2015-0601891E5 Indian Employment Income

Principal Issues: Is the employment income exempt from income tax?

Position: No

Reasons: None of the Guidelines apply to exempt the income.

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

XXXXXXXXXX
                                                2015-060189
                                                A. Townsend

September 29, 2015

Dear XXXXXXXXXX:

Re: Employment Income Earned by an Indian

This is in response to your letter inquiring as to whether the income of an Indian, as that term is defined in the section 2 of the Indian Act, is situated on a reserve and thus exempt from income 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 income of an Indian employee of XXXXXXXXXX (the “Employer”) is exempt from income 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 70-6R6, 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.

Our Comments

According to our understanding of the facts:

*     The Employer is responsible for providing XXXXXXXXXX services in XXXXXXXXXX.
*     The Employer is not an Indian organization controlled by an Indian Band or Tribal Council.
*     The Employer’s central management and control is not located on a reserve.
*     The Employer has locations throughout XXXXXXXXXX, some of which are located on reserves.
*     The Indian employee is resident on a reserve; however, the employee does not perform any duties of employment on a reserve.

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 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 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 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 an Indian’s employment 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 that is resident 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 resident on a reserve.

Additionally, Guideline 1 provides for a pro-rated exemption of employment income where an employee performs less than 90% but more than an incidental proportion of his/her duties on a reserve.  The amount of the pro-rated exemption is based on the percentage of duties that are performed 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.  In your situation, the Employer’s central management and control is not located on a reserve, therefore the employer is not considered to be resident on a reserve.  In addition, the Indian employee lives on a reserve but does not perform any of his/her duties of employment on a reserve.  As a result, 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.  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 Employer is not an Indian organization controlled by a Band or Tribal Council and its activities are not dedicated exclusively to the development of Indians who for the most part live on reserves.  Therefore guideline 4 will not apply to exempt the income.

You are also asking whether the CRA authorizes the Employer to withhold source deductions.  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.  Accordingly, 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 source deductions.  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
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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