2016-0649601M4 Indian Tax Exemption - Employment Income

Principal Issues: Whether the employment income of Indian employees of remote northern airports would be exempt from tax under section 87 of the Indian Act and paragraph 81(1)(a) of the ITA.

Position: Depends.

Reasons: We need more information.

Author: Merrigan, Lori
Section: 81(1)(a)

July 29, 2016

XXXXXXXXXX
House of Commons
Ottawa ON  K1A 0A6

Dear Colleague:

Thank you for your correspondence about the tax treatment of the employment income of XXXXXXXXXX who is an Indian, as defined in the Indian Act, and who is an employee of the XXXXXXXXXX at a remote airport that services northern First Nation communities. Thank you for your understanding in this delayed response.

Generally, Indigenous Canadians pay taxes and are taxed in the same way as all other Canadian residents, except where the tax exemption provided in the Indian Act applies. The Indian Act states that the personal property of an Indian or a band situated on a reserve is exempt from tax. Income is only exempt from tax under the Indian Act if it is found to be situated on a reserve.

The courts have established that 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 factor. To simplify the application of this “connecting factors test” with respect to common employment situations, the Canada Revenue Agency (CRA), together with interested Indigenous organizations, developed the Indian Act Exemption for Employment Income Guidelines.

Occasionally, there are situations where those guidelines do not apply, but income is found to be situated on a reserve and exempt from tax as a result of significant connecting factors not taken into account by the guidelines. In this regard, there may be additional factors in the situation you describe that may connect the employment income to a reserve.

The CRA can help employers determine the taxable status of their employees’ employment income, including income earned while working at remote airports.

Employers can send the CRA a written request to the Employer Compliance Division, 4th floor, 395 Terminal Avenue, Ottawa, ON, K1A 0L5.

The letter should include information about each employee’s duties and where they are performed, the proximity of the reserve to the airport, the creation and use of the airport with respect to its relationship with the First Nation community and any other factors that may connect the employment income to the reserve.

I trust that my comments will help you respond to your constituent, XXXXXXXXXX.

                                                                                                                   Yours sincerely,

                                                                                                                    The Honourable Diane Lebouthillier, P.C., M.P.

Prepared by: 
Lori Merrigan
613.670.9046
2016-064960

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