2015-0622871I7 Indian Exempt Income and Eligibility for Benefits

Principal Issues: 1. Is income that is exempt from tax pursuant to paragraph 81(1)(a) of the Income Tax Act (the “Act”) and paragraph 87(1)(b) of the Indian Act, required to be included in the calculation of income for the purpose of determining the eligibility for income-tested benefits under Part I of the Act? 2. Is the social assistance payments received by an Indian required to be included in calculating his or her income for the purpose of determining the eligibility for income-tested benefits under Part I of the Act?

Position: 1. Whether or not the exempt income should be included in a particular income calculation depends on how the income is defined for the purpose of the income calculation. 2. The determination depends on the facts of the particular situation.

Reasons: 1. See below. 2. See below.

Author: Mahendran, Ananthy
Section: 81(1)(a) of the Act and 87(1)(b) of the Indian Act, and 56(1)(u) of the Act

                                                                                                                                                  August 4, 2016

XXXXXXXXXX                                                                                                                          Income Tax Rulings Directorate
                                                                                                                                                  Business and Employment Division            
                                                                                                                                                  Ananthy Mahendran
                                                                                                                                                  905-721-5204

                                                                                                                                                  2015-062287

Section 87 Exempt Income - Indian’s Eligibility for Income-tested Benefits

This is in response to your email dated December 11, 2015, in which you requested our comments on whether employment income that is exempt from tax under paragraph 81(1)(a) of the Income Tax Act (the “Act”) and section 87 of the Indian Act (hereinafter referred to as the “exempt income”) is required to be included in the calculation of income for the purpose of determining the eligibility for various income-tested benefits. In this letter, unless otherwise expressly stated, all statutory references are to the provisions of the Act.

Exempt Income Received by an Indian

Section 87 of the Indian Act provides a tax exemption for the personal property of an Indian situated on a reserve. Paragraph 81(1)(a) provides that amounts which are declared to be exempt from income tax by any other enactment of the Parliament of Canada, that are not otherwise exempted by virtue of a tax convention or agreement with another country, shall not be included in computing the income of a taxpayer for a taxation year. Accordingly, the exempt income of an Indian under the Indian Act is not included in computing the income of a taxpayer under Part I of the Act. However, in certain circumstances, the Act specifically includes income that is exempt under paragraph 81(1)(a) in a particular calculation. Based on the above, it is our view that unless a specific provision includes the exempt income in an income calculation in the Act, the exempt income should not be included in the calculation for the purpose of determining the eligibility for income-tested benefits.

In particular, you have asked us to confirm whether or not the exempt income will impact income-tested benefits. This determination depends on the wording of the legislation in each particular circumstance. Although not an exhaustive list, the following are examples of the income-tested benefits where the exempt income is not included in the calculation of income:

*     spouse or common-law partner amount [118(1)(a)],

*     amount for an eligible dependant [118(1)(b)],

*     amount for infirm dependants age 18 or older [118(1)(b.1)], caregiver credit [118(1)(c.1)],

*     age (senior citizen) credit [118(2)],

*     medical expense credit [118.2],

*     goods and services tax/harmonized sales tax credit [122.5],

*     Canada child tax benefit [122.6], and

*     old age security benefits [180.2(1)].

Social Assistance Payments Received by an Indian

You have also asked us to clarify the treatment of social assistance payments received by an Indian for the purpose of determining the benefit eligibility. The determination of whether or not social assistance payments received by an Indian will impact income-tested benefits depends on the facts of the particular situation. Paragraph 56(1)(u) of the Act requires that social assistance payments received in the year that are made on the basis of a means, needs, or income test be included in a taxpayer’s income except to the extent that such amounts are otherwise required to be included in the taxpayer’s income or the income of the taxpayer’s spouse or common-law partner.

However, social assistance payments received from a First Nation by an Indian who lives on a reserve under a program that is administered by the First Nation are generally sufficiently connected to a reserve to be exempt from tax under section 87 of the Indian Act. In such a case, the social assistance payments received by the Indian would be treated as exempt income for the purpose of determining the eligibility for income-tested benefits. If a payment received by an Indian is a social assistance payment and is made on the basis of a means, needs or income test, and the payment is not exempt by virtue of section 87 of the Indian Act, the recipient of such assistance is required to include the amount received in his or her income pursuant to paragraph 56(1)(u) for the purpose of determining the eligibility for income-tested benefits. Please refer to our previous interpretations, E2015-061502I7 and E2014-0554111I7, which provide a detailed discussion on the distinction between the exempt income and the social assistance payments reported on line 145 of the T1 General, Income Tax and Benefit Return.

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. A severed copy will also be distributed to the commercial tax publishers, following a 90-day waiting period (unless advised otherwise to extend this waiting period), for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be e-mailed to: ITRACCESSG@cra-arc.gc.ca. In such cases, a copy will be sent to you for delivery to the taxpayer.

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

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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