2024-1043701E5 Indian Act Tax Exemption & Employment Income

Principal Issues:

Whether the employment income of certain employees is exempt under section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act.

Position:

Based on the information provided, no.

Reasons:

Based on the information provided, Guideline 4 does not apply, and the connecting factors identified by the requestor are not sufficient to situate the income on a reserve.

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

XXXXXXXXXX                                                                     2024-104370
                                                                                             Phyllis Chiu

February 25, 2025

Dear XXXXXXXXXX:

RE: Off-reserve employment and the tax exemption under section 87 of the Indian Act

This is in response to your enquiry asking whether the employment income of employees (Employees) of the XXXXXXXXXX (Employer) who are working off-reserve at the XXXXXXXXXX (Clinic), is exempt from income tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act (Act). Specifically, you ask about the application of Guideline 4 of Indian Act Exemption for Employment Income Guidelines (Guideline) to the employment situation of the Employees.

Our understanding of the information provided is as follows:

- The Employer is a non-profit society incorporated in XXXXXXXXXX, whose primary purpose is operating the First Nations-led primary care Clinic. XXXXXXXXXX. [Mandate]

- The Employer’s registered address and head office are located XXXXXXXXXX. [Locations]

- The Clinic serves the public (First Nations and non-First Nations individuals) but is aimed at providing services to residents of the nearby XXXXXXXXXX, each having their own reserve. While the Clinic is not located on-reserve, the Employees regularly travel to both of these First Nations reserves to provide healthcare services. This includes collecting clients from the reserves and transporting them to the Clinic for further care. [Service Obligations on Reserve]

- The Employer was founded by the Chief and Council of XXXXXXXXXX who are responsible for appointing the board of directors. The board is comprised of representation from the XXXXXXXXXX. The board of directors meet either in person at the Employer’s on-reserve head office or remotely via virtual platforms connected from on-reserve locations. The annual general meeting is also held on-reserve. The governance structure reflects the active involvement of First Nations leadership in the oversight of the operations. [Governance by First Nations Leadership]

- The Employer receives public XXXXXXXXXX to operate the Clinic in which holistic team-based models are employed to meet pressing primary healthcare needs of First Nations peoples living in both rural and urban settings. [Funding Sources]

It is your view that Guideline 4 applies to the employment situation of the Employees because of the Employer’s Mandate, Locations, Service Obligations on Reserve, Governance by First Nations Leadership, and Funding Sources.

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 with respect to common employment situations, the Canada Revenue Agency together with interested First Nations organizations, developed the Guidelines. The Guidelines are an administrative tool. There are four of them and they only apply to employees who are First Nations individuals and whose employment duties are generally fully or partially performed on a reserve. You specifically inquired about the application of Guideline 4, which is summarized as follows:

Guideline 4 - if all the conditions below are met, then all the income of a First Nations individual from that employment will usually be exempt even if they do not live or work on a reserve.

a) The employer is resident on a reserve;

b) The employer is:

i. a First Nations band which has a reserve (FNR), or a tribal council representing one or more FNRs; or

ii. an organization controlled by one or more such FNRs or tribal councils (First Nations Organization), if the organization is dedicated exclusively to the social, cultural, educational, or economic development of First Nation individuals who for the most part live on reserves; and

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

Condition (a) requires the employer to be resident on a reserve. Based on the information provided, the Employer’s registered address and head office are located on-reserve, the board of directors is comprised of First Nations individuals and the board meetings appear to take place on-reserve. However, the Clinic is located off-reserve XXXXXXXXXX (footnote 1) , where the Employer’s operations are primarily carried out. Whether the Employer is resident on a reserve is a question of fact.

Consistent with jurisprudence, the Guidelines define the term employer is resident on a reserve to mean “that the reserve is the place where the central management and control over the employer organization is actually located.” As noted in the Guidelines, “[T]he central management and control of an organization is usually considered to be exercised by the group that performs the function of a board of directors of the organization. However, it may be that the real management and control of an organization is exercised by some other person or group. Generally, management and control is exercised at the principal place of business, but it is recognized that this function may be legitimately exercised in a place other than the principal administrative office of the organization.” There must be sufficient control exercised from a reserve for the organization to be considered to be resident on a reserve. It is a question of fact where the actual central management and control is exercised. A review of all the facts, including the minutes of the board of directors’ meetings and resolutions or by-laws passed at the meetings, would be required to determine whether the Employer is resident on a reserve.

