2015-0615931E5 Indian Employment Income

Principal Issues: Whether the corporation is resident on a reserve.

Position: Question of fact, but in this case, likely not.

Reasons: The central management and control of the corporation is considered to be located off-reserve.

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

XXXXXXXXXX                                                                                                            2015-061593
                                                                                                                                    A. Mahendran
                                                                                                                                    (905) 721-5204
March 17, 2016

Dear XXXXXXXXXX:

Re:  Income Earned by Employees of XXXXXXXXXX (the “Corporation”)

This is in response to your e-mail dated October 29, 2015, wherein you requested a technical interpretation on whether the Corporation is resident on a reserve and thus, the income earned by the employees of the Corporation, that would otherwise be taxable employment income, will be exempt from tax under Guideline 2 of the Indian Act Exemption for Employment Income Guidelines (the “Guidelines”).

Our understanding of your particular situation is as follows:

*     The employees are Indians, as that term is defined in subsection 2(1) of the Indian Act.

*     The employees live on-reserve, but their duties of employment are performed off-reserve.

*     The employees work for the Corporation whose business primarily involves the XXXXXXXXXX.

*     The Corporation started its business services in the province of XXXXXXXXXX and is continuing its expansion throughout XXXXXXXXXX.

*     The head office of the Corporation is located off-reserve.

*     The meetings of the board of directors of the Corporation are held off-reserve.

*     The strategic decisions of the Corporation are made off-reserve.

*     The day-to-day operations of a division of the Corporation are managed by an office of the division on-reserve.

Our Comments

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 IC70-6R6, Advance Income Tax Rulings and Technical Interpretations.

Paragraph 81(1)(a) of the Act together with paragraph 87(1)(b) of the Indian Act exempt from tax “the personal property of an Indian or a band situated on a reserve.” The courts have determined that income, including employment income, is personal property for purposes of section 87 of the Indian Act. Therefore, employment income earned by an Indian will be exempt from tax if it is situated on a reserve.

The determination of whether income is situated on a reserve, and thus exempt from tax, requires the identification and evaluation of factors connecting the income to a location on a reserve. To simplify the application of the “connecting factors test” with respect to common employment situations, the Canada Revenue Agency (“CRA”), together with interested Indian organizations, developed the Guidelines, which can be found on the CRA’s webpage at www.cra-arc.gc.ca/brgnls/gdlns-eng.html.

In particular, 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 defined 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 a corporation is usually considered to be exercised by the group that performs the function of a board of directors of the corporation. It is not the residency of the individual directors that is relevant, but the location at which major organizational decisions are made. In terms of control of a corporation, there must be sufficient control exercised from a reserve in order for the corporation to be considered to be resident there.

In the present situation, the head office of the Corporation is located off-reserve, the meetings of the board of directors of the Corporation are held off-reserve, and the strategic decisions of the Corporation are made off-reserve. Based on the information you submitted, we are of the view that the central management and control of the Corporation is located off-reserve. The fact that the day-to-day operations of a division of the Corporation are managed by an office of the division on-reserve does not necessarily mean that the Corporation is centrally managed or sufficiently controlled from the reserve. Based on the above analysis, the Corporation is likely not considered to be resident on a reserve and thus, the income earned by the employees of the Corporation will not be exempt from tax under Guideline 2.

We trust that these comments will be of assistance to you.

Yours truly,

Roger Filion, CPA, CA
Manager
Non-Profit Organizations and Aboriginal Issues Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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