2024-1002921E5 Working off-reserve due to an accommodation-s87 IA

Principal Issues: Would the employment income earned by a First Nations employee, who returned to work after a long-term disability and is approved by their employer to work from home off-reserve due to a medical accommodation, qualify for the income tax exemption under the Indian Act?

Position: Not likely.

Reasons: Neither the Indian Act Exemption for Employment Income Guidelines nor the Guidance on the Application of the Indian Act Exemption for Employment Income Guidelines to issues raised by the COVID-19 crisis apply to the employment situation of the employee in 2024. In addition, there do not appear to be any sufficient connecting factors to situate the employment income on a reserve.

Author: Mahendran, Ananthy
Section: 81(1)(a) of the Income Tax Act and Section 87 of the Indian Act

XXXXXXXXXX                                                                    2024-100292
                                                                                            Ananthy Mahendran

August 20, 2024

Dear XXXXXXXXXX:

Re: Tax treatment of employment income of a First Nations employee

This is in reply to XXXXXXXXXX email of January 2, 2024, requesting clarification as to whether the employment income earned by an employee who is registered under the Indian Act and who returned to work in 2024 after a long-term disability, would be exempt from income tax under section 87 of the Indian Act if the employee performs their employment duties at their home off-reserve as a result of a medical accommodation request (duty to accommodate) approved by their employer, XXXXXXXXXX (Employer). On March 27, 2024, XXXXXXXXXX also requested clarification as to whether the administrative position provided under the Guidance on the Application of the Indian Act Exemption for Employment Income Guidelines to issues raised by the COVID-19 crisis (Guidance) could be extended and applied to the employee.

The following is our understanding of the information XXXXXXXXXX provided:

- The Employer’s office is located on a reserve of the XXXXXXXXXX and the Employer is resident on a reserve.

- The employees who are registered under the Indian Act (First Nations employees) generally perform more than 50% of their duties at the Employer’s on-reserve office; therefore, Guideline 3 of the Indian Act Exemption for Employment Income Guidelines (Guidelines) applies and the employees’ employment income is fully exempt from tax.

- One of the First Nations employees returned to work in 2024 after a long-term disability (Employee), and requested an accommodation for medical reasons to work from their home off-reserve. The Employer will likely approve the accommodation request.

- Prior to their long-term disability, the Employee performed more than 50% of their employment duties on-reserve (i.e., Guideline 3 applied) and the Employee’s employment income was fully exempt from tax.

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 IC70-6R12, Advance Income Tax Rulings and Technical Interpretations.

The employment income of a First Nations employee 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, one identifies potentially relevant factors connecting the property to a reserve and then one weighs the significance of each factor in light of three considerations: the purpose of the exemption from taxation, the type of property, and the nature of the taxation of that property. The courts (footnote 1) have stated that the purpose of the tax exemption is to protect the property of First Nations individuals that they acquire, hold, and use on a reserve, from erosion by taxation. It is not meant to confer a general economic benefit to First Nations individuals.

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.

In 2020, the Guidance was developed to accommodate employees who had been working on a reserve prior to the pandemic and who were eligible for the Indian Act tax exemption under Guideline 1, 2 or 3, but would lose the tax exemption because they were no longer performing any duties of employment on-reserve due to COVID-19 workplace restrictions. As stated in paragraph 2 of the Guidance, “where an individual’s regular place of employment (full time or part time) was located on a reserve before the imposition of COVID-19 workplace restrictions and changed solely because of those restrictions, the CRA will continue to apply the guidelines as if the individual was still working at their regular workplace on a reserve.”

The Guidance was a unique time-limited administrative position that applied to eligible First Nations employees from March 16, 2020, to December 31, 2022 (qualifying period). It was not a new interpretive position on section 87 of the Indian Act nor an intention to establish any broader administrative policy on the application of the Guidelines beyond the qualifying period. Therefore, the Guidance cannot be extended and applied to the Employee’s situation. Further, as the Employee works full-time from their home off-reserve, none of the Guidelines appear to apply and the income earned by the Employee off-reserve in 2024 would not be tax-exempt.

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.

Based on the limited information provided and absent the identification of any other connecting factors, it is our view that there would be insufficient connecting factors to situate the Employee’s income on a reserve where they work full-time from an off-reserve home office even if approved by their Employer as a medical accommodation. Consequently, the employment income of the Employee would not be exempt from income tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Act.

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
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 Akiwenzie v The Queen, [2003] 3 CTC 2001; Queen v Akiwenzie 2003 FCA 469; Monias v. The Queen 2001 FCA 239, Ozawagosh et al v. The Queen 2013 TCC 311

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