Principal Issues: Tax treatment of employment income or self-employed income of an Indian working on XXXXXXXXXX that is partly on a reserve.
Position: General information.
Reasons: Guidelines likely apply to employment income. Connecting factor analysis required for self-employment income.
XXXXXXXXXX 2011-041088 P. Burnley (613) 957-2100 July 20, 2011
Dear XXXXXXXXXX :
Re: Income of Indians Working on XXXXXXXXXX
This is in response to your email correspondence dated June 20, 2011, in which you asked about the tax treatment of income earned by Indians working on XXXXXXXXXX . We also acknowledge our telephone conversations of June 22 and July 13, 2011 (XXXXXXXXXX /Burnley). Based on our conversations, we understand that the XXXXXXXXXX will take about XXXXXXXXXX , and that XXXXXXXXXX is located on a reserve. The employer is located off-reserve but the Indians live on a reserve. Most workers will be earning employment income, although there may be some workers who will be self-employed. For purposes of our comments, we assume that the terms "Indian" and "reserve" have the meanings assigned by subsection 2(1) of the Indian Act.
The situation outlined in your email appears to relate to a factual one, involving specific taxpayers. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings". This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on our website at http://www.cra-arc.gc.ca.
Moreover, as explained in our telephone conversations, we cannot provide you with a definitive answer as to whether the income described above will be exempt from tax, as this is a determination that can only be made for a particular taxpayer, by his or her local TSO, after all the facts have been reviewed. However, we are able to provide the following general comments, which may be of assistance.
Paragraph 81(1)(a) of the Income Tax Act together with paragraph 87(1)(b) of the Indian Act exempt from tax personal property of an Indian that is situated on a reserve. Income, including income from employment, has been held by the courts to be personal property for the purposes of section 87 of the Indian Act. The Supreme Court of Canada, in Williams v. The Queen, 92 DTC 6320, established the general principle that all factors connecting particular income to a reserve must be identified, and the significance of each factor weighed, in determining whether that income is situated on a reserve (the "connecting factors" test). To simplify the application of this connecting factors test to common employment situations, the CRA, together with other government departments and interested Indian organizations, developed the Indian Act Exemption for Employment Income Guidelines (the "Guidelines"). These Guidelines are available on the CRA website.
- Guidelines 2 and 4 require the employer to be resident on a reserve in order for the employment income to be exempt from tax.
You have indicated that the employer is not resident on a reserve; therefore, neither Guideline 2 nor Guideline 4 will apply to the employment income.
- Guideline 1 exempts all of the employment income of an Indian if at least 90% of the employment duties are performed on a reserve.
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.
- Guideline 3 exempts all of the employment income of an Indian if more than 50% of the employment duties are performed on a reserve and either the employer is resident on a reserve or the Indian lives on a reserve.
In the situation you have outlined, the employees live on a reserve, therefore, if more than 50% of the employment duties are completed on a reserve, the employment income will qualify for a full exemption from tax. If less than 50%, but more than an incidental portion, of the employment duties are performed on a reserve, the employment income may be prorated.
A record of duties completed or time spent working on a reserve should be maintained to support a claim for the exemption described above. When recording time spent completing duties on a reserve it is only duties completed in accordance with a contract of employment that are taken into account. Commuting time to and from work, and stand-by time if applicable, is not considered time spent completing duties of employment on a reserve.
There may be unusual or exceptional situations where employment income may not be taxable even though it does not fall within one of the Guidelines; this could be the case where there are significant connecting factors that are not taken into account by the Guidelines. The determination of whether there are sufficient connecting factors to situate income on a reserve is always a question of fact.
You have also indicated that some of the workers may be self-employed. The leading court case with respect to the taxation of business income earned by an Indian is Southwind v. The Queen, 98 DTC 6084 (FCA). In Southwind, the Federal Court of Appeal endorsed consideration of certain factors that would be relevant in determining where business income is situated. Some of the factors relevant to the situation outlined are: the location of the business activities, the location of the customers, the location where decisions affecting the business are made, the type of business, the location of a fixed place of business and finally, the residence of the business owner. The listed factors are not necessarily of equal significance.
The key factor in determining whether an Indian's business income is tax-exempt is the location of the income-earning activities of the business. You have not indicated the nature of the business of the self-employed Indians, but in a situation where the Indian is providing casual XXXXXXXXXX work, the location where the work is performed would likely be considered the location of the income-earning activities. If an Indian is performing this work on a reserve, the income directly related to that work would likely be exempt from tax.
We trust that our general comments, above, are of assistance to you.
Yours truly,
Eliza Erskine
Manager
Non-Profit Organizations and Aboriginal Issues Section
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch