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: Information for employers with employees exempt under section 87 of the Indian Act.
Position: See information provided in letter.
Reasons: See information provided in letter.
Author: Townsend, Ann
Section: Section 87 of the Indian Act
March 19, 2021
Re: Employment Income and the Tax exemption under section 87 of the Indian Act
This is in reply to your email enquiring about the income tax exemption under section 87 of the Indian Act, which you will be claiming for the first time as a result of the COVID-19 pandemic.
In particular, you would like information on the supporting documentation required to be kept by your employer, how to claim a refund of the taxes that have been withheld, and information on the Canada Pension Plan (CPP) implications.
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 70-6R10, Advance Income Tax Rulings and Technical Interpretations.
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 Employment Income Guidelines. For additional details on the Guidelines go to: https://www.canada.ca/en/revenue-agency/services/aboriginal-peoples/indian-act-exemption-employment-income-guidelines.html.
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. In situations where an employee, who is registered under the Indian Act, is required to work from a home office on a reserve as a result of the COVID-19 pandemic, it is the CRA’s view that Guideline 3 will apply to exempt from tax all of the employment income if the employee lives on a reserve and has 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.
It is important to note that only income situated on reserve land qualifies for the exemption. The definition of a “reserve”, as provided in section 2 of the Indian Act, includes a tract of land, the legal title to which is vested in Her Majesty, which has been set apart by Her Majesty for the use and benefit of a band. Traditional land and reserve land are not the same. Traditional land is generally understood very broadly and may include reserve land; however, only reserve land is relevant for purposes of the tax exemption. If an employer or an employee is uncertain whether a tract of land is on a reserve, they should contact the First Nation office.
Form TD1-IN Determination of Exemption of an Indian’s Employment Income, reflects the Guidelines and is used by employers to help determine whether an employee’s employment income is exempt from income tax. It should be completed for each employee that is claiming the exemption from income tax under the Indian Act and the employer is required to retain the completed TD1-IN forms. The instructions for completing the TD1-IN state that it should be filled out in the presence of the employee. This includes a virtual presence where employees and employers are social distancing and are not in the same location because of the COVID-19 pandemic. However, the employee should still sign and return a completed TD1-IN form to the employer.
A fillable TD1-IN form can be obtained at the CRA website: https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/td1-in.html
Income tax deductions at source do not apply to income that is exempt under section 87 of the Indian Act. Where it is established that employment income paid to an Indian is exempt from tax, the employee can ask his or her employer to waive the tax deductions at source.
Employers must report all income and deductions on a T4 slip for employees who are registered under the Indian Act, regardless of whether their income is taxable or non-taxable:
* taxable earnings must be reported in box 14
* non-taxable earnings must be reported under code 71 in the Other Information area
Pensionable earnings must be reported in Box 26 of the T4 slip if an employer has elected to cover exempt employment income under the Canada Pension Plan.
An employer is always liable for appropriate source deductions with respect to its employees. Consequently, unless an employer is comfortable that the employment income of an employee is wholly or partially exempt from income tax, the employer should generally withhold. If amounts have been withheld and remitted for an employee whose income is later determined to be exempt from income tax, the employee may file an income tax return to claim a refund of the appropriate portion of these amounts. After filing the T4 information return, the employer may notice that they made an error on a T4 slip. If so, they will have to prepare an amended slip to correct the information. For more information, please see: RC4120 Employers' Guide - Filing the T4 slip and Summary.
If an individual notices errors on their T4 slip, they should first contact their employer and request that their T4 slip be amended. If the employer is unwilling to amend the T4 slip and the individual still disagrees with the amounts reported, the individual can then contact the Individual Tax Enquiries Line at 1-800-959-8281 to file a complaint.
Finally, although employment income that is exempt from income tax is excluded from pensionable earning, an employer may elect to provide these employees with optional CPP coverage by filing form: CPT124, Application for Coverage of Employment of an Indian in Canada Under the Canada Pension Plan Whose Income is Exempt Under the Income Tax Act. Employers must deduct Employment Insurance (EI) premiums from employment income.
When the employer does not elect to cover employees for CPP, an employee’s employment may still be included in pensionable employment. However, the employee must make an election to have their employment included as pensionable employment and pay the required employer and employee shares of the contributions within one year after April 30 of the contribution year. For the conditions that must be met and additional information go to: https://www.canada.ca/en/revenue-agency/services/tax/canada-pension-plan-cpp-employment-insurance-ei-rulings/cpp-ei-explained/indian-workers-canada-pension-plan.html
I trust these comments will be of assistance.
Roger Filion, CPA, CA
Non-Profit Organizations and Aboriginal Issues
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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