2021-0888051E5 Income Stabilization Fund Payments

Principal Issues: Does section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act (the “Act”) apply to exempt from income tax, the monthly payments made by a First Nation to its members who are sixty-five years of age or older?

Position: Question of fact, but likely yes.

Reasons: The monthly payments are included in income as pension benefits under subparagraph 56(1)(a)(i) of the Act. However, the monthly payments received by Elders appear to be situated on a reserve, and consequently, the payments received by these members would be exempt from income tax under section 87 of the Indian Act and excluded from income under paragraph 81(1)(a) of the Act.

Author: Gauthier, Michel
Section: 56(1)(a)(i), 81(1)(a); Indian Act s.87

XXXXXXXXXX

                                                                                     2021-088805
                                                                                     M. Gauthier

January 23, 2023

Dear XXXXXXXXXX:

Re: Elder payments

This is in reply to your email dated April 1, 2021, asking whether section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act (the “Act”) would apply to exempt from income tax, the monthly payments made by XXXXXXXXXX (“First Nation”) to its members (whether they live on reserve or off-reserve) who are sixty-five years of age or older (“Elder”).

The purpose of the monthly Elder payment is to ensure no Elder lives in poverty, however, there are no financial eligibility requirements.

In your view, the Elder payment would be considered a “superannuation or pension benefit” that would be included in the Elder’s income under subparagraph 56(1)(a) of the Act. Furthermore, it is your view that the payment is sufficiently connected to a reserve and exempt from tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Act. You referenced the Indian Act Exemption for Employment Income Guidelines (“Guidelines”) as support for your position.

Our Comments

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 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Under subparagraph 56(1)(a)(i) of the Act, any amount received by a taxpayer in the year as, on account or in lieu of payment of, or in satisfaction of, a superannuation or pension benefit is included in income. A superannuation or pension benefit includes any amount received out of a superannuation or pension fund or plan. Generally, a plan will be considered a superannuation or pension fund or plan where contributions have been made to the plan by or on behalf of an employer or former employer of an employee in consideration for services rendered by the employee and the contributions are used to provide an annuity or other periodic payments on or after the employee's retirement in consideration for his or her employment services. A superannuation or pension benefit also includes a periodic payment by a government to persons above a specific age (old-age pension) or disabled or widowed.

In the present situation, the monthly Elder payment is funded and administered by the First Nation, which is a municipal or public body performing a function of government in Canada as described in paragraph 149(1)(c) of the Act, and it is only available to the First Nation members who are 65 years of age or older and who are ordinarily resident in Canada. The monthly Elder payments appear to be an old-age pension and would be considered a pension benefit. As a result, the Elder payments would be included in the Elders’ income under subparagraph 56(1)(a)(i) of the Act unless it is exempt from income tax by paragraph 87(1)(b) of the Indian Act and excluded from income under paragraph 81(1)(a) of the Act.

Paragraph 87(1)(b) of the Indian Act exempts from income tax the personal property situated on a reserve of an individual who is registered or entitled to be registered under the Indian Act. The Canadian courts have determined that personal property includes income and concluded that the determination of whether income is situated on a reserve requires identifying the various factors connecting the income to a reserve and weighing the significance of each such factor, this is known as the “connecting factors test”.

The Guidelines were developed as an administrative tool to help Indigenous taxpayers apply the connecting factors test to common employment situations. Since the Elder payment is not employment income, the Guidelines do not apply. As such, determining whether the Elder payments are situated on a reserve requires the application of the connecting factors test.

The connecting factors test is a two-step analysis. First, one identifies potentially relevant factors connecting the property to a reserve and then one weighs the significance of each factor in light of three considerations: the purpose of the exemption from taxation, the type of property, and the nature of the taxation of that property.

The following relevant factors demonstrate that the monthly payments have a significant connection to a reserve:

* The Elder payments are funded and administered by the First Nation, which is resident on a reserve.

* The funding for the Elder payments was derived from a land settlement agreement.

* The Elder payments are only available to members of the First Nation.

* All of the Elders are registered or entitled to be registered under the Indian Act.

As stated above, the monthly Elder payments received by an Elder are required to be included in income under subparagraph 56(1)(a)(i) of the Act unless otherwise excluded from income under the Act. In our view, the monthly Elder payments appear to have significant connecting factors that would situate the payments on a reserve. Consequently, the monthly Elder payments received by an Elder would be exempt from income tax under paragraph 87(1)(b) of the Indian Act and excluded from income pursuant to paragraph 81(1)(a) of the Act.

We trust that these comments will be of assistance.

Yours truly,

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

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2023

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2023