2020-0844651I7 Workers Compensation paid by employer First Nation

Principal Issues: Should workers’ compensation payments paid by an employer who is a First Nation be treated in the same manner as social assistance payments administered and paid by a First Nation?

Position: No.

Reasons: Workers’ compensation should be treated in the same manner as the related employment income.

Author: Townsend, Ann
Section: 81(1)(a); 56(1)(v)

                                                                                  June 6, 2022

André Perrier                                                           HEADQUARTERS
Legislation Section                                                 Income Tax Rulings Directorate
Program Support and Services Division              Ann Townsend
Assessment, Benefit and Service Branch

                                                                                   2020-084465

    Workers’ Compensation payments received from an employer who is a First Nation

This is in reply to your email of March 31, 2020 asking if workers’ compensation payments could be received from an employer who is a First Nation and whether those payments should be exempt from income tax under Indian Act in the same manner as social assistance payments received from a First Nation.

In certain circumstances, an employee may receive workers’ compensation payments under an employees’ or workers’ compensation law of Canada or a province, from their employer (e.g., a First Nation) rather than from a compensation board. This is discussed in paragraph 4 of IT-202R – Employees’ or Workers’ Compensation, where it states:

“4. For the purpose of paragraph 56(1)(v) the amount of compensation may be received either from a compensation board or from the employer or former employer of the person entitled thereto. An employee may, under the terms of an employment contract or collective agreement, or by reason of being granted injury leave with pay under the Financial Administration Act, be entitled to receive salary or wages during a period in which the employee is also entitled to compensation. Where, in these circumstances, the employee receives no payment from a compensation board, the amount received from his or her employer, to the extent that it does not exceed the compensation amount, will be included in the employee’s income for the year, as compensation, under paragraph 56(1)(v). The excess, if any, will be included in the employee’s income under subsection 5(1).”[Our emphasis]

Income of an individual who is registered or entitled to be registered under the Indian Act, 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”.

As noted in your email, it is the position of the Canada Revenue Agency (CRA) that social assistance payments received by an individual who lives on a reserve and who is registered under the Indian Act, are sufficiently connected to a reserve and exempt from income tax if the payments are received from a First Nation under a program that is administered by the First Nation. You are questioning whether workers’ compensation payments received under a workers’ compensation law in Canada from an employer who is a First Nation, should be treated in the same manner.

For the purposes of the exemption from tax under section 87 of the Indian Act, it is the CRA’s position that the receipt of Employment Insurance benefits, Canada Pension Plan benefits, Quebec Pension Plan benefits, registered pension plan benefits, retiring allowances, and wage-loss replacement plan benefits will usually be exempt from income tax when received as a result of employment income that was exempt from tax. If a portion of the employment income was exempt, then a similar portion of these amounts will be exempt. These amounts are not required to be reported on the T1S-D, Credits and Benefits Return. For additional information, go to canada.ca/en/revenue-agency/services/indigenous-peoples/indian-act-exemption-employment-income-guidelines.html and select “Employment-Related income.”

Similarly, the CRA views the Indian Act tax exemption as applying to workers’ compensation payments if the employment income to which such payments relate was exempt. In a case where the employment income to which the workers’ compensation payments relate to was partially exempt and partially taxable, the workers’ compensation payments will be pro-rated between the exempt and taxable categories in the same ratio as the employment income. Otherwise, workers’ compensation payments are not exempt under the Indian Act.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA’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.

Yours truly,

Ann Townsend, CPA, CMA
Non-Profit Organizations and Indigenous Issues
Business and Employment Division
Income Tax Rulings Directorate

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