2022-0932231I7 Employ incom tax exemption under the Indian Act
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: Whether employment income earned at remote airports that are located off-reserve or partially off-reserve, qualifies for the exemption from tax under the Indian Act.
Reasons: Depends on the particular facts for each remote airport and the employee.
Section: 81(1)(a) - ITA, s87 - Indian Act
December 19, 2022
Service, Innovation and Integration Branch Income Tax Rulings Directorate
XXXXXXXXXX Ann Townsend
Attention: Bernard Trop
Re: Remote airport employees 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 exempt from income tax the employment income earned at certain XXXXXXXXXX remote airports operated by XXXXXXXXXX (Employer). In particular, you are asking about the employment income earned by employees who are registered or entitled to be registered under the Indian Act (Employees).
The following is our understanding of the facts:
* The Employer operates XXXXXXXXXX remote airports in XXXXXXXXXX with XXXXXXXXXX serving First Nations communities that have no all-weather road access to the rest of XXXXXXXXXX
* Of the XXXXXXXXXX remote airports serving First Nation communities, XXXXXXXXXX are located on reserves, XXXXXXXXXX are located partially off-reserve and XXXXXXXXXX are located adjacent to reserves (Off-reserve airports).
* The XXXXXXXXXX remote airports enable year-round access to air transportation for necessary services, supplies, and emergency medical care.
* The Employees live on the reserves of the First Nations community that the remote airport is serving.
* Employees working at Off-reserve airports may perform some of their employment duties on reserve, for example, attending on-reserve meetings and training.
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 the connecting factors test with respect to common employment situations, the CRA together with interested First Nations organizations, developed the Indian Act Exemption for Employment Income Guidelines (Guidelines). (footnote 2) Generally, to qualify for the tax exemption under the Guidelines, the employment duties must be fully or partially performed on a reserve or the employer or the employee must be resident on a reserve.
Although the Employer is not resident on a reserve, it is our understanding that the Employees working at the Off-reserve airports reside on a reserve and may perform some of their duties of employment on a reserve. Therefore, Guidelines 1 or 3 may apply to exempt the employment income of those Employees.
Guideline 1 will exempt from income tax all the employment income of an employee who is registered or entitled to be registered under the Indian Act (the eligible employee), if at least 90% of the eligible employee’s 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 the income related to the duties that are performed on a reserve (the proration rule).
Guideline 3 will exempt from income tax all the employment income of an eligible employee if more than 50% of the eligible employee’s employment duties are performed on a reserve and the eligible employee lives on a reserve.
In this case, since the Employees live on reserves, Guideline 3 would apply to exempt from income tax all the employment income of the Employees who perform more than 50% of their employment duties on a reserve. However, if less than 50% but more than an incidental portion of Employee’s duties are performed on a reserve, Guideline 1 will only apply to exempt the portion of the income related to duties performed on a reserve.
Furthermore, none of the Guidelines will apply where an Employee performs all of their duties of employment at an Off-reserve airport. However, there may be situations where there are connecting factors other than those reflected in the Guidelines, which would situate the employment income on a reserve. In such situations, it is necessary to apply the connecting factors test as established by the courts to determine whether the employment income is situated on a reserve. In doing so, it is important that each individual situation be analyzed on its own merit. We cannot apply a single connecting factors test to all the Employees working at the various Off-reserve airports as each of their particular situations may be different.
Connecting Factors Test
The connecting factors test is a two-step analysis. First, potentially relevant connecting factors that would situate the income to a reserve are identified and then each factor is given weight in light of three considerations: the purpose of the Indian Act tax exemption, the type of income, and the taxation of that income.
Based on the Employer’s general description of the mission and purpose of the remote airports XXXXXXXXXX, it is our view that where an Off-reserve airport is:
* the main means of transportation for the delivery of supplies and the necessities of life (food and shelter materials) in the remote area,
* an integral source of transportation to the residents of the surrounding First Nations communities and provide year-round access to air transportation for emergency medical care,
* located in a remote area that does not have year-round road access and is a significant distance from an urban center (that is, a community with ample amenities), and
* used by a majority of passengers who are members of the surrounding First Nations communities,
the employment income earned at the Off-reserve airport by an Employee who lives on a reserve (i.e., in the surrounding First Nations communities), will generally be considered situated on a reserve. Please note that the above unique connecting factors must be considered together since individually they would not, in our view, be significant enough to situate the particular employment income on a reserve. Furthermore, whether all of the above factors exist can only be determined annually on a case-by-case basis. The existence or creation of another viable transportation option in the remote area may result in a particular Off-reserve airport not being considered an integral source of transportation to the residents of the surrounding First Nations communities and would weaken the connection to a reserve. In addition, where the majority of passengers using the Off-reserve airport are no longer members of the First Nations, the connection would also be weakened.
Since we cannot apply a single connecting factors test to all the Employees working at the various Off-reserve airports, we are unable to confirm whether the employment income of all those Employees are exempt from income tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act.
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We trust these comments will be of assistance to you.
Ms. Nerill Thomas-Wilkinson, CPA, CA
Non-Profit Organizations and Indigenous Issues Section
Specialty Tax Division
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