2014-0544241E5 Employment Income - Employer's move to off-reserve

Principal Issues: Will Indian employees be exempt from tax under the Indian Act Exemption for Employment Income Guidelines (the “Guidelines”) or other connecting factors?

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

Reasons: Guideline 3 may apply if the Indian employees worked on a reserve for the employer for most of the year and the Indian employees continued to reside on a reserve while the employer moved off a reserve. If not, Guideline 1 may apply to prorate the income.

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

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                                                                                                                                                           2014-054424
                                                                                                                                                           A. Mahendran

February 27, 2015

Dear XXXXXXXXXX:

Re: Employment Income Earned by Indians

This is in response to your letter of August 18, 2014, in which you requested an advance income tax ruling with respect to the payroll withholding requirements of the XXXXXXXXXX (the “Employer”) in respect of a number of employees. Specifically, you are asking if the decisions in Folster v. The Queen, 97 DTC 5315, and The Queen v. Boubard et al, 2009 DTC 5035, would apply to exempt the employment income earned by these employees. 

In the situation you have described, the Employer had an office, located on the XXXXXXXXXX Reserve, until XXXXXXXXXX. The employees working in the XXXXXXXXXX (the “Office”) provided services for individuals residing on the XXXXXXXXXX (the “Reserves”) exclusively and all work performed by these employees was to benefit individuals on the Reserves. The employees working in the Office consisted primarily of Indians, as that term is defined in section 2 of the Indian Act. Some of them reside on a reserve and some do not. The Office was involuntarily closed XXXXXXXXXX. Following the closure of the Office, the employees who formerly worked in the Office now work either from their homes or from another office located in XXXXXXXXXX. These employees continue to provide services exclusively to individuals on the Reserves.

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “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 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

Our Comments

As indicated to you in our telephone conversation (Mahendran/XXXXXXXXXX) on September 19, 2014, the Income Tax Rulings Directorate (the “Directorate”) is unable to provide an advance income tax ruling as these are generally not issued for completed transactions (please see Information Circular IC 70-6R6, noted above). Also, an advance income tax ruling generally applies to the taxpayer identified in the request and there are currently no individual employees identified in your request. Furthermore, in the situation you have described, the Directorate is being asked to provide an advance income tax ruling on the Indian Act Exemption for Employment Income 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 an advance income tax ruling in such circumstances; however, we are prepared to provide the following general comments.  

General

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, 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 (“SCC”), 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” with respect to common employment situations, the Canada Revenue Agency (CRA), together with interested Indian organizations, developed the Indian Act Exemption for Employment Income Guidelines (the “Guidelines”). The Guidelines are an administrative tool intended to approximate the “connecting factors test” described by the SCC in Williams. 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 two or three factors, which are implicitly given significant weight, in determining whether the employment income is exempt from tax under paragraph 87(1)(b) of the Indian Act.

*     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 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.

For purposes of the Guidelines, 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” as defined in section 2 of the Indian Act. 

You have indicated that, prior to XXXXXXXXXX, the Indian employees were exempt from tax under Guideline 3 - more than 50% of the duties of employment are performed on a reserve and the employer was resident on a reserve. You have also indicated that some of the employees reside on a reserve and some do not, and there are individuals whose employment income, based on the Guidelines, would not meet the exemption criteria. 

In particular, you have requested our opinion on whether, in each situation described below, the employment income of certain groups of employees would be exempt from tax under section 87 of the Indian Act. The following is our general comments with respect to your situations.

Situation A

Your Question

Since the Employer had an office on a reserve for the first half of XXXXXXXXXX, are the employees who worked in that office exempt from taxation under Guideline 3 for all of XXXXXXXXXX or for the first half of XXXXXXXXXX only?

