Principal Issues: [TaxInterpretations translation] Will Guideline 4 apply to employees of XXXXXXXXXX who are located off a reserve and 80% of the clientele are Indians living on a reserve?
Position: General comments. Likely that the criteria in Guideline 4 would not be satisfied.
Reasons: The target clientele would not be made up exclusively of Indians who for the most part live on a reserve.
2010-035507 XXXXXXXXXX Catherine Ayotte, Notary, M.Fisc. April 20, 2010
Dear Sir,
Subject: Indian Act income exemption
This is further to your letter of January 20, 2010, in which you asked for our comments on the application of Guideline 4 to the employment income of employees who will be working in XXXXXXXXXX.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Please note that the Canada Revenue Agency (CRA) does not issue advance income tax rulings to precisely identify the tax treatment of salary earned by a status Indian. In such a situation, you should forward all relevant facts and documents to the appropriate Tax Services Office for its opinion. However, we are prepared to provide the following general comments that you may find useful.
Where Indians (endnote 1) are in receipt of income, paragraph 81(1)(a) and section 87 of the Indian Act provide an exemption from tax for the personal property of an Indian situated on a reserve. In order to assist Indian communities, the CRA has developed guidelines entitled Indian Act Exemption for Employment Income Guidelines ("Guidelines"). Taking into consideration the various connecting factors, the Guidelines describe the employment situations that the CRA considers to be covered by section 87 of the Indian Act. You can obtain a copy of the Guidelines on the CRA Internet site at http://www.cra-arc.gc.ca/brgnls/gdlns-eng.html .
Our Comments
Guideline 4
Under Guideline 4, all of the income of an Indian from an employment will usually be exempt from income tax if all of the following conditions are satisfied:
(1) The employer is resident on a reserve;
(2) The employer is, as the case may be,
- an Indian band with a reserve,
- a tribal council representing one or more Indian bands which have reserves;
- an Indian organization controlled by one or more such bands or tribal councils, if the organization is dedicated exclusively to the social, cultural, educational or economic development of Indians who for the most part live on reserves.
(3) The duties of the employment are in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on reserves.
(1) The employer is resident on a reserve
According to your comments, the employer is the XXXXXXXXXX. The XXXXXXXXXX is resident on a reserve and wishes to establish XXXXXXXXXX which would be located off reserve, in the XXXXXXXXX area, but its head office would be on an Indian reserve, XXXXXXXXXX.
The term "employer is resident on a reserve", as used in the Guidelines, means that the reserve is the place where the central management and control of the employer's organization is located. Management and control of an organization is generally considered to be exercised by the group that performs the functions of a board of directors of the organization.
However, the actual management and control of an organization may be exercised by another 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 location other than the main administrative office of the organization. Where an organization, which would not otherwise be considered as resident on the reservation, claims that it meets the definition because it holds its board meetings on the reservation, it should generally be considered to meet the definition where the management and control of the organization is legitimately exercised during those meetings. A conclusive resolution of this question of fact requires a review of all the facts surrounding a situation, including the minutes of the board meetings and the resolutions or by-laws passed at those meetings.
Another element to consider is the employment relationship between the employee and the employer. XXXXXXXXXX
2) Employer characteristics
As stated above, the employer may be an Indian organization dedicated exclusively to the social, cultural, educational or economic development of Indians, who for the most part live on reserves.
For this purpose, the word "exclusively" means that the organization is dedicated solely to the social, cultural, educational or economic development of Indians living on a reserve. It would not be sufficient for these elements to be only part of the organization's objectives. A review of the objectives or mandate of XXXXXXXXXX would be required to determine whether this element of Guideline 4 could be satisfied.
In addition, the clientele for such a project must consist exclusively of Indians, who, for the most part, live on reserves. You informed us that approximately 80% of the clientele of XXXXXXXXXX will consist of Indians living on reserves. Consequently, based on the facts presented, we cannot conclude that XXXXXXXXXX will meet this Guideline 4 condition. This would require ensuring that the recipients of XXXXXXXXXX are exclusively Indians, as defined in the Indian Act, who for the most part live on reserves.
The term "Indians who...live on reserves" as used in Guideline 4, means that the Indian lives on a reserve in a domestic establishment that is his or her principal place of residence and the centre of his or her daily activities. The fact that an Indian is absent from a reserve for certain periods of time because of XXXXXXXXXX does not necessarily mean that the Indian has taken up residence off the reserve. The determination of residency is a question of fact that must be analyzed on an individual basis after an examination of all the circumstances. The criteria used in Interpretation Bulletin IT-221R3 Determination of an Individual's Residence Status (Endnote 2), may also be applied to determine the principal place of residence XXXXXXXXXX.
3) Nature of employment carried on exclusively for the benefit of Indians
The third condition in Guideline 4 requires that the duties of the employment are in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on reserves.
Based on the information you have submitted to us, XXXXXXXXXX's activities would be related to non-commercial activities. However, the activities should only be carried out for the benefit of Indians who for the most part live on reserves. In this regard, it is the CRA's position that the use of the phrase "aimed at the benefit of Indians" has the meaning of "exclusively for the benefit of Indians". Consequently, the comment above regarding the clientele of XXXXXXXXXX is also valid for this third condition.
We hope that our comments are of assistance.
Best regards,
Ghislain Martineau
Manager
Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.
ENDNOTES
1 As defined in the Indian Act, a person who is registered or entitled to be registered as an Indian. Whether a person is entitled to be registered as an Indian is a question of fact. In order for the CRA to provide tax benefits to Indians, it requires confirmation of entitlement from Indian and Northern Affairs Canada.
2 This bulletin is available on the CRA Internet site at http://www.cra-arc.gc.ca/E/pub/tp/it221r3-consolid/READ-ME.html.