In determining whether an organization is resident on a reserve, there is always some concerns where the head office of the organization is located on a reserve, but its main operations are carried out off-reserve. Based on the information provided, we are unable to determine if the Employer is resident on a reserve. Even if the Employer was determined to be resident on a reserve, conditions (b) and (c) of Guideline 4 must also be met.

The Employer does not meet condition (b)(i) of Guideline 4 as it is not one of the entities described therein, but it appears to be a First Nations Organization as described in the first part of condition (b)(ii) of Guideline 4. The second part of condition (b)(ii) and condition (c) of Guideline 4 do not appear to have been satisfied. Since the Clinic is located off-reserve and serves the public (both First Nations and non-First Nations individuals), the Employer’s activities are neither dedicated exclusively to nor carried on exclusively for the benefit of First Nations individuals who for the most part live on reserves. Consequently, Guideline 4 does not apply to the Employees’ employment situation.

You mentioned that the Employees regularly travel to reserves to provide healthcare services, including collecting clients from the reserves and transporting them to the off-reserve Clinic for further care. However, it is our view that travel time to and from a reserve is not considered duties performed on a reserve. Guidelines 1 and 3 apply where at least 90% and more than 50%, respectively, of the employment duties are performed on a reserve. Based on our understanding of the information provided, the Employees appear to perform all or substantially all (that is, 90% or more) of their employment duties at the off-reserve Clinic. As such, neither Guideline 1 nor 3 apply to the Employees’ situation. However, where a particular Employee is a First Nations individual and performs more than an incidental proportion of their employment duties on-reserve, the portion of their income related to those duties will be exempt (Proration Rule). For more information, go to canada.ca/taxes-guidelines-indigenous and select “Proration Rule”.

As noted above, the Guidelines 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 situations, it is necessary to apply the connecting factors test as established by the courts.

In applying the connecting factors test, the courts have established that the weight assigned to each connecting factor is determined by considering the purpose of the exemption, the type of property in question, and the nature of the taxation of the property.

Connecting factors that have been considered and given weight by the courts in cases involving employment income include: the residence of the employer; the residence of the employee; and the nature, location, and special circumstances of the work performed by the employee. The weight assigned by the courts to each of these factors has varied according to the facts of each case.

You suggested that certain attributes of the Employer, such as its Mandate, Locations, Service Obligations on Reserve, Governance by First Nations Leadership, and Funding Sources connect the Employer and the Clinic to reserves, however, the courts have held that such attributes cannot be given significant weight in a connecting factors test where the Employer’s operations are primarily carried out off-reserve.

There is no information to indicate whether the Employees are living on- or off-reserve. Although the residence of an employee may be potentially relevant, it is generally not given significant weight under a connecting factors test where the employment duties are performed off-reserve.

Regarding the nature, location, and special circumstances of the work performed by the Employees, you stated that while the Clinic is not located on-reserve, the Employees regularly travel to reserves to provide healthcare services including collecting clients from the reserves and transporting them to the Clinic for further care. This suggests that the services provided benefit First Nations individuals who live on reserves. The courts, however, have concluded that benefitting reserves is not, in and of itself, sufficient to situate employment income on a reserve where the income is related to employment duties performed off-reserve.

In summary, Guideline 4 does not appear to apply to the Employees’ employment situation and as discussed above, the provision of services that benefit to First Nations individuals on-reserve is not sufficient to situate the Employees’ employment income on a reserve where the employment duties are performed off-reserve. Therefore, in the absence of the identification of other connecting factors, the employment income earned by the Employees working off-reserve at the Clinic is not situated on a reserve and is not 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.

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 XXXXXXXXXX First Nations

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© His Majesty the King in Right of Canada, 2025

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté le Roi du Chef du Canada, 2025