2021-0891931E5 Director's Fees - Whether Guideline 3 would apply

Principal Issues: Whether Guideline 3 of the Indian Act Exemption for Employment Income Guidelines would apply to exempt from tax the director’s fees earned by an individual, who is registered as an Indian under the Indian Act, and who performs their duties as a director from an on-reserve home office and/or on-reserve business office as a result of the COVID-19 pandemic.

Position: No.

Reasons: The Guidelines are an administrative tool intended to deal with the most common employment situations. Director’s fees received by corporate board members are considered employment income; however, they are not the type of employment income to which the Guidelines apply. The connecting factors test must be used.

Author: Mahendran, Ananthy
Section: 81(1)(a)

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                                                                                         2021-089193
                                                                                         A. Mahendran
                                                                                        (905) 721-5204

September 8, 2021

Dear XXXXXXXXXX:

Re: Tax treatment of director’s fees received by a First Nation individual

This is in reply to your correspondence of April 1st, 2021 requesting a technical interpretation as to whether or not Guideline 3 of the Indian Act Exemption for Employment Income Guidelines (the “Guidelines”) would apply to exempt from tax the director’s fees earned by an individual, who is registered under the Indian Act, and who performs their duties as a director from an on-reserve home office and/or on-reserve business office as a result of the COVID-19 pandemic.

Our Comments

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 70-6R11, Advance Income Tax Rulings and Technical Interpretations.

The personal property of an individual who is registered or entitled to be registered under 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 personal property is situated on a reserve. Income, including director’s fees, is considered personal property and therefore, the tax exemption of the director’s fees depends on whether the fees are situated on a reserve.

As stated in the Guidelines, they are an administrative tool intended to deal with the most common employment situations. Director’s fees received by corporate board members are considered employment income; however, they are not the type of employment income to which the Guidelines apply. Determining whether director’s fees are 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”. The courts have determined that the most important factor connecting employment income to a reserve is the location of the duties of employment. Therefore, it is our view that director’s fees paid to an individual, who is registered under the Indian Act and who performs their duties as a director from a home office or a business office located on a reserve as a result of the COVID-19 pandemic, are considered to be situated on a reserve and exempt from income tax under section 87 of the Indian Act.

We trust these comments will be of assistance.

Yours truly,

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

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