2014-0539231E5 Indian Employment Income

Principal Issues: Can we issue an advance income tax ruling that the proposed employment income for an Indian will be exempt from income tax?

Position: No.

Reasons: The CRA only issues income tax rulings based on the income tax law. The exemption from income tax for Indians is based on guidelines that are not law. Based on the information provided, it appears that none of the guidelines will apply to exempt the employment income from income tax.

Author: Townsend, Ann
Section: 81(1)(a)

XXXXXXXXXX
                                                                                                                                                                     2014-053923
                                                                                                                                                                     A. Townsend

October 8, 2014

Dear XXXXXXXXXX:

Re: Employment Income Earned by an Indian

This is in response to your email of July 8, 2014, in which you requested an advance income tax ruling with respect to the taxation of employment income earned by an Indian, as that term is defined in section 2 of the Indian Act. In the situation you have described, an Indian organization that is located on a reserve is proposing to hire Indian employees who will be performing their duties of employment from a new satellite office located off-reserve. The services that will be provided from the satellite office will be for the benefit of the Indians who are living in the off-reserve communities that surround the satellite office.

As noted in our telephone conversation on August 27, 2014, (Townsend/XXXXXXXXXX), Information Circular 70-6R5, “Advance Income Tax Rulings”, outlines various circumstances in which the Income Tax Rulings Directorate (the “Directorate”) will provide a written statement (advance income tax ruling) outlining how the CRA will interpret specific provisions of existing Canadian income tax law. Although there is no legal requirement to issue these advance income tax rulings, this is an administrative service that the Directorate provides, and all requests are considered except for those generally listed in paragraph 15.

One of those exceptions is when a matter on which a determination is requested is primarily one of fact and the situation is such that all of the pertinent facts cannot be established at the time of the request of the ruling. For example, situations involving issues of residency may be one of those circumstances in which the Directorate would be unable to provide an advance income tax ruling. In the proposed transaction, the residency of the taxpayer and the employer are pertinent factors in determining whether the employment income would be considered to be exempt from tax.

In paragraph 9 of Information Circular 70-6R5, it also states that an advance income tax ruling generally only applies to the taxpayer identified in the request and there are currently no individual taxpayers identified in your original request. In certain cases a
ruling may be provided to a group of individuals, however, in the situation you describe there are significant factors that may vary between the individuals, including residency and employment duties, which would therefore make it difficult to provide an advance income tax ruling for such a group of taxpayers.

Finally, as mentioned above, the Directorate provides written statements outlining how the CRA will interpret specific provisions of Canadian income tax law. In your situation the Directorate is being asked to provide an advance income tax ruling on the Indian Act Exemption for Employment Income Guidelines (the “Guidelines”) which are only a supplement or a guide in interpreting existing income tax law. It is not generally the practice of this Directorate to provide advance income tax rulings in such circumstances; however, we are prepared to provide the following general comments.

On August 29, 2014, the Directorate updated the Information Circular for Advance Tax Rulings and released Information Circular 70-6R6, which is available on the CRA website at: http://www.cra-arc.gc.ca/E/pub/tp/ic70-6r6/ic70-6r6-e.html. 

Our Comments

Generally, Indians are taxable in Canada on the same basis and in the same manner as non-Indian individuals. However, paragraph 81(1)(a) of the Income Tax Act together with paragraph 87(1)(b) of the Indian Act exempts from tax personal property of an Indian that is situated on a reserve. Income, including income from employment, has been held by the Supreme Court of Canada (“SCC”) to be personal property for the purposes of section 87 of the Indian Act. Therefore, the employment income of an Indian may qualify for an exemption from income tax if the income is determined to be situated on a reserve.

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 CRA 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 Guidelines. The Guidelines are an administrative tool intended to approximate the “connecting factors test” described by the SCC 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. Each Guideline relies on only 2 or 3 elements, which are implicitly given significant weight, in determining whether the employment income is exempt. 

Guidelines 1, 2, and 3 discuss employment situations where an Indian lives or works on a reserve. Generally, for the income to qualify for an exemption from tax under one of these guidelines, an Indian must:

*     work on a reserve (all or some of the time);
*     live on a reserve and have an employer located on a reserve;
*     or work on a reserve more than 50% of the time and either live on a reserve or have his or her employer located on a reserve.

According to the information you have provided, the employees will not live on a reserve and will not work on a reserve. Therefore, Guidelines 1, 2 and 3 will likely not apply to exempt the employment income.

Guideline 4 has no requirement for an employee to live or work on a reserve; however, there are other, specific criteria that must be met. Guideline 4 requires that 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 where that organization is dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves. It is unclear to us whether the employer would be such an employer. However, it does not appear that this employer is dedicated exclusively for the cultural, educational, or economic development of Indians who for the most part live on reserves since the employer will be providing services to clients who live off-reserve.

Guideline 4 also requires that the duties of the employment must be 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. In your situation, the employees will be providing services from a satellite office to benefit Indians who live in the surrounding communities that are not located on a reserve; therefore guideline 4 will not apply to exempt the income.

Where an individual does not agree with an assessment of income tax on employment income for a taxation year, the individual has the right to file a notice of objection. An objection is filed by using one of these options:

*     online submission, by accessing “My Account” from the CRA website; select the option “Register my formal dispute”; or

*     completing Form T400A, Objection – Income Tax available on the CRA website at:  http://www.cra-arc.gc.ca/E/pbg/tf/t400a/t400a-12e.pdf.

The time limit for filing an objection for an individual is whichever of the following two dates is later:

*     one year after the date of the return’s filing deadline; or
*     90 days after the day we sent the notice of assessment or notice of determination.

We trust that this information will be of assistance to you.

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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