2020-0864811E5 Indian Employment Income

Principal Issues: Whether Guideline 3 applies to exempt from tax the employment income earned by individuals working from on-reserve home offices as a result of the COVID-19 pandemic.

Position: Yes, provided the individual also lives on a reserve.

Reasons: Guideline 3 exempts from tax employment income where an individual performs over 50% of their duties of employment on a reserve and lives on a reserve.

Author: Townsend, Ann
Section: 81(1)(a)

XXXXXXXXXX                                                                                              2020-086481
                                                                                                                      Ann Townsend
October 28, 2020

Dear XXXXXXXXXX:

Re: Employment Income and the Tax exemption under section 87 of the Indian Act

This is in reply to your email of September 24, 2020, asking whether Guideline 3 of the Indian Act Exemption for Employment Income Guidelines, will apply to exempt from tax the employment income earned by the “employees” of XXXXXXXXXX (the “employer”), who are registered as Indians under the Indian Act, and who are performing their duties of employment from on-reserve home offices as a result of the COVID-19 pandemic.

You have provided us with the following information:

* The employer’s office is not located on a reserve.
* Prior to the COVID-19 pandemic, the employees duties of employment were performed at the employer’s office and the employment income was not exempt from income tax.
* Due to the COVID-19 pandemic, the employer’s office was closed and all of its employees are teleworking from home offices located across Canada.

Our Comments:

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.

The COVID-19 pandemic has resulted in the imposition of safety measures by governments and employers to protect the health of employees.  These measures include the promotion of physical distancing across an organization and employees teleworking from home offices.

The employment income of Indians, as that term is defined in 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”.

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.

Guideline 3 exempts from tax all of the employment income of an employee, who is registered as an Indian, 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 addition, Guideline 1 provides for a prorated exemption of employment income where an employee, who is registered as an Indian, performs less than 90%, but more than an incidental proportion, of their duties on a reserve and none of the other guidelines apply to that income. The amount of the prorated exemption is based on the percentage of duties that are performed on a reserve.

Under the guidelines, it is the CRA’s view that when determining the location where the duties of employment are performed, the most relevant location is the one where the employee has to perform the duties of employment under the terms of employment. In the case of telework arrangements, where the terms of an employment agreement require the employee to work for a certain period of time from a particular location, such as from a home office, this is the location where the employee has to perform the duties of employment. Generally, if the home office is located on a reserve, the employment duties are considered to be performed on a reserve.

In your situation, Guideline 3 will apply to exempt from tax all of the employment income of the employees that live on a reserve and have performed more than 50% of the employment duties on a reserve during the year. Where an employee has performed less than 50% of their employment duties on a reserve, the employment income earned from the duties performed on a reserve is still eligible for a prorated exemption from tax under Guideline 1.

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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