2022-0940071I7 Employment income earned on surrendered reserve land

Principal Issues: Is the employment income earned on reserve land surrendered by a First Nation to provide employment exempt from tax under the Indian Act.

Position: Yes, but only the employment income earned by a member of the First Nation that surrendered the reserve land and who is registered or entitled to be registered under the Indian Act.

Reasons: Based on jurisprudence, the courts have given significant weight to employment duties performed by members of a First Nation on land that was once reserve land but was surrendered by the First Nation in exchange for the promise of employment of its members.

Author: Townsend, Ann
Section: 81(1)(a)

                                                                               November 25, 2022

Employer Compliance Audit Section                      Income Tax Rulings Directorate
Collections and Verification Branch                        Ann Townsend

                                                                               2022-094007

Attention: Kenneth Ng

Re: Employment income earned on surrendered reserve land

This is in response to your request for our views on whether the income tax exemption provided under section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act (Act) applies to the employment income earned by the Indigenous employees who work at the mine site of XXXXXXXXXX (Employer). It is our understanding that the mine site is located on land that was surrendered by the XXXXXXXXXX (Band) with the promise of employment for Indigenous individuals.

Our Comments

Employment income 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 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 other government departments and interested First Nations organizations, developed the Indian Act Exemption for Employment Income Guidelines (Guidelines). There are four Guidelines that incorporate various relevant connecting factors and describe employment situations covered by section 87 of the Indian Act.

A reserve is defined in the Indian Act as:

“reserve

(a) means a tract of land, the legal title to which is vested in Her Majesty, that has been set apart by Her Majesty for the use and benefit of a band,…”

When a First Nation surrenders reserve land, the land no longer meets the definition of a reserve under the Indian Act. Therefore, when applying the Guidelines, employment duties performed on this land will not be considered to be performed on a reserve. Based on our understanding of the information provided, the employment income earned by Indigenous employees at the mine site does not meet any of the employment situations described in the Guidelines.

The Guidelines are an administrative tool created to address the most common employment situations. 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.

A First Nation surrendering reserve land for the employment of its members is a fact that has been given significant weight by the courts in applying the connecting factors test. In Boubard et al v. the Queen, 2008 TCC 133; 2008 FCA 392 (Boubard), the Sagkeeng First Nation surrendered part of its reserve for the construction of a mill on the surrendered land in exchange for the promise of employment opportunities for its members at the mill. The courts concluded that subjecting employment income to taxation in these circumstances would erode the entitlement that flows from the reserve to the members of the First Nation that surrendered the land:

“… To subject employment income of the Sagkeeng people from the Mill to taxation in these circumstances is to erode their entitlement that flows directly from the Reserve land.” (footnote 1) (our emphasis)

Based on the above, there is a significant connecting factor that situates the employment income earned at the mine site by the employees who are members of the Band on a reserve. Therefore, it is our view that the income tax exemption applies to the members of the Band who work at the mine site and who are registered or entitled to be registered under the Indian Act. Consequently, the Employer is not required to withhold income tax on employment income paid to those employees.

The employment income earned by the employees working at the mine site, who are not members of the Band, does not have the significant connecting factor used by the courts in Boubard to situate the income on a reserve. Therefore, subjecting these employees to tax on their employment income earned at the mine site would not erode their entitlement that flows from reserve land. Without this significant connecting factor and given that, based on the information provided to us, none of the Guidelines appear to apply, it is our view that the employees who are not members of the Band do not qualify for the tax exemption on their employment income earned at the mine site. Consequently, the Employer is required to withhold income tax on employment income paid to those employees.

It should be noted that our views are consistent with the independent advice received by the Employer.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

We trust these comments will be of assistance to you.

Yours truly,

Ms. Nerill Thomas-Wilkinson, CPA, CA
Manager
Non-Profit Organizations and Indigenous Issues Section
Specialty Tax Division

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Par. 53 Boubard et al v. the Queen, 2008 TCC 133;

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