2014-0542451I7 Indian Employment Income - Volunteer Firefighters

Principal Issues: Is the employment income of an Indian, who works as a volunteer firefighter in remote areas, considered tax exempt pursuant to paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act?

Position: Whether employment income is taxable or exempt is a question of fact. General comments provided.

Reasons: Guidelines 2, 3, and 4 will not likely apply. Guideline 1 may apply if some of the duties of employment are performed on a reserve and those duties are not merely incidental to duties performed off a reserve.

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

                                                                                                                                            January 8, 2015  

XXXXXXXXXX Tax Services Office                                                                                     Income Tax Rulings Directorate
                                                                                                                                             Business and Employment Division                                                                                                                                                                            Ananthy Mahendran
                                                                                                                                             905-721-5204

Attn:  XXXXXXXXXX                                                                                                            2014-054245

Indian Employment Income - Volunteer Firefighters    

This is in response to your enquiry, which we received on August 8, 2014, wherein you ask for our comments on whether the employment income earned by volunteer firefighters (the “firefighters”) is exempt from income tax under paragraph 87(1)(b) of the Indian Act where the duties of employment are performed on remote locations in XXXXXXXXXX.  

Our understanding of the facts in your particular situation is as follows:
*     The firefighters are Indians, as that term is defined in subsection 2(1) of the Indian Act.
*     The firefighters live on a reserve.
*     The firefighters work for an employer that is located off-reserve.
*     The employer has been reporting the employees’ income as taxable in Box 14 on the T4 slip, Statement of Remunerations Paid, for several years.

Our Comments:

Section 87 of the Indian Act exempts from taxation the personal property of an Indian situated on a reserve. The courts have determined that for the purposes of section 87 of the Indian Act, employment income is considered personal property. Therefore, what must be determined is whether the employment income of an Indian is situated on a reserve.

The Supreme Court of Canada, in Williams v. The Queen, 92 DTC 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,” the CRA, together with interested Indian organizations, developed the Indian Act Exemption for Employment Income Guidelines (the “Guidelines”), which are summarized as follows:

1.    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.

2.    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. 

3.    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.

4.    Guideline 4 exempts all of the employment income of an Indian if the employer is resident on a reserve, the employer is an Indian band or tribal council, and the duties of the 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.

The definition of a “reserve,” as provided in section 2 of the Indian Act, includes a tract of land, the legal title to which is vested in Her Majesty, which 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. Even if the lands on which the firefighters perform their employment duties are located in the remote areas of XXXXXXXXXX, these lands may not necessarily meet the definition of a reserve under the Indian Act. The following analysis assumes that the employment duties are not performed on a reserve.

Guidelines 2 and 4 require the employer to be resident on a reserve in order for the employment income to be exempt from tax. If the employer is not resident on a reserve, neither Guideline 2 nor Guideline 4 will apply to the employment income earned by the firefighters. Guidelines 1 and 3 require the employment duties to be performed on a reserve. If the employment duties are not performed on a reserve, then these guidelines would also not apply to the employment income earned by the firefighters. Consequently, if the employer is not resident on a reserve and the employment duties are not at all performed on a reserve, then the employment income that the firefighters received from the employer does not qualify for an exemption from income tax under paragraph 87(1)(b) of the Indian Act.

However, if some of the duties of employment are performed on a reserve and those duties are not merely incidental to duties performed off a reserve, the exemption will apply to the portion of the income related to the duties performed on the reserve. In calculating the time spent performing duties on a reserve, the CRA would require that the employees keep a detailed log book, clearly outlining the areas they worked and time spent on the reserve in the course of their duties of employment.

Whether an Indian’s employment income is taxable or exempt from tax is a question of fact that can only be determined after a review of all the facts and circumstances applicable to each employee. Based on the information you submitted to us, it is not clear to us whether or not the employment duties are performed on a reserve and therefore, we are unable to provide a conclusive answer to your question.

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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