Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether employment income of an Indian employee is exempt from income tax?
Position: Question of fact, likely yes.
Reasons: See below.
Author: Meers, Rob
Section: 87 Indian Act; 81(1)(a) Income Tax Act
March 16, 2016
Re: Tax Exempt Status of Indian Employment Income
This is in response to your letter dated January 22, 2016, 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 paid to an Indian employee of XXXXXXXXXX (the “Employer”) is exempt from tax according to the Indian Act Exemption for Employment Income Guidelines (“Guidelines”).
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.
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 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. In situations where the Guidelines would apply, Guideline 2 is the Guideline that is most often referred to with respect to situations where duties of employment are completed off-reserve. Guideline 2 relies on only two factors: the residence of the employer and the residence of the employee. For purposes of the Guidelines, “employer is resident on a reserve” means that the reserve is the place where the central management and control over the employer organization is actually located.
In your submission, you indicated that the employee lives on a reserve. You also stated that the Employer’s head office and administration are located on a reserve. The accounting, human resources, general administration and books and records are located at its head office. You have indicated that the Employer is managed by its Board of Directors and that the meetings of the Board of Directors take place on a reserve. The work done by the employee is performed at a location off-reserve.
Whether the Employer is resident on a reserve is ultimately a question of fact, however, in situations where the employee and the employer are both resident on a reserve, Guideline 2 would apply and the employment income would be exempt from tax.
We trust that these comments will be of assistance.
Roger Filion, CPA, CA
Non-Profit Organizations and Aboriginal Issues
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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