2020-0835681E5 Indian Act Exemption – Employment Income

Principal Issues: Are the employees (those working at the field office and those doing XXXXXXXXXX) exempt from income tax pursuant to Guideline 2?

Position: Maybe.

Reasons: The client would need to confirm whether the employer is in fact resident on a reserve. The client would also need to verify that the XXXXXXXXXX workers live on the reserve in a domestic establishment that is his or her principal place of residence and that is the centre of his or her daily routine.

Author: Gauthier, Michel
Section: 81(1)(a); Indian Act s.87

XXXXXXXXXX
                                                                                                                                   2020-083568
                                                                                                                                   M. Gauthier

October 29, 2020

Dear XXXXXXXXXX:

Re: Indian Act Exemption for Employment – Guideline 2

This is in reply to your email dated January 7, 2020 where you asked whether employees of a partnership would be exempt from tax pursuant to Guideline 2 of the Indian Act Exemption for Employment Income Guidelines.

Our understanding of your particular situation is that the employer is a Limited Partnership (“Partnership”) with approximately XXXXXXXXXX General Partners totalling XXXXXXXXXX% of ownership interests and XXXXXXXXXX Limited Partner holding the remaining XXXXXXXXXX% of ownership interests in the Partnership. One of the General Partners is a Corporation that is owned by a family of First Nation individuals The other partners are Individuals, Corporations, and a First Nation. Some of these partners are First Nation individuals or are entities that are controlled by First Nation individuals and some are not.

The Corporate Partner works in XXXXXXXXXX and XXXXXXXXXX and wanted to bring in investment funds to expand their business, so the Partnership was created. A goal of this partnership was to create jobs for First Nation and non-First Nation employees and to create or purchase companies for bidding on large XXXXXXXXXX jobs. The employees you’ve inquired about are Indians, as that term is defined in subsection 2(1) of the Indian Act.

Our Comments:

This technical interpretation provides general comments about the provisions of the Income Tax Act (the "Act") and the Income Tax Regulations (the "ITR"). 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.

Section 87 of the Indian Act exempts from taxation the personal property of an Indian situated on a reserve. The Supreme Court of Canada, in Williams v. The Queen, (92 D.T.C. 6320), concluded that the determination of 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 such factor. To simplify the application of this “connecting factors test” to employment income, the Canada Revenue Agency (CRA), together with interested First Nation organizations, developed the Guidelines.

Guideline 2 exempts the employment income of an employee when the employer is resident on a reserve and the employee lives on a reserve.

The term “employer is resident on a reserve,” as defined in the Guidelines, means that 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 usually considered to be exercised by the group that performs the function of a board of directors of the organization. However, it may be that the real management and control of an organization is exercised by some other person or group. Generally, management and control is exercised at the principal place of business but it is recognized that this function may be legitimately 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 exercised.

In the facts provided, you stated that the employer is resident on a reserve because the central management and control of the Partnership is performed on a reserve. To support your view, you stated that the sales office for acquisitions and expansion, all accounting functions and other day to day functions of this Partnership are all done from the head office which is located on reserve. You also stated that both directors of the Partnership maintain their offices on reserve.

The fact that an entity has rented an office space on a reserve to facilitate its administrative duties and business development activities does not necessarily mean that the entity is managed or controlled from the reserve; locating an office on the reserve is not necessarily the same as being resident on the reserve. The courts have concluded that although an employer’s residence on a reserve is a connecting factor to a reserve, that factor will have minimal weight if the location of the employer has no tangible significance to the reserve.

Generally, the courts have indicated that weight should be given to the location of an employer on a reserve only where the scope of the employer’s activities on a reserve, or the direct benefits flowing to a reserve, indicate a clear nexus between the employer and the reserve. In determining whether a benefit to a reserve is provided, the CRA will take into account whether the location of the employer benefits the particular reserve or reserves where the employees reside. Furthermore, the courts have also stated that connections that are artificial should not be given weight in determining the location of income for purposes of the exemption.

Although we can’t confirm whether or not the employer is in fact resident on a reserve, there does appear to be some factors connecting the employer to the reserve. Please note however that nothing in this letter should be construed as confirming or implying that the CRA has reviewed or is making a determination in respect of where the central management and control over the employer organization is actually located.

The second condition of Guideline 2 is that the employee must live on reserve. The phrase “Indian lives on the reserve” is defined in the Guidelines as meaning “the Indian lives on the reserve in a domestic establishment that is his or her principal place of residence and that is the centre of his or her daily routine”.  

The first set of employees are field office employees who travel to the field office located 125km away from the Partnership’s head office and then return to their on-reserve principal residences at the completion of the work day. It appears as though these employees meet the condition of “living on reserve” for the purposes of Guideline 2. Therefore, if the organization is an employer that is resident on a reserve, then the conditions of Guideline 2 would appear to be satisfied and all of the income from such employment would be situated on a reserve pursuant to Guideline 2 and would be exempt from income tax.

The second set of employees work in a division of the Partnership that specializes in XXXXXXXXXX and work wherever there is XXXXXXXXXX. The employees maintain a residence on reserve, however, they are generally working away from home for 2-3 weeks at a time. Due to the time that these employees are away from home, you would need to verify that the residence maintained on reserve is his or her principal place of residence and that it is the centre of his or her daily routine.

In addition, you indicated that the Partnership had acquired a company that had the specialized technology for these XXXXXXXXXX employees. It is our understanding that the employees are employed by the Partnership and not the acquired company, however, if this is not the case, it could impact whether the requirements of Guideline 2 are satisfied. Therefore, for the XXXXXXXXXX employees, it would be a question of fact whether they would meet the requirements of Guideline 2.

We trust that these comments will be of assistance.

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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