2023-0998901E5 Indian Act Employment Guidelines - modern treaties

Principal Issues: Do the Indian Act Exemption for Employment Income Guidelines apply to modern treaty governments with former reserve land?

Position: 1. Guidelines 1, 2, and 3 will apply. 2. Guideline 4 will not apply because the modern treaty government is neither a band as defined under the Indian Act nor a tribal council. Furthermore, it is not likely that the modern treaty government's activities are carried on exclusively for the benefit of First Nations individuals who for the most part (i.e., a majority) live on former reserve land.

Reasons: 1. Under modern treaties, former reserve lands are to be treated as reserves for purposes of the section 87 tax exemption. 2 Current Guideline 4 does not apply as a modern treaty government is not a band as defined under the Indian Act. Furthermore, it is unlikely that the modern treaty government’s non-commercial activities would be carried on exclusively for the benefit of First Nation individuals who for the most part live on a reserve.

Author: Townsend, Ann
Section: 81(1)(a); s87 Indian Act

                                                                                           July 24, 2024

XXXXXXXXXX                                                                     Ann Townsend
                                                                                            2023-099890

Dear XXXXXXXXXX:

RE: Application of the Indian Act Exemption for Employment Income Guidelines to modern treaty governments and former reserve lands

This is in response to your enquiry asking the Canada Revenue Agency (CRA) to update the Indian Act Exemption for Employment Income Guidelines (Guidelines) to include the former reserve land of modern treaty governments in the definition of reserve and to include modern treaty governments in the list of employers under Guideline 4.

It is our understanding that when a First Nation negotiates a modern treaty with Canada, it becomes a modern treaty government, and is no longer governed under the Indian Act. (footnote 1) Historically, when a First Nation negotiated a modern treaty with Canada, the tax exemption under section 87 of the Indian Act ceased to apply on the modern treaty government’s former reserve land and to its beneficiaries. However, on July 22, 2022, the Minister of Crown-Indigenous Relations announced that the section 87 tax exemption would be available for continuation on modern treaty governments’ former reserves and other First Nations reserves in Canada for prospective and existing modern treaty government beneficiaries who are registered or entitled to be registered under the Indian Act.

Our Comments:

This technical interpretation provides general comments about the provisions of the Income Tax Act (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 (First Nations individual), is exempt from income tax under section 87 of the Indian Act and paragraph 81(1)(a) of the 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”.

The connecting factors test is a two-step analysis. First, potentially relevant factors that connect the income to a location are identified and then each factor is given weight in light of three considerations: the purpose of the income tax exemption, the type of property, and the taxation of that property. The courts have concluded that the purpose of the tax 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 First Nations individuals.

To simplify the application of this connecting factors test with respect to common employment situations, the CRA together with interested First Nations organizations, developed the Guidelines. There are 4 Guidelines. Guidelines 1 to 3 are summarized below:

Guideline 1, under this guideline when at least 90% of a First Nations individual’s employment duties are performed on a reserve, all of their employment income will usually be exempt from income tax. 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, only the portion of income that is earned from duties performed on a reserve is exempt from tax (proration rule).

Guideline 2, under this guideline when a First Nations individual lives on a reserve and their employer is resident on a reserve, all of their employment income will usually be exempt from income tax.

Guideline 3, under this guideline when more than 50% of a First Nations individual’s employment duties are performed on a reserve and either the employer is resident on a reserve or the First Nations individual lives on a reserve, all of their employment income will usually be exempt from income tax.

For the purposes of the Guidelines, “on a reserve” means:

“on a reserve as defined for purposes of the Indian Act, including any settlements deemed to be reserves for purposes of the Indian Settlements Remission Order, and any other areas given similar treatment under federal legislation.”

A modern treaty is given force of law through an act of parliament (i.e., federal legislation). Therefore, where under a modern treaty, section 87 of the Indian Act applies on former reserve lands as if they were reserves, “on a reserve” will include “on a former reserve land” for the purposes of the Guidelines. Therefore, no amendments to Guidelines 1, 2, and 3 are required to apply them to the employment situations of First Nations individuals who are modern treaty government beneficiaries.

Guideline 4, under this guideline all of the employment income of a First Nations individual will usually be exempt from income tax regardless of where the individual lives or where they perform their duties of employment, if all of the following conditions are met:

1. The employer is resident on a reserve; and

2. The employer is:

a. A First Nation band which has a reserve, or a tribal council representing one or more such bands; or

b. an organization controlled by one or more bands or tribal councils as described in paragraph 2(a), if the organization is dedicated exclusively to the social, cultural, educational, or economic development of First Nations individuals who for the most part live on reserves; and

3. The duties of employment are in connection with the employer's non-commercial activities carried on exclusively for the benefit of First Nations individuals who for the most part live on reserves.

It is the CRA's view that Guideline 4 is a generous interpretation of the connecting factors test established by the courts. Therefore, it is appropriate to restrict the application of Guideline 4 to situations that squarely fit the criteria. In other words, all of the conditions of Guideline 4 must be satisfied in order for it to apply.

For Guideline 4 to apply, the employer must be a band (as defined under the Indian Act) with a reserve, a tribal council representing such bands, or an organization controlled by such bands or tribal councils if it is dedicated exclusively to the social, cultural, educational, or economic development of First Nations individuals who for the most part live on reserves. Additionally, the employment duties must be in connection with the employer’s non-commercial activities which are dedicated exclusively for the benefit of First Nations individuals who for the most part (i.e., a majority) live on a reserve. The connection to reserves in Guideline 4 is established through the employment duties benefiting First Nations individuals who for the most part live on reserves. Therefore, if the population benefiting from the employer’s non-commercial activities is not comprised of a majority of First Nations individuals who live on reserves, this connection would not exist, and Guideline 4 would not apply.

Based on the information you provided, it is our understanding that the majority of the beneficiaries of modern treaty governments do not live on reserves or former reserve lands. Therefore, even if the Guidelines were updated to add modern treaty governments to the list of eligible employers under Guideline 4, it likely will still not apply because the duties of employment would not be exclusively for the benefit of First Nations individuals who for the most part live on reserves or former reserve lands. However, it is possible that a modern treaty government or an organization controlled by a modern treaty government may offer social and economic development services only to First Nations individuals who live on reserves or former reserve lands.

Consistent with the federal government’s new tax policy approach in negotiating modern treaties with First Nations, we agree with updating the Guidelines to allow modern treaty governments or organizations controlled by modern treaty governments to be eligible employers under Guideline 4. In the interim, the CRA will consider a modern treaty government that was formerly a band as defined under the Indian Act or was created to represent one or more such bands, to be an eligible employer for purposes of Guideline 4. This administrative position will be applied to a modern treaty government from the effective date that its modern treaty reinstates or continues the application of section 87 of the Indian Act on its former reserve lands.

As noted in the Guidelines, they are an administrative tool created to address the most common employment situations. 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 cases, any factors connecting the income to a reserve or former reserve land must be analysed in accordance with the various court decisions to determine if the Indian Act tax exemption applies.

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
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

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

1 https://www.rcaanc-cirnac.gc.ca/eng/1100100032275/1529354547314

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