2021-0893311E5 Indian Act exemption and employment income

Principal Issues: Whether the individual’s employment income qualifies for the Indian Act exemption pursuant to section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act.

Position: Proration rule in Guideline 1 will apply to exempt from tax the percentage of duties performed on a reserve.

Reasons: Only work that is actually performed on a reserve should be considered when applying the Guidelines. Consistent with jurisprudence, it is the CRA’s longstanding position that time spent off-reserve preparing for work on a reserve and time spent travelling to and from a reserve is not considered time spent working on a reserve.

Author: Townsend, Ann
Section: 81(1)(a), 87(1)(a) of the Indian Act

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                                                                                    2021-089333
                                                                                    Ann Townsend

February 2, 2022

Dear XXXXXXXXXX:

Re: Off-reserve employment duties and the Indian Act tax exemption

This is in reply to your correspondence asking for our views on whether section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act will apply to exempt from tax the employment income earned by an employee of the XXXXXXXXXX(“Employer”).

In particular, you have asked for our comments on whether the time an employee spends off-reserve to prepare for work on a reserve and the time they spend to commute to remote reserves, is considered employment duties performed on a reserve.  

The following is our understanding of the facts:

* The employee is registered under the Indian Act and does not live on a reserve (“Employee”).

* The Employer is resident on a reserve.

* The Employee prepares reports and arranges visits to various reserves from the Employer’s satellite office that is located off-reserve.

* The Employee is required to commute long distances to visit reserves in remote areas of XXXXXXXXXX.

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.

Employment income earned by an individual who is registered or entitled to be registered under the Indian Act, is exempt from income tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax 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 together with interested First Nations organizations, developed the Indian Act Exemption for Employment Income Guidelines (“Guidelines”).

You acknowledge that Guideline 2 and Guideline 4 do not apply to the Employee’s situation, but it is your view that Guideline 1 or Guideline 3 could apply to exempt from income tax the employment income related to time spent preparing for work on a reserve and time spent travelling to and from a reserve. Guideline 1 exempts from income tax all of the employment income of an employee if at least 90% of their 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 proportion of the income related to the duties that are performed on a reserve (the proration rule). Guideline 3 exempts from income tax all of the employment income of an employee if more than 50% of their employment duties are performed on a reserve and either the employer is resident on a reserve or the employee lives on a reserve.

To determine whether employment income is exempt from tax under either Guideline 1 or 3, the portion of employment duties performed on a reserve must be determined. In considering what time is relevant for the purpose of this determination, we generally take into account:

* whether an actual “duty of employment” was performed (i.e., was the employee required to perform the particular task and was the employee compensated by the employer for performing that particular task); and

* whether the duty of employment was actually performed on a reserve. It is our longstanding view that time spent preparing for work on a reserve and time spent travelling to and from a reserve, is not considered time spent performing employment duties on a reserve for purposes of the Guidelines.

Although most common employment situations that are subject to the Indian Act exemption are covered by the Guidelines, there may be situations where there are other connecting factors that may result in employment income being treated differently than under the Guidelines. In such situations, it is necessary to apply the connecting factors test as established by the courts.

The courts have stated that when applying the connecting factors test, it is first necessary to consider the purpose of the Indian Act tax exemption. The courts have concluded that the purpose of the exemption is to ensure the protection of reserve lands and property on those lands from erosion by the government through taxation; it is not meant to confer a general economic benefit to individuals registered under the Indian Act.

Even in situations where employment duties performed off-reserve benefited reserves, the courts have concluded that this fact alone is not enough to situate the related employment income on a reserve. For example, in Ozawagosh et al v the Queen (2013 TCC 311), the Tax Court of Canada concluded that although employment duties performed off-reserve were beneficial to reserves, it was not sufficient to connect the income to a reserve because it had nothing to do with the purpose of the Indian Act tax exemption, which is the protection from taxation of personal property on reserves.

Consistent with the courts and our previous positions, it is our view that there are insufficient connecting factors to situate all of the Employee’s income on a reserve. In other words, it is our view that time spent preparing for work on a reserve and time spent travelling to and from a reserve is not considered time spent performing employment duties on a reserve. Therefore, only the portion of the Employee’s employment income related to actual duties performed on a reserve will be exempt from tax under the Indian 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 Section
Business and Employment Division
Income Tax Rulings Directorate

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