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: Is the employment income earned by the Employees of an Indian organization in connection with the Employer’s non-commercial activities performed exclusively for the benefit of Indians who live both on and off reserve exempt from tax under section 87 of the Indian Act regardless of where their office is located?
Reasons: The decisions held in court cases confirm that benefiting a reserve is not, in and of itself, sufficient to situate the income on a reserve.
Author: Mahendran, Ananthy
Section: 81(1)(a) of the Income Tax Act and 87(1)(b) of the Indian Act
November 30, 2020
Re: Tax treatment of employment income earned by First Nation employees
This is in response to your request for a technical interpretation on the tax treatment of employment income earned by certain First Nation individuals (the “Employees”) who work for XXXXXXXXXX (the “Employer”). In particular, you have asked us whether the employment income earned by the Employees in connection with the Employer’s non-commercial activities performed exclusively for the benefit of Indians who live both on and off reserve is exempt from tax under section 87 of the Indian Act regardless of where their office is located.
Based on the information contained in your letter, we understand that the Employer is a XXXXXXXXXX serving the XXXXXXXXXX First Nations. The purpose of the Employer is to provide services for the benefit of members who belong to the XXXXXXXXXX First Nations. The members live both on and off reserve. The Employer has many offices which are located both on and off reserve.
More specifically, you have requested our views on the possible application of section 87 of the Indian Act to the following two scenarios:
1. The Employee performs duties entirely off-reserve and resides on-reserve.
2. The Employee performs duties entirely off-reserve and resides off-reserve.
This technical interpretation provides general comments about the provisions of the Income Tax 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 70-6R10, Advance Income Tax Rulings and Technical Interpretations. All legislative references in this letter are to the Income Tax Act, unless otherwise specified.
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/indian-act-exemption-employment-income-guidelines.html.
Guideline 1 would apply to exempt all of the employment income of the Employees 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. Since the Employees perform duties entirely off-reserve, Guideline 1 will not apply to exempt the employment income of the Employees regardless of whether they live on or off a reserve. Residence of the Employees is not a factor to be considered in Guideline 1.
Guideline 2 would apply to exempt the employment income of the Employees when the employer is resident on a reserve and the Employee lives on a reserve. 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. 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 XXXXXXXXXX (the “Reserve”) where the administration and payroll work is being carried out, and the board of directors’ meetings take place alternately on various reserves. Generally, central management and control is exercised at the principal place of business of an organization but this function could be exercised in a place other than the principal administrative office of the organization. It is a question of fact where the central management and control is actually exercised. If the central management and control of the Employer is, in fact, exercised on the Reserve, the Employer will be considered to be resident on the Reserve and Guideline 2 will apply to exempt the employment income of the Employee in scenario 1 where the Employee resides on a reserve. In scenario 2, even if the Employer is resident on the Reserve, Guideline 2 will not apply to exempt the employment income because the Employee does not reside on a reserve.
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 scenarios you have outlined, the Employees perform duties entirely off-reserve and therefore, Guideline 3 will not apply to exempt the employment income of the Employees.
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. Furthermore, the 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 reserve. These requirements must all be satisfied in order for Guideline 4 to apply.
In the situation you have described, if the Employer is an Indian organization described above, the Employer’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. Based on the information you provided, it is our understanding that two-thirds of the people receiving the services from the Employer do not live on reserves. Accordingly, the Employer’s activities are neither dedicated exclusively to, nor carried on exclusively for the benefit of, Indians who for the most part live on reserves. Therefore, it is our view that Guideline 4 will not apply to your situation.
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. The determination of whether there are sufficient connecting factors to connect income to a reserve is always a question of fact. 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 have described, you are of the view that the Employees’ work benefits the reserve and therefore, their employment income should be exempt from tax regardless of where their office is located. However, the courts have concluded that benefiting a reserve is not in and of itself sufficient to situate the income on a reserve. In other words, even if the Employees’ work helps to maintain and enhance the quality of life on a reserve for the members living there, this factor is not, in and of itself, sufficient to connect the Employees’ income to that reserve. Therefore, the employment income earned by the Employees will not be exempt from tax under section 87 of the Indian Act unless there are other significant connecting factors to situate the income on a reserve.
We trust these comments will be of assistance.
R. Filion, CPA, CA
Non-Profit Organizations and Indigenous Issues Section
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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