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 the employment income earned by Indians that benefit Indigenous women who live off-reserve is exempt from tax.
Reasons: There are not enough factors that connect the income to a reserve for it to be considered situated on a reserve.
Author: Townsend, Ann
July 6, 2020
Re: Employment Income and the Tax exemption under section 87 of the Indian Act
This is in reply to your correspondence of February 10, 2020 that was transferred and assigned to the NPO and Aboriginal Issues Section for a technical interpretation. You have asked whether section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act will apply to exempt from tax the employment income earned by the “Employees” of XXXXXXXXXX (the “Employer”).
You have provided us with the following information:
* The Employer is a non-profit organization whose membership consists of Indigenous women registered as Indians under the Indian Act that primarily live off-reserve.
* The Employer is not located on a reserve.
* The Employer’s purpose is to address the gaps in the social, educational, and cultural, needs of Indigenous women in the province of XXXXXXXXXX.
* The Employees are registered as Indians under the Indian Act.
* The Employees do not live on a reserve.
* The Employees’ duties of employment are not performed on a reserve.
You are of the view that the Canada Revenue Agency’s (CRA) current policy concerning section 87 of the Indian Act does not address sex-based inequities and you are asking the CRA to review this policy. In addition, you are of the view that the employment income earned by your Employees, whose work benefits Indigenous women, should be entitled to the same tax exemption that is given to employees of First Nations and Tribal Councils.
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 70-6R9, Advance Income Tax Rulings and Technical Interpretations.
Employment income is exempt from income tax under paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act only if the income is situated on a reserve. The courts have established that determining 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. This is referred to as the “connecting factors test”.
To simplify the application of this connecting factors test with respect to common employment situations, the CRA together with interested First Nations organizations, developed the Indian Act Employment Income Guidelines. You have acknowledged that none of the Guidelines apply to the Employees in your situation. However, you are of the view that their employment income should be treated in the same manner as employees of First Nations and Tribal Councils.
The employment income earned by employees of Tribal Councils and First Nations may qualify for an exemption from tax under Guideline 4, which requires that:
a) The employer is resident on a reserve; and
b) The employer is:
* an Indian band which has a reserve, or a tribal council representing one or more Indian bands which have reserves; or
* an Indian organization controlled by one or more such bands or tribal councils, if the organization is dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves; and
c) The duties of employment are in connection with the employer’s non-commercial activities carried on exclusively for the benefit of Indian’s who for the most part live on reserves.
All of these conditions must be met for Guideline 4 to apply.
In the situation you have described the Employer is a non-profit organization that is not controlled by a band or a tribal council and whose non-commercial activities benefit Indians who live off-reserve. Therefore, Guideline 4 does not apply to your situation.
The Indian Act Exemption for Employment Income Guidelines are an administrative tool and deal with the most common employment situations. In some situations, there are other uncommon factors that result in employment income being treated differently than the typical scenarios the Guidelines describe. In such cases, any factors connecting the income to a reserve must be analysed in accordance with the various court decisions to determine if the tax-exemption applies. Connecting factors that have been considered and given weight by the courts 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 these factors has varied according to the facts of each particular case.
You are of the opinion that the employment income should be exempt in your case because the Employer benefits and support Indigenous women, which have historically been subjected to discrimination and were forced to live off-reserves.
The exemption under the Indian Act refers to “property” and the courts have concluded that property includes income therefore, the income is exempt from income tax if it is situated on a reserve. Since, income is intangible, and the wording of the tax exemption is very broad, determining where it is located can be difficult. As a result, the CRA relies on court decisions to help make this determination and adapts its policies as required to follow jurisprudence.
The Courts have considered the purpose of the section 87 of the Indian Act and concluded that the purpose is to ensure the protection of Indian reserve lands and property on those lands from erosion by the government through taxation; it is not meant to confer a general economic benefit. The Courts have also considered situations where the employment duties were not performed on a reserve but benefited Indigenous individuals. In these cases, the Courts have concluded that this fact alone was not enough to situate the employment income on a reserve. For example, the Federal Court of Appeal (FCA) in Monias v. The Queen (2001 DTC 5450) stated:
“That the work from which employment income is earned benefits Indians on reserves, and indeed may be integral to maintaining the reserves as viable social units, is not in itself sufficient to situate the employment income there. It is not the policy of paragraph 87(1)(b) to provide a tax subsidy for services provided to and for the benefit of reserves. Rather, it is to protect from erosion by taxation the property of individual Indians that they acquire, hold and use on a reserve, although in the case of an intangible, such as employment income, it is the situs of its acquisition that is particularly important.” (emphasis added)
The FCA case of the Queen v Shilling (2001 DTC 5420) is similar to your situation. The appellant worked for a non-profit organization that provided social services to Indigenous people that lived off-reserve in a large Canadian city. When discussing the location and nature of the employee’s work, at paragraph 52 the FCA stated:
“In finding that the nature of the respondent’s duties are not a connecting factor to a reserve, we do not overlook the fact that the services provided are social services to Native people as opposed to employment in a for-profit enterprise. However, many not-for-profit social service organizations exist in Canadian cities. Employees of such organizations are not exempt from income tax. Given the limited purpose of paragraph 87(1)(b ) of the Indian Act, the fact that the employment at issue involves providing social services to off-reserve Native people, is no reason for conferring preferred tax treatment under that provision.” (emphasis added)
In the situation you have described, the Employer is not resident on a reserve, the employment duties are not performed on a reserve, the Employees do not live on a reserve, and the Employer benefits individuals that are not resident on a reserve. All of these factors connect the employment income to a location off-reserve and therefore, section 87 of the Indian Act does not apply to your situation.
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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