2 January 2025 External T.I. 2024-1020361E5 - Indian Act Tax Exemption & 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: Whether the employment income of the Employees is situated on a reserve and exempt from income tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act.

Position: Based on the information provided, no.

Reasons: Based on the information provided, none of the Indian Act Exemption for Employment Income Guidelines apply and the connecting factors identified by the requestor are not sufficient to situate the income on a reserve.

January 2, 2025

XXXXXXXXXX									Phyllis Chiu
										2024-102036

Dear XXXXXXXXXX:

RE: Off-reserve employment and the tax exemption under section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act

This is in response to your enquiry asking whether the employment income of employees (Employees), who are registered under the Indian Act and working off-reserve at the XXXXXXXXXX (Health Centre), is exempt from income tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act (Act). We apologize for the delay in responding.

Our understanding of the information provided, is as follows:

• The Health Centre was created through the amalgamation of the XXXXXXXXXX (Predecessors).
• The Health Centre is a public hospital and extended health care facility providing all acute, chronic care, and residential long term care services and programs incidental thereto.
• The Health Centre provides services to all residents of XXXXXXXXXX.

It is our further understanding that the Health Centre is located off-reserve and the Predecessors were also located off-reserve. In addition, the Health Centre provides services to both on-reserve and off-reserve communities.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Employment income earned by an individual who is registered or entitled to be registered under the Indian Act (First Nations individual) is exempt from income tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Act only if the income is situated on a reserve.

The courts have established that determining whether income is situated on a reserve, and thus exempt from income tax, requires identifying the various factors connecting the income to a reserve and weighing the significance of each factor. This is referred to as the “connecting factors test”.

To simplify the application of the connecting factors test with respect to common employment situations, the Canada Revenue Agency together with interested First Nations organizations, developed the Indian Act Exemption for Employment Income Guidelines (Guidelines) (endnote 1) . The Guidelines are an administrative tool and only apply to employees who are First Nations individuals and whose employment duties are generally fully or partially performed on a reserve.

For purposes of the Guidelines, ““on a reserve” means on a reserve as defined for purposes of the Indian Act, including any settlements deemed to be reserves for purposes of the Indian Settlements Remission Order, and any other areas given similar treatment under federal legislation (for example, Category I-A lands under the Cree-Naskapi" (of Quèbec) Act)” (endnote 2) . It should be noted that a First Nation’s traditional territory is generally understood very broadly and may include reserve land; however, only reserve land is relevant for purposes of the Indian Act tax exemption.

Guidelines 1 and 3 apply where the employment duties are performed on a reserve. Based on our understanding of the information provided, the Employees appear to perform all their employment duties at the Health Centre which is located off-reserve. As such, Guidelines 1 and 3 do not apply and the Employees’ employment income would not be fully exempt from income tax. However, where a particular Employee performs more than an incidental proportion of their employment duties on-reserve, the portion of their income related to those duties will be exempt.

Guidelines 2 and 4 apply where the employer is resident on a reserve. Based on our understanding of the information provided, the Health Centre does not appear to be resident on a reserve. Therefore, Guidelines 2 and 4 do not apply to the Employees’ employment situation.

As noted above, the Guidelines are an administrative tool created to address the most common employment situations. There may be situations where there are other connecting factors that may result in employment income being treated differently than under the Guidelines. In such situations, it is necessary to apply the connecting factors test as established by the courts.

In applying the connecting factors test, the courts have established that the weight assigned to each connecting factor is determined by considering the purpose of the exemption, the type of property in question, and the nature of the taxation of the property.

Connecting factors that have been considered and given weight by the courts in cases involving employment income include: the residence of the employer; the residence of the employee; and the nature, location, and special circumstances of the work performed by the employee. The weight assigned by the courts to each of these factors has varied according to the facts of each particular case.

In the present situation, the residence of the employer and location of work performed appear to be off-reserve. There is no information to indicate whether the Employees are living on- or off-reserve. Although the residence of an employee may be potentially relevant, the courts have held that it should generally be given little weight in a connecting factors test.

You suggested that the nature and special circumstances of the services provided by the Health Centre is a significant factor that should situate the Employees’ employment income on a reserve. The information you provided states that the Health Centre has historically provided (through its Predecessors) and continues to provide services to the surrounding First Nations communities located on-reserve and off-reserve, including areas covered by Treaties 3, 5, and 9. Although the services provided likely benefit First Nations individuals living on reserves, the courts have concluded that, with respect to employment income earned off-reserve, benefitting reserves is not, in and of itself, sufficient to situate such income on a reserve.

In summary, none of the Guidelines appear to apply to the Employees’ employment situation and as discussed above, the provision of services to First Nations communities is not sufficient to situate the Employees’ employment income on a reserve where the related employment duties are performed off-reserve. Therefore, in the absence of the identification of other connecting factors, the employment income earned by the Employees working off-reserve at the Health Centre is not situated on a reserve and is not exempt from tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Act.

We trust these comments will be of assistance.

Yours truly,

Ms. Nerill Thomas-Wilkinson, CPA, CA

Manager
Non-Profit Organizations and Indigenous Issues Section
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

ENDNOTES

1 https://www.canada.ca/en/revenue-agency/services/indigenous-peoples/indian-act-exemption-employment-income-guidelines.html

2 Ibid.