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: Would employment income earned by a First Nation individual who works for XXXXXXXXXX in a facility that is located immediately adjacent to a reserve be exempt from tax under paragraph 87(1)(b) of the Indian Act?
Position: Unable to determine.
Reasons: Insufficient information
Author: Mahendran, Ananthy
Section: 81(1)(a) of the Income Tax Act and 87(1)(b) of the Indian Act
MEMORANDUM NOTE DE SERVICE
DATE November 18, 2019
TO Senior Individual Services Agent FROM Business and Employment Division
À Taxpayer Services Directorate DE Income Tax Rulings Directorate
Taxpayer Services and Debt Ananthy Mahendran
Management Branch (905) 721-5204
Attention: Steven Long FILE 2019-080003
SUBJECT: Tax treatment of employment income earned by a First Nation individual
This is in response to your email of March 6, 2019, requesting a technical interpretation on the tax treatment of employment income earned by a First Nation individual (the “Employee”) who works for XXXXXXXXXX (the “Employer”) in a facility that is located immediately adjacent to a reserve. Based on the information provided, it appears that the Employee does not live on a reserve and approximately fifty percent of the Employee’s duties are performed on a reserve. In particular, you have asked us whether the employment income earned by the Employee is exempt from tax under section 87 of the Indian Act.
Generally, First Nation individuals 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. Paragraph 87(1)(b) of the Indian Act states that the personal property of an “Indian,” as the term is defined in the Indian Act, or a band situated on a reserve is exempt from tax. Income, including income from employment, has been held by the courts to be personal property for the purposes of section 87 of the Indian Act. Therefore, 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 First Nations organizations, developed the Indian Act Exemption for Employment Income Guidelines (the Guidelines). The Guidelines are available on our website at: https://www.canada.ca/en/revenue-agency/services/aboriginal-peoples/information-indians.html.
Guidelines 2 and 4 require the Employer to be resident on a reserve in order for the employment income to be exempt from tax. As stated in the Guidelines, an employer is resident on a reserve if the reserve is the place where the central management and control over the employer organization is actually located. You have indicated that the Employer is not resident on a reserve; therefore, neither Guideline 2 nor Guideline 4 will apply to the employment income.
Guideline 3 would apply to exempt all of the employment income of the Employee if more than 50% of the employment duties are performed on a reserve and either the Employer is resident on a reserve or the Employee lives on a reserve. In the situation you have outlined, neither the Employer is resident on a reserve nor the Employee lives on a reserve; therefore, Guideline 3 will not apply to exempt the employment income of the Employee.
Guideline 1 would apply to exempt all of the employment income of the Employee 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. Based on the information provided, approximately 50% of the Employee’s duties are performed on a reserve; therefore, 50% of the employment income may be exempt from tax by virtue of the Guideline 1 proration rule.
Occasionally, there are situations where 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, there may be additional factors in the situation you describe that may connect the employment income to a reserve. 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 each of these factors has varied according to the facts of each particular case. These factors would have to be identified and examined to determine if they situate the employee’s income on the reserve.
In the situation you described, the Employee is of the view that his work benefits the reserve and therefore, his income is exempt from tax. However, the courts have concluded that benefiting a reserve is not in and of itself sufficient to situate the income on a reserve. Therefore, the fact that the Employee’s work benefits a reserve does not mean that the income is situated on a reserve and exempt from tax. In the absence of additional connecting factors, Guideline 1 proration rule would apply to exempt 50% of the employment income of the Employee.
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. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.
We trust these comments will be of assistance.
R. Filion, CPA, CA
Non-Profit Organizations and Aboriginal Issues Section
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.
© Her Majesty the Queen in Right of Canada, 2021
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2021
For additional commentary on Technical Interpretations, court cases, government releases, and conference materials in a single practical document specifically geared toward owner-managed businesses, see Video Tax News Monthly Tax Update newsletter.
This effective summary and flagging tool is the most efficient way to ensure that you, your firm, and clients are fully supported and armed for whatever challenges are thrown your way.
Packages start at $399/year.