2022-0958721E5 Employment income tax exemption under the Indian Act

Principal Issues: Whether employment income earned by employees of XXXXXXXXXX that telework from home offices located off-reserve, qualifies for the exemption from tax under the Indian Act.

Position: Guidelines 1 or 3 may apply.

Reasons: See response.

Author: Townsend, Ann
Section: Paragraph 81(1)(a) - ITA, Section 87 - Indian Act

                                                                               June 7, 2023

XXXXXXXXXX                                                       Income Tax Rulings Directorate
                                                                               Ann Townsend

                                                                               2022-095872

Dear XXXXXXXXXX:

RE: Employment income and the income tax exemption under section 87 of the Indian Act

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 exempt from income tax the employment income earned by certain employees of XXXXXXXXXX. These employees are registed under the Indian Act, and will likely be teleworking from home offices located off-reserve (Employees).

Based on the facts you provided, it is our understanding that XXXXXXXXXX is a separate operating agency and employer that reports into Indigenous Services Canada (ISC) through the Assistant Deputy Minister, Lands and Economic Development Sector. XXXXXXXXXX provides services to First Nations across Canada in leasing and administering oil and gas rights on reserves. XXXXXXXXXX’s head office is located on a reserve (as defined under the Indian Act). We have previously opined that where the central management and control of XXXXXXXXXX is exercised on a reserve, it would be considered resident on a reserve for the purpose of the Indian Act Exemption for Employment Income Guidelines (Guidelines). (footnote 1)

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 70-6R12, 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 the connecting factors test with respect to common employment situations, the Canada Revenue Agency (CRA) together with interested First Nations organizations, developed the Guidelines. Generally, to qualify for the tax exemption under the Guidelines, the employment duties must be fully or partially performed on a reserve.

Guideline 1 would exempt from income tax all the employment income of an Employee, if at least 90% of the 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 applies to the portion of the income related to the duties that are performed on a reserve (the proration rule).

It is our understanding that prior to the COVID-19 pandemic, the Employees performed at least XXXXXXXXXX% of their duties of employment from XXXXXXXXXX’s on-reserve head office and claimed the exemption from tax under Guideline 1.

During the COVID-19 pandemic, the CRA issued the Guidance on the application of the Indian Act Exemption for Employment Income Guidelines to issues raised by the COVID-19 crisis (Guidance). Paragraph 2 of the Guidance states that “where an individual’s regular place of employment (full time or part time) was located on a reserve and changed solely because of the COVID-19 workplace restrictions, the CRA will continue to apply the guidelines as if the individual was still reporting to their regular workplace on a reserve”. Therefore, an Employee would have been eligible to apply the administrative position set out in the Guidance, if they met the following requirements:

* The Employee must have usually performed the duties of employment on a reserve before the workplace restrictions.

* The Employee’s regular place of employment was located on a reserve before the COVID-19 workplace restrictions and must have changed solely because of those restrictions.

* The Employee must work at the on-reserve location as soon as the restrictions are lifted.

The Guidance was effective from March 16, 2020 to December 31, 2022, and it was an administrative position to help taxpayers during the COVID-19 crisis. It was not a new interpretive position nor an intention to establish any broader policy.

Since the Guidance no longer applies, you are asking whether an Employee will qualify for the tax exemption if they work full-time or part-time from their off-reserve home office. Where an Employee works on-reserve and off-reserve, Guidelines 1 or 3 may apply to exempt all or a portion of their employment income. Where the Employee works full-time off reserve, none of the Guidelines would apply. Although most common employment situations that are subject to the Indian Act tax 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.

It is your view, the following factors are sufficient to situate the employment income earned by the Employees to a reserve under the connecting factors test:

• XXXXXXXXXX’s office has been located on a reserve for 28 years.

• XXXXXXXXXX’s location on a reserve provides economic development for the First Nations communities.

• XXXXXXXXXX provides services to First Nations across Canada.

• XXXXXXXXXX’s has a target of 50% Indigenous recruitment and some employment competitions are open to only Indigenous individuals.

• Indigenous peoples are XXXXXXXXXX’s clientele.

