2020-0867841I7 Canada Recovery Benefits - Indian Act Exemption

Principal Issues: Will the Recovery Benefits received by a First Nation Individual be exempt from tax under section 87 of the Indian Act?

Position: The Recovery Benefits you receive will be treated in the same way as the total income that entitled you to these benefits

Reasons: The Recovery Benefits are available to workers who earned a minimum total income of $5,000 (before taxes) from one or more of the following sources; employment income, self-employment income and/or provincial or federal benefits related to maternity or paternity leave. This total income includes income exempt under section 87 of the Indian Act. We feel that the taxability of the income that entitled the recipient to the benefits is a strong connecting factor when determining whether the benefits received are sufficiently connected to a reserve for the purposes of section 87 of the Indian Act.

Author: Gauthier, Michel
Section: 81(1)(a); section 87 of the Indian Act, Canada Recovery Benefits Act

Bernard Trop
Service, Innovation and Integration Branch                                                Income Tax Rulings
Federal, Indigenous and Quebec Affairs Division                                       Directorate
Indigenous Affairs Section                                                                          M. Gauthier
555 Mackenzie Avenue, 5th Floor, Office 5-209                                         343-548-9970
Ottawa, ON                                            
K1A 0L5                                                                                                     2020-086784

Canada Recovery Benefits and Indian Act Exemption

This is in reply to your request for information on the taxability of Canada Recovery Benefits (“Recovery Benefits”) paid to an Indian, as that term is defined in section 2 of the Indian Act. You asked whether the Recovery Benefits will be exempt from tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act.

Our Comments:

The Recovery Benefits are generally included in income pursuant to subparagraph 56(1)(r)(iv) of the Income Tax Act unless exempt pursuant to another provision of that Act.

Paragraph 81(1)(a) of the Income Tax Act, together with paragraph 87(1)(b) of the Indian Act provides that “the personal property of an Indian or a band situated on a reserve” is exempt from taxation. The courts have determined that income is personal property for purposes of section 87 of the Indian Act. Therefore, Recovery Benefits received by an Indian may qualify for an exemption from income tax if it is determined to be situated on a reserve.

The Supreme Court of Canada, in Williams v. The Queen, 92 DTC 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.

On our website titled Information on the tax exemption under section 87 of the Indian Act (footnote 1)  we state 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.”

The Canada Recovery Benefits Act (CRBA) contains the eligibility criteria for the Recovery Benefits which is comprised of the Canada Recovery Benefit, the Canada Recovery Sickness Benefit and the Canada Recovery Caregiving Benefit. The Income Tax Rulings Directorate reviewed the CRBA and prepared the following two questions and answers (Q&As) for our First Nations clients. We feel these Q&As should answer your questions on the taxability of the Recovery Benefits.

Q1: I am a First Nation individual, will the Recovery Benefits received in 2020 be exempt from tax under section 87 of the Indian Act?

A1: The Recovery Benefits you receive will be treated in the same way as the total income that entitled you to these benefits.

The Recovery Benefits are available to workers who earned a minimum total income of $5,000 from one or more of the following sources; employment income, self-employment income and/or provincial or federal benefits related to maternity or paternity leave. Total income includes income exempt under section 87 of the Indian Act.

If the Recovery Benefits are in respect of a two-week period beginning in 2020, this total income is your total income for either 2019 or the 12-month period preceding the day on which you made your application (straddle period). Therefore, if the total income that entitled you to the Recovery Benefits in either 2019 or the straddle period is exempt from tax under section 87 of the Indian Act, your Recovery Benefits will also be exempt. If the total income that entitled you to the Recovery Benefits is partially exempt from tax in both 2019 and the straddle period, your Recovery Benefits will also be partially exempt. Your Recovery Benefits will be treated as exempt in the same proportion as the total income of the period that is more advantageous to you. If the total income that entitled you to the Recovery Benefits in one period is partially exempt and the total income in the other is taxable, your Recovery Benefits will be treated as exempt in the same proportion as the total income of the period that was partially exempt. If the total income that entitled you to the Recovery Benefits is taxable in both periods, your Recovery Benefits will also be taxable.

In addition, if you have a combination of taxable and exempt income and you had a reduction of at least 50% in your average weekly employment income or self-employment income that includes a reduction of exempt income, for reasons related to COVID-19, the Recovery Benefits you received may be exempt in the proportion of the exempt income lost over the total income lost, if this proportion is more advantageous to you.

Q2: I am a First Nation individual, will the Recovery Benefits received in 2021 be exempt from tax under section 87 of the Indian Act?

A2: The Recovery Benefits you receive will be treated in the same way as the total income that entitled you to these benefits.

The Recovery Benefits are available to workers who earned a minimum total income of $5,000 from one or more of the following sources; employment income, self-employment income and/or provincial or federal benefits related to maternity or paternity leave. Total income includes income exempt under section 87 of the Indian Act.

If the Recovery Benefits are in respect of a two-week period beginning in 2021, this total income is your total income for either 2019, 2020, or in the 12-month period preceding the day on which you made your the application (straddle period). Therefore, if the total income that entitled you to the Recovery Benefits in 2019, 2020 or the straddle period is exempt from income tax under section 87 of the Indian Act, your Recovery Benefits will also be exempt. If the total income that entitled you to the Recovery Benefits is partially exempt from tax in all the periods, your Recovery Benefits will also be partially exempt. The Recovery Benefits will be treated as exempt in the same proportion as the total income of the period that is more advantageous to you. If your total income that entitled you to the Recovery Benefits in two periods is partially exempt and the total income in the other period is taxable, your Recovery Benefits will be treated as exempt in the same proportion as the total income of the period that was partially exempt that is more advantageous to you. If your total income that entitled you to the Recovery Benefits in one period is partially exempt and the total income in the other periods is taxable, your Recovery Benefits will be treated as exempt in the same proportion as the total income of the period that was partially exempt. If your total income that entitled you to the Recovery Benefits is taxable in all periods, your Recovery Benefits will also be taxable.

In addition, if you have a combination of taxable and exempt income and you had a reduction of at least 50% in your average weekly employment income or self-employment income that includes a reduction of exempt income, for reasons related to COVID-19, the Recovery Benefits you received may be exempt in the proportion of the exempt income lost over the total income lost, if this proportion is more advantageous to you.

We trust that these comments will be of assistance.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’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. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

Yours truly,

Roger Filion, CPA, CA
Manager
Non-Profit Organizations and Indigenous Issues
Business and Employment 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/revenue-agency/services/aboriginal-peoples/information-indians.html

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