2014-0531421E5 Employment Income Earned by an Indian

Principal Issues: Does the employment income of an Indian qualify for an exemption from income tax where the duties of employment are performed on certain locations including traditional lands?

Position: Question of fact, but in the circumstances given no.

Reasons: 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. Even though the lands on which the employee performs his employment duties are traditional lands, these lands may not necessarily meet the definition of a reserve under the Indian Act.

Author: Mahendran, Anandavally
Section: 81(1)(a) and 153(1) of the Income Tax Act and 87(1)(b) of the Indian Act

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                                                                                                                                                               2014-053142
                                                                                                                                                               Ananthy Mahendran
                                                                                                                                                               (905) 721-5204
August 21, 2014

Dear XXXXXXXXXX:

Re: Employment Income Earned by an Indian

This is in response to your correspondence of May 2, 2014, wherein you ask for our comments as to whether the employment income earned by an Indian, as that term is defined in section 2 of the Indian Act, is exempt from tax where the duties of employment are performed on certain locations including the traditional lands. We also acknowledge our related phone conversation on June 27, 2014 (XXXXXXXXXX/Mahendran).

Our understanding of the facts in your particular situation is as follows:

*     An employee is an Indian, as that term is defined in subsection 2(1) of the Indian Act.
*     The employee lives off-reserve. 
*     The employee works for an employer that is located off-reserve. 
*     The duties of employment are performed off-reserve. 

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.

Paragraph 81(1)(a) of the Income Tax Act (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, an employer that does not deduct tax at source should satisfy themselves that the employee meets the following two requirements: (1) the person claiming the exemption is an Indian, and (2) the personal property of the Indian is situated on a reserve.  With respect to the first requirement, 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.

With respect to the second requirement, the courts have determined that income from employment is personal property for purposes of section 87 of the Indian Act. Therefore, to satisfy the second requirement, what must be determined is whether the employment income of the Indian is situated on a reserve. 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”), which are 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.
*     Guideline 2 exempts all of the employment income of an Indian employee who lives on a reserve, provided that the employer is also resident on a reserve.
*     Guideline 3 exempts all of the employment income of an Indian 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.
*     Guideline 4 has no requirement for an employee to live or work on a reserve; however, it requires, among other things, that the employer be resident on a reserve.

Guidelines 2, 3, and 4 are relevant to employment situations where an Indian lives on a reserve and/or the employer is resident on a reserve. According to the information provided, neither the employee nor the employer is resident on a reserve. Therefore, in your particular situation, Guidelines 2, 3, and 4 do not apply to exempt the Indian’s employment income.

Generally, for employment income to qualify for a full or partial exemption from tax under Guideline 1, an Indian must perform his or her 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”. You are of the view that the Indian employee performs his employment duties on reserve and traditional lands. However, 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. Even if the lands on which the employee performs his employment duties are traditional lands, these lands may not necessarily meet the definition of a reserve under the Indian Act. Based on the information you submitted to us, it is our understanding that the lands on which the employee performs his employment duties do not meet the definition of a reserve under the Indian Act. Consequently, the employment income that the employee received from his employer would likely not qualify for an exemption from income tax.

Also, you have indicated in your correspondence that the employer refuses to recognize the employee’s tax exempt status under section 87 of the Indian Act. 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. Accordingly, 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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