2015-0617871E5 Indian Employment Income

Principal Issues: Will the employment income of the Indian employees qualify for an exemption from tax under the Guidelines?

Position: Question of fact.

Reasons: Facts provided.

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

XXXXXXXXXX                                                                                                                              2015-061787
                                                                                                                                                      Ann Townsend
March 1, 2017

Dear XXXXXXXXXX

Re:  Employment Income Earned by Indians

This is in response to your letter asking for our views on the application of section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act (“Act”) to the employment income of Indian employees of the XXXXXXXXXX (the “Employer”). You note that the Indian employees (the “Employees”) are Indians as that term is defined in section 2 of the Indian Act. In particular, you have asked for our comments on whether:

*     the Employer is resident on a reserve for the purposes of the Indian Act Exemption for Employment Income Guidelines (the “Guidelines”);
*     the employment income of the Employees will qualify for the exemption from tax under Guideline 4; and
*     there are sufficient connecting factors to support an exemption from tax for the employment income of the Employees if the Guidelines do not apply.

OUR COMMENTS

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 your specific situation, we are able to provide the following general comments that may be of assistance.

Section 87 of the Indian Act exempts from taxation the personal property of an Indian situated on a reserve. The Supreme Court of Canada, in Williams v. The Queen, (92 D.T.C. 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” to employment income, the Canada Revenue Agency (CRA), together with interested Indian organizations, developed the Guidelines, which are summarized as follows:

1.    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.

2.    Guideline 2 exempts all of the employment income of an Indian employee who lives on a reserve and whose employer is also resident on a reserve.

3.    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 employee lives on a reserve.

4.    Guideline 4 requires that the employer be resident on a reserve. It also requires that the employer be an Indian band that has a reserve, or a tribal council representing one or more Indian bands that have reserves, or an Indian organization controlled by one or more such bands or tribal councils. In addition, the organization must be dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on a reserve, and that 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 reserve. These elements must all be satisfied in order for Guideline 4 to apply.

You have asked for our comments on whether the Employer is resident on a reserve. The phrase “employer is resident on a reserve” is defined in the Guidelines to mean 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 considered to be exercised by the group that performs the function of a board of directors.

You have indicated that the head office of the Employer is located on a reserve and the board of directors’ meetings take place on a reserve, which would indicate that the Employer is likely resident on a reserve. However, it is a question of fact where the central management and control of an organization is located.

If the Employer is, in fact, resident on a reserve, Guidelines 1, 2 or 3 will apply to exempt the employment income, or a portion of the employment income, of the Employees that live on a reserve and/or performs duties of employment on a reserve.

You have also asked for our comments on whether Guideline 4 will apply to exempt from tax all of the employment income of the Indian employees.  As noted above, if the employer is an Indian organization, the organization’s activities must be dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves. Additionally, the employee’s duties of 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.

It is our understanding that the Employer’s programs and services benefit all registered Indians who are residents of XXXXXXXXXX. Based on population statistics, the majority of registered Indians in XXXXXXXXXX do not live on reserves. Therefore, it is unlikely that Guideline 4 will apply, as the Employer’s activities do not appear to be dedicated exclusively to nor carried on exclusively for the benefit of Indians who for the most part live on reserves.  However, this is a question of fact.

There are occasionally situations in which the Guidelines do not apply but employment income is found to be situated on a reserve and exempt from tax because of significant connecting factors other than those taken into account by the Guidelines. In this regard, you have asked us to consider the connecting factors in light of the decision of the Tax Court of Canada in the case of Brenda McNab v. The Queen [1992] 2 CTC 2547.

The McNab case involved an Indian employee who lived both on and off a reserve, whose employer was found to be resident on a reserve, and who performed most of her employment duties off reserve. In finding that the employee’s income was exempt from tax, the court noted in particular that, “…all of her work was on the instructions of an employer whose sole purpose was to benefit Indians on reserves.”

It is our view that the McNab case is difficult to apply to the situation you have described since it involved connecting factors that were specific to an individual employee, such as her residence and the nature of her duties of employment. In addition, in the McNab case, the employer’s activities were strictly for the benefit of women who resided on reserves.

Connecting factors that have been considered and given weight by the courts in cases involving employment income include the location or residence of the employer; the nature, location and surrounding circumstances of the work performed by the employee; the nature of any benefit that accrued to the reserve from the work; and the residence of the employee. The weight assigned by the courts to these factors has varied according to the facts of each particular case. Additionally, the courts have cautioned that even if an employee’s work helps to maintain and enhance the quality of life on a reserve for the Indians living there, that fact does not necessarily connect the employment income to that reserve.

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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