2020-0866851I7 Tax treatment EI rcvd by First Nations individual

Principal Issues: Would EI benefits received by a First Nations individual, who met the minimum requirement of 120 hours of insured work and was granted a one-time credit of 300 insured hours to make the individual eligible for EI, be exempt from tax under section 87 of the Indian Act?

Position: The EI benefits received by the individual will be exempt from tax under paragraph 81(1)(a) of the Act and section 87 of the Indian Act if the employment income arising from the actual qualifying hours was exempt from tax under the Indian Act.

Reasons: The one-time credit made the individual eligible for the EI benefits under Part I of the EIA but it does not have any impact on how the EI benefits are calculated under Part I of the EIA.

Author: Mahendran, Ananthy
Section: 81(1)(a) and 56(1)(a) of the Income Tax Act, 87 of the Indian Act, and 153.17(1) of the EIA

                                                                                     April 12, 2022

Team Leader                                                               Business and Employment Division
XXXXXXXXXX Call Centre                                                 Income Tax Rulings
Directorate
Assessment, Benefit, and Service Branch                              Ananthy Mahendran

Attention: XXXXXXXXXX                                                   2020-086685



Tax treatment of certain employment insurance benefits received by a First Nations individual

This is in reply to the email from XXXXXXXXXX dated October 9, 2020, requesting our comments on the tax treatment of the employment insurance (EI) benefits received by a First Nations individual because of the Temporary Measures to Facilitate Access to Benefits program (the “Program”), which was put in place on September 27, 2020. The Program granted workers with 120 hours of insurable employment, a one-time credit of an additional 300 hours of insurable employment to allow them to access EI benefits.

Our Comments

In the situation described, the First Nations individual worked on a reserve and had employment income that was exempt from tax under section 87 of the Indian Act. The individual was laid off due to the COVID-19 pandemic and received the maximum amounts of the Canada Emergency Response Benefit (CERB) from Employment and Social Development Canada. The CERB received by the individual was exempt from tax because the employment income that made the individual eligible for the CERB was exempt from tax under section 87 of the Indian Act. The individual had at least 120 hours of insurable employment that was earned on a reserve. The individual applied for EI benefits in October 2020 and was granted a one-time credit of 300 hours of insurable employment under the Program to make them eligible for EI benefits.

Subparagraph 56(1)(a)(iv) of the Income Tax Act (the “Act”) specifies that any amount received by an individual in a year as a benefit under Part I of the Employment Insurance Act (the “EIA”) is included in computing their income for the taxation year. Pursuant to paragraph 153.17(1)(b) of the EIA, an individual who makes an initial claim for benefits under Part I of the EIA on or after September 27, 2020, or in relation to an interruption of earnings that occurs on or after that date, is deemed to have in their qualifying period an additional 300 hours of insurable employment if they otherwise had 120 hours of insurable employment. Accordingly, the EI benefits are received under Part I of the EIA, and are required to be included in income under subparagraph 56(1)(a)(iv) of the Act.

Paragraph 81(1)(a) of the Act and section 87 of the Indian Act provide a tax exemption for the personal property situated on a reserve of an individual who is registered or entitled to be registered under the Indian Act. The courts have determined that income, including EI benefits, is personal property for purposes of section 87 of the Indian Act. Therefore, EI benefits received by a First Nations individual will be exempt from income tax if it is determined 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. 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 (footnote 1) (the “Guidelines”).

The Guidelines provide that employment-related income, such as EI benefits, will usually be exempt from income tax when received as a result of employment income that was exempt from tax. Also, the webpage titled “Information on the tax exemption under section 87 of the Indian Act” (footnote 2) states the following with respect to employment-related benefits:

“Employment Insurance benefits, Canada Pension Plan benefits, Quebec Pension Plan benefits, registered pension plan benefits, retiring allowances, and wage-loss replacement plan benefits you receive are treated in the same way as the employment income that gave rise to the particular income. In other words, if your employment income is exempt from income tax under section 87 of the Indian Act, your employment-related income will also be exempt. If part of your employment income is exempt, any employment-related income arising from that exempt income will also be exempt from income tax.”

In the situation described, the individual had 120 hours of insurable employment (the “qualifying hours”) and was granted the one-time credit of 300 hours of insurable employment (the “one-time credit”) under Part VIII.5 of the EIA. The one-time credit made the individual eligible for the EI benefits under Part I of the EIA, but it did not have any impact on how the EI benefits are calculated under Part I of the EIA. Therefore, the EI benefits received will be exempt from tax under paragraph 81(1)(a) of the Act and section 87 of the Indian Act if the employment income arising from the qualifying hours was exempt from tax under the Indian Act. In the situation described, the qualifying hours of the First Nations individual was earned on a reserve and the employment income that arose from those hours, was exempt from tax under section 87 of the Indian Act. Therefore, EI benefits received by the First Nations individual would be exempt from tax under section 87 of 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, including information that could reveal the identity of the taxpayer.

We trust these comments will be of assistance.

Yours truly,

Ms. Nerill Thomas-Wilkinson, CPA, CA
Manager
Non-Profit Organizations and Indigenous Issues Section
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 https://www.canada.ca/en/reven...

2 https://www.canada.ca/en/reven...

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