• XXXXXXXXXX’s employees work closely with First Nations and often travel to attend meetings on First Nations reserves.

• Recognizing and upholding Indigenous rights is an opportunity to take meaningful action to advance reconciliation.

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 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.

In the case of the Queen v Akiwenzie (footnote 2) , the courts considered whether the employment income earned by an employee of ISC (then known as the Department of Indian Affairs and Northern Development) was exempt from tax because their duties of employment benefited reserves across Canada. Based on the facts listed in this case, Mr. Akiwenzie lived on a reserve, performed 20% of his duties of employment on a reserve, and his employment duties assisted First Nations in entering into agreements with the government of Canada. The Federal Court of Appeal (FCA) considered the fact that the employment duties benefited a reserve and stated that this had nothing to do with the policy of the tax exemption:

“[11] Keeping this in mind, the fact that the respondent's duties were beneficial and indeed “integral to the future of reserves” as the Tax Court Judge found cannot result in his income being situated on these reserves. As was stated by this Court in Monias (footnote 3) , supra:

[66] That the work from which employment income is earned benefits Indians on reserves, and indeed may be integral to maintaining the reserves as viable social units, is not in itself sufficient to situate the employment income there. It is not the policy of paragraph 87(1)(b) to provide a tax subsidy for services provided to and for the benefit of reserves. Rather, it is to protect from erosion by taxation the property of individual Indians that they acquire, hold and use on a reserve, although in the case of an intangible, such as employment income, it is the situs of its acquisition that is particularly important (The same basic point is made forcefully in Desnomie v. Canada, 186 D.L.R. (4th) 718 (F.C.A.) at the close of paragraph 21). The genuineness of the respondent qua Indian, or his “indianness” if I may say so, can be given no more importance for exactly the same reason.” [Our emphasis]

Ozawagosh et al v. The Queen (footnote 4) is a more recent employment income case that also considered whether employment that benefited Indigenous individuals qualified for the tax exemption under a connecting factors test. The court referred to the FCA decision in Akiwenzie and stated:

“[41] The Federal Court of Appeal in Canada v. Akiwenzie, 2003 FCA 469, clearly indicated at paragraphs 10 and 11 that, even if employment duties performed were beneficial to reserves, this still had nothing to do with the preservation of the personal property of an Indian qua Indian on such reserves.

[42] My colleagues Hershfield and Archambault in Dugan v. The Queen, 2011 TCC 269, and Desnomie v. The Queen, 1998 CanLII 255, subsequently affirmed by the Federal Court of Appeal, 2000 DTC 6250, have explained that even if an employee’s work may help to maintain and enhance the quality of life on a reserve for the Indians living there, that does not necessarily connect the employee’s entitlement to, or use of, the employment income to that reserve as a physical location. The erosion of the entitlement of an Indian qua Indian on a reserve has to be determined by reference to the person whose income is involved and not by reference to the different reserves that are benefiting directly or indirectly from the services of that person. Hence, I believe this factor should not be given much weight.” [Our emphasis]

Consistent with the above cases, the fact that XXXXXXXXXX’s services and the employment duties of the Employees benefit First Nations reserves across Canada, is not a factor that is given significant weight in the connecting factors test. Therefore, it is our view that there are insufficient connecting factors to situate an Employee’s employment income on a reserve where the Employee works full-time from an off-reserve home office. Consequently, the employment income of these Employees would not be exempt from income tax under section 87 of the Indian Act. However, where the Employee works part-time on a reserve, the proration rule would generally apply to exempt the portion of their employment income that is related to their duties performed on-reserve.

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 https://www.canada.ca/en/revenue-agency/services/indigenous-peoples/indian-act-exemption-employment-income-guidelines.html

2 Akiwenzie v The Queen, [2003] 3 CTC 2001; Queen v Akiwenzie 2003 FCA 469; SCC 2004/06/10 Docket: 30174 - Application for leave to appeal dismissed with costs.

3 Monias v. The Queen 2001 FCA 239.

4 Ozawagosh et al v. The Queen (2013 TCC 311).

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