2025-1050141M4 First Nations organization & its employees

Principal Issues:

1) How does CRA determine the tax status of First Nations service organizations operating off-reserve. 2) Whether the income of employees of the First Nations organization operating off-reserve is exempt from tax under section 87 of the Indian Act? 3) Does CRA review to determine how many employees are working off-reserve in First Nations organizations? How does CRA determine the tax status of the these employees?

Position:

1) General comments provided. 2) question of fact 3) General comments provided.

Reasons:

1)&3) Based on our self-assessment income tax system, the onus is on taxpayers to accurately determine the proper reporting of their income tax situation or tax status. CRA may conduct an audit to maintain the integrity of the tax system.

2) The application of the section 87 exemption depends on whether the income in question is situated on a reserve.

Author: Chiu, Phyllis
Section: 2(1), 81(1)(a) and 149(1) of the Income Tax Act and 2(1) and 87(1)(b) of the Indian Act.

Legislative Policy and Regulatory Affairs Branch                        2025-000523

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Dear XXXXXXXXXX:

The Honourable Élisabeth Brière, Minister of National Revenue, has asked me to reply to your correspondence of January 10, 2025, about the taxation of First Nations services organizations, which are operating in urban centres such as Winnipeg, and their employees.

First Nations services organizations may be exempt from income tax under subsection 149(1) of the Income Tax Act. Whether an organization meets the specific requirements to be exempt depends on all of the relevant facts of each particular situation.

Regarding the taxation of the employees of a First Nations services organization, the Government of Canada taxes individuals, including First Nations individuals, on their income based on their residency. An individual who is resident in Canada during a calendar year is subject to Canadian income tax on their worldwide income from all sources.

Generally, First Nations individuals are taxed in the same way as all other Canadian residents, except where the tax exemption provided in the Indian Act applies. Section 87 of the Indian Act exempts from tax the personal property situated on a reserve of an individual who is registered or entitled to be registered under the Indian Act.

The Canadian courts have determined that personal property includes employment income. The courts have also established that determining if income is situated on a reserve, and therefore exempt from tax, requires identifying the various factors connecting the income to a reserve and weighing the significance of each factor. It is important to remember that it is the income and not the individual that is exempt from income tax.

Generally, the location where the employment duties are required to be performed is the most significant factor in determining whether the related employment income is situated on a reserve. Where the employment duties are performed off-reserve, the employment income likely will not be situated on a reserve and will not be exempt from income tax under section 87 of the Indian Act. For more information on how the Indian Act tax exemption applies to employment income, go to canada.ca/taxes-guidelines-indigenous.

You also ask how the Canada Revenue Agency (CRA) administers the Indian Act tax exemption where employment income is earned off-reserve. Under Canada’s self-assessment tax system, it is the taxpayer’s responsibility to accurately determine their tax status, accurately report their annual income, and calculate whether they owe tax. Please note that failing to do so may result in penalties or other consequences.

The CRA understands that most taxpayers comply with the tax laws in Canada. The CRA’s auditing processes help these taxpayers better understand and meet their obligations, as well as help to maintain public confidence in the fairness and integrity of the tax system. The CRA generally plans audits based on risk assessment, which looks at a number of factors such as the likelihood or frequency of errors in tax returns or whether there are indications of non-compliance with tax obligations. The CRA also looks at the information it has on file for the taxpayer and may compare that information to similar situations or consider information from other audits or investigations.

I trust the information I have provided is helpful.

Sincerely,

Soren Halverson
Assistant Commissioner
Legislative Policy and Regulatory Affairs Branch
Canada Revenue Agency

Prepared by:
Phyllis Chiu
February 25, 2025
ITRD file # 2025-105014
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