2015-0568081E5 Indian Employment Income

Principal Issues: Whether income of Indian employees would remain exempt should the employer relocate off-reserve?

Position: Question of fact.

Reasons: See below.

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

XXXXXXXXXX                    2015-056808
                                            R. Meers
                                            (613) 670-9037

May 28, 2015

Dear XXXXXXXXXX:

Re: Impact of Office Move on Indian Employment Income

This is in response to your letter dated December 3, 2014, inquiring as to whether the income of an Indian, as that term is defined in section 2 of the Indian Act, 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”). In particular, you have asked us to comment whether the income of Indian employees of the XXXXXXXXXX (the “Employer”) would remain exempt should your office relocate off-reserve.

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 included in your submission, it is our understanding that the Employer is currently resident on a reserve but is considering relocating. The Employer is dedicated exclusively to the development and delivery of social, cultural, educational, mental and physical health, and economic development programs for the benefit of its members. Of the XXXXXXXXXX individuals employed by the employer, there are XXXXXXXXXX Indians who live on a reserve and XXXXXXXXXX non-Indian employees who do not live on a reserve. You estimate that currently XXXXXXXXXX% of the Indian employees’ employment duties are performed on and delivered to reserve lands and that XXXXXXXXXX% of the elected officials’ duties are performed on a reserve. Should the Employer’s office relocate off-reserve, it is unclear what percentage of the employees’ duties would be performed on a reserve.

Paragraph 81(1)(a) of the Act together with paragraph 87(1)(b) of the Indian Act exempt from income tax the personal property of an Indian situated on a reserve. Employment income has been determined to be personal property for the purpose of section 87 of the Indian Act and therefore is exempt from income tax if it is situated on a reserve. There is no tax exemption for the non-Indian employees.

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).

Note that for purposes of the Guidelines 1 and 3 the focus is on the location where the employment duties are performed. Based on the facts provided, it is unclear whether any of the employees would perform more than 90% of their duties on a reserve, and thus qualify for the full exemption, once the office is relocated off-reserve. Employees who perform less than 90% but more than an incidental proportion of their duties on a reserve would qualify for a pro-rated exemption on their employment income. Employees who perform all of their duties in the office would likely not qualify for the exemption under Guideline 1 should the office relocate off-reserve.

*     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, all of the employees who are Indians live on a reserve. However, it is unclear whether the Employer would be considered resident on a reserve if the office relocates. The Employer’s principal place of business would not be located on the reserve and it is uncertain if the central management and control over the organization would be located on a reserve. If the Employer is not considered resident on a reserve, then Guideline 2 would not apply. If the Employer is resident on a reserve, then the employment income of the Indian employees who live on a reserve would be exempt.

*     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.

Guideline 3 would apply to exempt the income from employment of the Employer’s Indian employees who live on a reserve and perform more than 50% of their employment duties on a reserve. Again, employees who perform all of their duties in the office likely would not qualify for the exemption under Guideline 3 if the office relocates off-reserve and less than 50% of their employment duties are performed on a reserve.

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

o     The employer is resident on a reserve; and

o     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

o     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 is unclear whether all of these conditions will be met if the Employer relocates its office off-reserve. As discussed above, the Employer may not be resident on a reserve once the office relocates. While the Employer appears to be an Indian organization controlled by one or more bands that have reserves, we are not certain 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. A review of the Aboriginal Affairs and Northern Development Canada’s website shows that of the total registered population of XXXXXXXXXX over half reside off a reserve. If the Employer is providing services and delivering programs to all band members, it is unlikely that Guideline 4 would apply either before or after the move as the activities must be carried on exclusively for the benefit of Indians who for the most part live on reserves. 

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

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2015

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2015