2014-0523531E5 Employment Income Earned by an Indian

Principal Issues: 1. Is the employment income earned by an Indian exempt from tax where the Indian is employed by a corporation to perform work in XXXXXXXXXX located on a reserve. 2. What is the responsibility of the employer for withholdings?

Position: 1. Whether employment income is taxable or exempt is a question of fact, but in this situation, the income may be exempt from tax. 2. See document.

Reasons: 1. Guideline 1 may apply because the income is earned on a reserve. 2. Subsection 153(1) of the Income Tax Act.

Author: Mahendran, Anandavally
Section: 81(1)(a), 153(1)

XXXXXXXXXX
                                                                                                                                                      2014-052353
                                                                                                                                                      Ananthy Mahendran
                                                                                                                                                      (905) 721-5204

August 1, 2014

Dear XXXXXXXXXX:

Re: Employment Income Earned by an Indian

This is in response to your correspondence of March 6, 2014, wherein you ask for our comments on the tax treatment of employment income earned by an Indian, as that term is defined in section 2 of the Indian Act, and the resulting employer responsibility for withholding federal income taxes, Canada Pension Plan (CPP) and Employment Insurance (EI) contributions. We also acknowledge our related phone conversations on March 7, 2014 and March 26, 2014 (XXXXXXXXXX/Meers and XXXXXXXXXX/Mahendran).

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation. 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 70-6R5, Advance Income Tax Rulings.

You have indicated that the employee (the “Employee”) declared in his TD1-IN form, Determination of Exemption of an Indian’s Employment Income, that he is an Indian. The Employee performs all of his employment duties in XXXXXXXXXX located on a reserve. Your question is whether you, as his employer (the “Employer”), would be able to accept the Employee’s TD1-IN document and exempt the Employee from all taxes, CPP and EI contributions on the payment of his earnings.

Paragraph 81(1)(a) of the Act, together with paragraph 87(1)(b) of the Indian Act, exempt from tax certain income of Indians. Paragraph 87(1)(b) of the Indian Act states that “the personal property of an Indian or a band situated on a reserve” is exempt from taxation. Accordingly, to waive the tax deductions at source, an employer should satisfy themselves that the employee meets the following two requirements: (1) the person claiming the exemption is an Indian, and (2) the employment income of the Indian is situated on a reserve.

For the purposes of the exemption, an Indian is defined in subsection 2(1) of the Indian Act as a person who is registered as an Indian or is entitled to be registered as an Indian. The courts have determined that income from employment is personal property for purposes of section 87 of the Indian Act.

The Supreme Court of Canada, in Williams  v. The Queen, 92 D.T.C. 6320, concluded that the determination of whether income is situated on a reserve, and thus exempt from tax, requires identifying the various factors connecting the income to a reserve and weighing the significance of each such factor.

To simplify the application of this “connecting factors test” with respect to common employment situations, the CRA, together with interested Indian organizations, developed the Indian Act Exemption for Employment Income Guidelines (the “Guidelines”). Based on the nature of your questions, the Guideline that may apply in your situation may be summarized as follows:
Guideline 1 exempts all of the employment income of an Indian if at least 90% of the employment duties are performed on a reserve. When less than 90%, but more than an incidental proportion, of the duties are performed on a reserve, and none of the other Guidelines apply, only the portion of income that is earned from duties performed on a reserve is exempt from tax.

Generally, for employment income to qualify for a full exemption from tax under Guideline 1, an Indian must perform at least 90% of the employment duties “on a reserve”. According to subsection 2(1) of the Indian Act, a reserve “means a tract of land, the legal title to which is vested in Her Majesty, that has been set apart by Her Majesty for the use and benefit of a band.”  Whether a piece of land is a “reserve” is a question of fact that would ordinarily be raised with an Indian’s local band office or Aboriginal Affairs and Northern Development Canada.

According to Guideline 1, if the XXXXXXXXXX of the Employer is located on a reserve and the Employee performs almost all (at least 90%) of his employment duties at that XXXXXXXXXX, then all of the income of the Employee from the employment duties performed at that XXXXXXXXXX will be exempt from tax under Guideline 1.

Specifically, you have asked for our comments on the requirements of the Employer to withhold source deductions with respect to the Employee. Under subsection 153(1) of the Act, every person making a payment of salary or wages or other remuneration is required to withhold source deductions. CRA’s guide T4001, Employers’ Guide - Payroll Deductions and Remittances, provides information for employers in determining which deductions are to be made for Indians. Form TD1-IN helps employers determine the appropriate tax treatment for employees and suggests that the form be completed by the employer, in the presence of the employee. Where an employer determines that the income of an Indian is exempt or partially exempt from tax under section 87 of the Indian Act, and the employee requests withholdings to be reduced, the employer may grant the waiver requested by the employee. If the waiver is granted, the employer must maintain this form on file for the employee. More information regarding payroll deductions for Indians can be found on our Web site at http://www.cra-arc.gc.ca/brgnls/stts-eng.html#hdng13.

An employer is liable for appropriate source deductions with respect to its employees. Consequently, unless an employer is comfortable that employment income of an Indian is wholly or partially exempt from income tax, the employer should generally withhold. If amounts have been withheld and remitted for an employee whose income is later determined to be exempt from income tax, the employee may file an income tax return to claim a refund of the appropriate portion of these amounts.

We trust that these comments will be of assistance.

Yours truly,

Roger Filion, CPA, CA
Manager
Non-Profit Organizations and Aboriginal Issues
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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