2014-0530711E5 Indian Tax Exemption - Employment Income

Principal Issues: Whether income of Indian employees should be exempt?

Position: Question of fact, but not likely.

Reasons: See below.

Author: Meers, Rob
Section: 87 Indian Act; 81(1)(a) Income Tax Act

XXXXXXXXXX                                                                                                                                  2014-053071
                                                                                                                                                          R. Meers
                                                                                                                                                          (613) 957-2100

November 19, 2014

Dear XXXXXXXXXX:

Re:  XXXXXXXXXX (the “Centre”)

This is in response to the letter we received from your predecessor, XXXXXXXXXX, dated April 15, 2014, inquiring as to whether the employment income of the Indian, as that term is defined in section 2 of the Indian Act, employees of the Centre would be situated on a reserve and thus exempt from tax for purposes of section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act (the “Act”). We also acknowledge the additional information provided during our phone conversations the last of which was September 15, 2014 (Meers/XXXXXXXXXX, Meers/XXXXXXXXXX).

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 70-6R6, Advance Income Tax Rulings and Technical Interpretations. Although we cannot comment on your specific situation, we are able to provide the following general comments, which may be of assistance.

Based on the information contained in the letter and our phone conversations, our understanding of the facts is as follows:

*     The Centre is situated on the same property and occupies one of the buildings of the XXXXXXXXXX (the “School”) of the XXXXXXXXXX.
*     The Centre is not located on a reserve.
*     The Centre is a corporation without share capital. It was incorporated in XXXXXXXXXX.
*     There is a total of XXXXXXXXXX staff XXXXXXXXXX. Most live on the reserve.
*     In XXXXXXXXXX, there were XXXXXXXXXX children enrolled in the facility of which XXXXXXXXXX were not Indians. In XXXXXXXXXX, there are XXXXXXXXXX children enrolled XXXXXXXXXX of whom are Indians. Most of the children live on the reserve.
*     The Centre is open to all members of the community. Preference is given to working parents, students of the School and students of XXXXXXXXXX.
*     The Board of Directors is made up of parents of children attending the Centre and community members. All board members are Indians.
*     Board meetings are held at the Centre and the Centre Director works out of the Centre.
*     The Center does use some of the School’s facilities, most notably the library, but there is no direct connection or affiliation to the School.

The location of the duties of employment is usually the key factor in determining whether an Indian’s employment income is situated on a reserve and exempt from tax. However, the courts have recognized that employment income may be situated on a reserve, even where many or all of the duties of employment are carried on off-reserve, as long as other connecting factors of significant weight connect the employment income to a reserve. These factors may include the circumstances surrounding the employment, the residence of the employer and the residence of the employee.

In consultation with other government departments as well as interested Indian groups and individuals, the Canada Revenue Agency identified a number of connecting factors that can be used to determine whether a person’s employment income is situated on a reserve. This initiative resulted in the development of the Indian Act Exemption for Employment Income Guidelines (“Guidelines”). The Guidelines are an administrative tool intended to approximate the “connecting factors test” described by the Supreme Court of Canada in Williams v. The Queen, 92 DTC 6320. The Guidelines were intended to apply in common employment situations to assist Indian employees to determine whether their employment income was taxable. Unlike the connecting factors test, each Guideline relies on only 2 or 3 elements, which are implicitly given significant weight, in determining whether the employment income is exempt.

*     Guideline 1 exempts the employment income of an Indian when 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, the exemption is prorated to apply to the portion of income related to the duties that are performed on a reserve (the proration rule).

Based on the facts provided, the duties are not performed on a reserve. As such, Guideline 1 does not apply.

*     Guideline 2 exempts the employment income of an Indian employee when the employer is resident on a reserve and the Indian lives on a reserve. The term “employer is resident on a reserve”, as used in the Guidelines, means that 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 (it is not the residency of the individual directors that is relevant, but the location at which major organizational decisions are made). 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.

Based on the information provided, XXXXXXXXXX of the XXXXXXXXXX employees are Indians living on a reserve. However, it would appear that the Centre is not resident on a reserve. The Centre itself is not located on the reserve and it appears that the central management and control over the organization is located at the Centre. The Centre’s Director works at the Centre and meetings of the Board of Directors are held at the Centre. As such, Guideline 2 does not apply.

*     Guideline 3 exempts the employment income of an Indian employee if more than 50% of the employment duties are performed on a reserve and either the employer is resident on a reserve or the Indian lives on a reserve.

As indicated above, the employment duties are not performed on the reserve, therefore, Guideline 3 does not apply.

*     Guideline 4 allows an exemption for the employment income of an Indian where certain conditions are met. Specifically, Guideline 4 requires that:

-     The employer is resident on a reserve; and

-     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

      -     The duties of 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 reserves.

All of these conditions must be met for Guideline 4 to apply. It would appear that not all of these conditions are met. As discussed above, the Centre is not resident on a reserve. As well, the Centre is not an Indian band which has a reserve, or a tribal council representing one or more Indian bands which have reserves, nor is the Centre an Indian organization controlled by one or more such bands or tribal councils.

Since the Centre is not resident on the reserve and the duties of its employees are not performed on the reserve, none of the Guidelines would apply. However, because the Guidelines were developed as an administrative tool to interpret the laws of the court, there may be unique situations in which additional connecting factors are relevant and may be given significant emphasis. In light of this, we have examined the relevant connecting factors in relation to the decision handed down by the Federal Court of Appeal in Folster v. The Queen, 97 DTC 5315 (“Folster”). Where the facts of a particular situation fit the facts and connecting factors as weighted in the Folster decision, income is generally considered to be sufficiently connected to a reserve and, therefore, to be exempt from tax. In the Folster decision, the connecting factors given the most weight were:

1.    The residence of the taxpayer. 
2.    The nature of the services performed and the circumstances surrounding it. 
3.    The history of the institution. 

The first connecting factor in Folster requires that the employee live on a reserve. This connecting factor would only be met for the employees living on the reserve. The second connecting factor evaluates the nature of the services performed and the circumstances surrounding them. You have indicated that the Centre is not operated for profit and that most of the children at the Centre are Indians. Most of the children live on the reserve; however, spaces at the Centre are available to all residents of the community not just to Indians and those living on the reserve. It is also our understanding that there is another XXXXXXXXXX facility located on the reserve. Although the First Nation community likely benefits from the Centre, it is not clear to what extent the Centre directly benefits the reserve. Lastly, in the Folster decision, the institution had previously been situated on a reserve and there was a proposal to designate the land upon which the hospital is built as reserve land. You have indicated that, although the Centre occupies one of the buildings of the School, the Centre does not have the same historical connection to the reserve as the School. The Centre was incorporated in XXXXXXXXXX and did not exist at the time the School was located on the reserve. 

The determination of whether there are sufficient connecting factors to connect income to a reserve is always a question of fact. Based on the information available to us, it is not likely that the income of the employees of the Centre would be sufficiently connected to a reserve to be viewed as situated on a reserve and is therefore taxable.

We trust that these comments will be of assistance.

Yours truly,

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

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