2015-0569171E5 Indian Employment Income

Principal Issues: Whether income of Indian employees should be exempt.

Position: Question of fact, but not likely.

Reasons: See below.

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

XXXXXXXXXX                                                                                                        2015-056917
                                                                                                                                R. Meers
                                                                                                                               (613) 670-9037
December 7, 2016

Dear XXXXXXXXXX:

Re: Tax Exempt Status of Indian Employment Income

This is in response to your e-mail inquiring 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 on whether the employment income of Indian employees (the “Employees”) of the XXXXXXXXXX (the “Bureau”), an administrative unit of the XXXXXXXXXX (the “Employer”), would be exempt from tax.

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 70-6R7, Advance Income Tax Rulings and Technical Interpretations. Although we cannot comment on their specific situation, we are able to provide the following general comments, which may be of assistance.

It is our understanding that:

*     The Employer’s headquarters are situated off-reserve;

*     the Bureau’s offices are off-reserve;

*     the Employees perform the vast majority of their work off-reserve; and

*     some of the Employees live on a reserve but most do not.

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.

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 (the “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).

Based on the facts provided, it appears unlikely that any of the Employees would perform more than 90% of their duties on a reserve, and thus qualify for the full exemption. 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.

*     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.

As you stated in your submission, the Employer is not resident on a reserve, therefore, Guideline 2 would not apply.

*     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.

As the employer is not resident on a reserve, Guideline 3 would only apply to exempt the income from employment of the Indian employees who live on a reserve and perform more than 50% of their employment duties on a reserve. Based on the information provided, Guideline 3 would not apply to most employees.

In your submission, you indicated that there was some confusion on your part surrounding Guideline 4.

*     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. The Employer is not resident on a reserve, nor is the Employer 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 such bands or tribal councils. Therefore, Guideline 4 will not apply.

As the Guidelines were developed as an administrative tool, they do not constitute a definitive test. There may be unique 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 Employees’ view that all of their duties are in relation to or supporting First Nation communities regardless if their work is performed on a reserve. We would refer you to the case of Alexander Akiwenzie v. Her Majesty The Queen, 2003 TCC 68 (TCC).

In that case, the taxpayer estimated that he performed approximately 20% of his employment duties on a reserve while most of his duties were performed at his office off-reserve. However, because of the nature of his work, as an employee of Indigenous and Northern Affairs Canada (formerly known as Department of Indian Affairs and Northern Development), the taxpayer felt that his income should be exempt from tax because his employment was working with Indians on reserves. The tax court judge concurred and found that his employment income was virtually connected to all reserves in Canada.

However, an application for a judicial review of the decision of the tax court judge in this case was made to and heard by the Federal Court of Appeal (“FCA”), Akiwenzie v. The Queen (2004 DTC 6007). The FCA found that the fact that an employee’s duties were beneficial to reserves does not, in and of itself, result in his income being situated on these reserves. There must be a link to a reserve as a physical location or economic base. There is no erosion of an entitlement to enjoy property on a reserve unless there is a link between the property and the reserve.

The FCA also cites the case of Monias v. The Queen (2001 DTC 5450) in which the Federal Court of Appeal previously stated:

“That the work from which employment income is earned benefits Indians on reserves, and indeed may be integral to maintaining the reserves as viable social units, is not in itself sufficient to situate the employment income there. It is not the policy of paragraph 87(1)(b) to provide a tax subsidy for services provided to and for the benefit of reserves. Rather, it is to protect from erosion by taxation the property of individual Indians that they acquire, hold and use on a reserve, although in the case of an intangible, such as employment income, it is the situs of its acquisition that is particularly important.”

The FCA judge set aside the decision of the tax court judge and returned the matter back to the Chief Justice of the tax court with instructions that 20% of the employment income be exempt from tax. The 20% represented the amount of the employee’s employment income that the Crown conceded came within the exemption on the basis that the respondent was physically present on the reserves 20% of the time in the course of his employment.

As stated by Judge Archambault in Desnomie v. The Queen (98 DTC 1744), “the “erosion of the entitlement of an Indian qua Indian on a reserve” has to be determined by reference to the person whose income is involved and not by reference to the different reserves that are benefiting directly or indirectly from the services of this person.” As a result, the fact that all of the Employees’ duties are in relation to or supporting First Nation communities regardless if their work is performed on a reserve is likely not, in and of itself, a significant enough connecting factor to allow for the exemption.

In addition, you have asked for our comments on the requirements of the Employer to withhold source deductions with respect to the Employees. 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 an employer 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. If an income tax return had been previously filed, the employee may request a reassessment of the T1 return for the applicable year. The request may be made using form T1-ADJ, T1 Adjustment Request, or by providing a signed letter containing the details of the request. Further information on how to change a return can be found on our website at http://www.cra-arc.gc.ca/changereturn/.

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

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