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: How to calculate the prorated exemption under Guideline 1 when a First Nation individual is no longer performing a portion of their employment duties on a reserve as a result of the COVID-19 pandemic and workplace restrictions.
Position: A First Nation individual can continue to calculate the prorated exemption based on the number of days or hours during which the individual would normally have worked on a reserve but was forced to work off reserve because of the COVID-19 pandemic.
Reasons: As an administrative matter and under the extraordinary circumstances, the CRA will consider the number of days or hours, as the case may be, during which a First Nation individual was forced to work off reserve only because of the workplace restrictions, to count towards the prorated exemption under Guideline 1.
Author: Mahendran, Ananthy
February 22, 2021
Re: Guideline 1 proration rule during the period of COVID-19 workplace restrictions
This is in reply to your email of December 9, 2020, requesting clarification on the “proration rule” contained in Guideline 1 of the Indian Act Exemption for Employment Income Guidelines (“Guideline 1”). In your situation, you regularly perform a portion of your employment duties on a reserve and you usually claim a prorated exemption under Guideline 1. However, as a result of the COVID-19 pandemic and workplace restrictions you are no longer able to perform a portion of your employment duties on a reserve and you are asking how to calculate the prorated exemption under Guideline 1.
This technical interpretation provides general comments about the provisions of the 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 70-6R10, Advance Income Tax Rulings and Technical Interpretations.
Guideline 1 applies to exempt all of the employment income of an employee if at least 90% of the employment duties are performed on a reserve. When less than 90%, but more than an incidental proportion, of the duties are performed on a reserve, and none of the other Guidelines apply, the exemption is prorated to apply to the portion of income related to the duties that are performed on a reserve (the proration rule).
The Canada Revenue Agency (CRA) has issued the Guidance on the application of the Indian Act Exemption for Employment Income Guidelines to address issues raised by the COVID-19 crisis (the “Guidance”). The Guidance provides information on the CRA’s administrative position on the application of the Indian Act Exemption for Employment Income Guidelines as a result of the COVID-19 crisis, which can be obtained at the following CRA webpage: https://www.canada.ca/en/revenue-agency/campaigns/covid-19-update/guidance-application-indian-act-exemption.html.
The Guidance states, under the heading overview, that where an individual’s regular place of employment (full time or part time) was located on a reserve and changed solely because of the COVID-19 workplace restrictions, the CRA will continue to apply the Guidelines as if the individual was still reporting to their regular workplace on a reserve. The Guidance also states, under situation II, that the fact that an individual has been working off-reserve only because of the workplace restrictions, will not, of itself, cause the CRA to reject the prorated exemption in Guideline 1. As an administrative matter and under the extraordinary circumstances, the CRA will consider the number of days or hours, as the case may be, during which an individual was forced to work off reserve only because of the workplace restrictions, to count towards the prorated exemption under Guideline 1. This will be the CRA position where, among other things, the individual usually performs part of their duties of employment on a reserve and intends to work, and does work, at the on-reserve location as soon as the restrictions are lifted.
Based on the above, the prorated exemption will continue to apply to the portion of income related to the duties that would have been performed on a reserve. In other words, an employee can continue to calculate the prorated exemption based on the number of days or hours during which an individual would normally have worked on a reserve but was forced to work off reserve because of the COVID-19 pandemic. In addition, the employee and the employer should maintain sufficient and appropriate records to support the time that would have been spent on reserves in order to substantiate a tax exemption based on Guideline 1.
We trust that these comments will be of assistance.
Roger Filion, CPA, CA
Non-Profit Organizations and Indigenous Issues Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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