2024-1040541E5 Status of Lands in Additions to Reserve process

Principal Issues: Whether the employment income earned from work performed on lands under the Additions to Reserve process is situated on a reserve.

Position: Based on the information provided, no.

Reasons: The employment income from work performed on these lands is not situated on a reserve; therefore, the employment income is not exempt from tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Act.

Author: Chiu, Phyllis
Section: ITA para. 81(1)(a); IA s. 87

January 14, 2025

XXXXXXXXXX                                                                  Phyllis Chiu
                                                                                          2024-104054

Dear XXXXXXXXXX:

RE: Employment on lands undergoing the Additions to Reserve process and the tax exemption under section 87 of the Indian Act

This is in response to your enquiry asking whether the employment income from work performed at offices located on lands currently going through the Additions to Reserve process (ATR lands) is situated on a reserve and exempt under section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act (Act). It is your understanding that income earned on ATR lands qualifies for the Indian Act tax exemption.

Our Comments

This technical interpretation provides general comments about the provisions of the 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 income 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 to common employment situations, the Canada Revenue Agency together with interested First Nations organizations, developed the Indian Act Exemption for Employment Income Guidelines (Guidelines) (endnote 1) . The Guidelines are an administrative tool that only applies to employees who are First Nations individuals and whose employment duties are generally fully or partially performed on a reserve.

For purposes of the Indian Act tax exemption and 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 (for example, Category I-A lands under the Cree-Naskapi" (of Quèbec) Act)” (endnote 2) .

The term reserve as defined in subsection 2(1) of the Indian Act:

(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, and

(b) except in subsection 18(2), sections 20 to 25, 28, 37, 38, 42, 44, 46, 48 to 51 and 58 to 60 and the regulations made under any of those provisions, includes designated lands.

The term designated lands as defined in subsection 2(1) of the Indian Act:

means a tract of land or any interest therein the legal title to which remains vested in Her Majesty and in which the band for whose use and benefit it was set apart as a reserve has, otherwise than absolutely, released or surrendered its rights or interests, whether before or after the coming into force of this definition.

To qualify as a reserve or a designated land, a tract of land must be set apart for the use and benefit of the First Nation (the “setting apart requirement”).

The setting apart requirement (that is, the reserve creation process) involves a number of phases and is not completed until all third-party interests are resolved, necessary surveys and environmental assessments are conducted, jurisdiction over the land is transferred from the province to Canada, and the ministerial order officially designating the land as a reserve is issued. These steps together mark the completion of the setting apart requirement, and the land becoming a reserve.

It is our understanding that a ministerial order has not been issued for the ATR lands to designate the lands as a reserve. Since the ATR lands have not yet met the setting apart requirement, the employment duties performed at the offices located on these lands, are not performed on a reserve. As such, the employment income from duties performed on ATR lands is not situated on a reserve and is not exempt from tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Act.

While the above are our views based on the information submitted and our understanding of the reserve creation process, you should verify the status of the lands with officials from Additions-to-Reserves at Indigenous Services Canada.

We trust 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

ENDNOTES

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

2 Ibid.

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