Our Comments

Guidelines 2 and 4 are relevant to employment situations where an employer is resident on a reserve. According to the information provided, on or XXXXXXXXXX, the Employer is not resident on a reserve. Therefore, in your particular situation, Guidelines 2 and 4 do not apply to exempt the employment income of these Indian employees. However, Guideline 3 may still apply to exempt all of the employment income of an Indian employee if more than 50% of the duties of employment are performed on a reserve and the Indian employee lives on a reserve. Where an Indian employee performed his or her duties of employment exclusively (100%) in the Office for the first half of XXXXXXXXXX and the Indian employee continued to live on a reserve while the employer moved off a reserve, then all of the employment income of the employee may be exempt from tax under Guideline 3, even if they performed their duties of employment off a reserve in the second half of XXXXXXXXXX.

If Guideline 3 does not apply to your particular situation because neither the Employer nor the employee is resident on a reserve, then Guideline 1 may apply to exempt the income that is earned from the duties performed on a reserve. Generally, for employment income to qualify for a full exemption from tax under Guideline 1, an Indian must perform at least 90% of his or her employment duties on a reserve. Based on the information provided, it is unlikely that these employees perform 90% or more of their employment duties on a reserve. However, the exemption may be prorated if a portion of the duties of employment is 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 a reserve.

Situation B

Your Question

For XXXXXXXXXX and subsequent years, are the employees who formerly worked in the Office exempt from taxation under other connecting factors identified by the courts?

Our Comments

There are occasionally situations in which the Guidelines do not apply but income is found to be situated on a reserve and exempt from tax as a result of significant connecting factors not taken into account by the Guidelines. In this regard, you have asked us to consider the connecting factors in your situation in light of the decisions of the Federal Court of Appeal (the “FCA”) in F. Marianne Folster v. The Queen (“Folster”), 97 DTC 5315, and The Queen v. Boubard et al (“Boubard”), 2009 DTC 5035.

The decision of the FCA in Folster involved a fact situation in which the FCA concluded that the location of the employment was of less significance due to the circumstances surrounding the employment. In Folster, the taxpayer was an Indian residing on a reserve. She was employed by the local hospital, which was built to serve the First Nations community living in the area. It was estimated that 80% of the patients were members of that community. The original hospital had been located on the reserve; however it was destroyed by fire. When the hospital was rebuilt it was situated off-reserve. The FCA, in reversing the decision of the Tax Court of Canada, concluded that the residence of the taxpayer, the nature of the services performed, the history of the institution in question, and the circumstances surrounding the employment were important in connecting the income earned from the employment to the reserve. The fact that the hospital was located off-reserve was given little weight.

The CRA will generally only apply the Folster decision to exempt employment income in situations where duties are not performed on a reserve where the facts of the particular situation are the same as, or very similar to, the facts in Folster. In Folster, there was a historical connection between the services provided off-reserve and the reserve, and the relocation was involuntary. In addition, the government continued to have an obligation to provide those services after the relocation. In the present situation, after the office closure, the additional connecting factors that you have described to us (such as the employees who formerly worked in the Office continue to serve the Reserves exclusively, the employment was aimed at providing benefits to Indians on the Reserves, and the services provided by the employees to the residents of the Reserves remain an integral part of the Reserves even after the involuntary office closure and continue to be an obligation of the government) may be relevant in connecting the income earned from the employment to the reserve. However, it should be noted that the decision in Folster will not apply where the employee is not resident on a reserve.

Boubard is a decision of the FCA in which the FCA concluded that a decision to absolutely surrender reserve land in order to obtain employment for band members is a connecting factor to which significant weight should be given when determining whether employment income earned from duties completed on the surrendered land is exempt from tax. In this case, the land was surrendered in exchange for employment for band members. The facts of the present situation are quite different from those in Boubard, and therefore, it is unlikely that the decision in Boubard would apply to your situation. 

Requirements of the employer to withhold source deductions

You have also asked for our comments on the requirements of the Employer to withhold source deductions with respect to those employees described in your situation. 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 website 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 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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