of this Condition necessitates some sort of quantification. The existence of another business in the community or vicinity that sells supplies or necessities of life would affect the satisfaction of Condition (e) if the result is that the employer is no longer the integral or major supplier to reserve-resident status Indians. If, in a particular situation, the employer is no longer the major supplier then the case to support a connection to the reserve would be weakened.

Whether the foregoing factors exist in any particular situation are factual issues to be determined by the relevant Tax Services Office. We acknowledge that in your client's situation, a possible additional connecting factor exists, which is that the employer is owned and operated by reserve-resident status Indians. However, we note that based on available information and the details provided in your correspondence, we would be of the opinion that it is possible that Conditions (c) and (e) have not been met.

We trust that these comments will be of assistance.

Yours truly,

Roxane Brazeau-LeBlond, C.A.

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

c.c.: Holly Sadler
Saskatoon TSO