Principal Issues: Would Guideline 4 apply to exempt from tax the employment income of the status Indian employees of a particular organization?
Position: Question of fact, but likely the employment income is taxable
Reasons: From the information provided it does not appear that the requirements of Guideline 4 are met.
2005-015641
XXXXXXXXXX Renée Shields
(613) 948-5273
November 30, 2005
Dear XXXXXXXXXX:
Re: Status Indian employment income
This is in response to your letter of October 24, 2005 inquiring about the taxation of employment income earned by non-reserve resident status Indian employees of XXXXXXXXXX (the "Corporation"). The Corporation delivers child and family services and community education programs to First Nations individuals. Specifically, you have asked whether the employment income of the status Indian employees working in XXXXXXXXXX would be exempt under Guideline 4 of the Indian Act Exemption for Employment Income Guidelines (the "Guidelines")
The situation outlined in your letter relates to a factual one, involving specific taxpayers. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. However, as discussed, we are unable to provide an advance income tax ruling in the absence of a proposed transaction. Therefore, although we cannot provide any binding comments on the specific situation, we are prepared to provide the following general comments, which may be of assistance.
Paragraph 81(1)(a) of the Income Tax Act (the "Act") and section 87 of the Indian Act provide a tax exemption for a status Indian's personal property situated on reserve. Because income is not a physical object, determining its location can be difficult. The Supreme Court of Canada addressed this problem in the 1992 case of Williams v. the Queen. The decision in Williams requires the identification of various factors connecting the particular income to a location either on or off a reserve. These factors are then analyzed to determine what weight they should be given in identifying the location of the property. If the most significant factors connect the property to a location on a reserve, the income will be tax exempt.
To facilitate this complex connecting factors determination, the Canada Revenue Agency ("CRA") consulted with interested Indian groups and individuals and developed the Guidelines. Although the Guidelines do not cover every employment situation, they are a useful administrative tool for status Indians and for CRA employees to be able to work with the very broadly worded tax exemption provided by the Indian Act and the Act.
Guideline 4 exempts the employment income of a status Indian individual if certain conditions are met. All of the conditions must be met for the Guideline to apply. Whether each condition is satisfied is always a question of fact to be ascertained on the specifics applicable to a particular employer and employee.
The first requirement of Guideline 4 is that the employer be an Indian band that has a reserve, or a tribal council representing one or more Indian bands that have reserves, or an Indian organization controlled by one or more such bands or tribal councils. Whether the Corporation is controlled by the bands mentioned in your letter or by the Province of XXXXXXXXXX and its legislative regime would be a question of fact.
Secondly, the employer must be resident on a reserve. An employer is resident on a reserve if its central management and control is located on a reserve. The central management and control of an organization is usually considered to be exercised by the group that performs the function of the 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. In the case of the Corporation, although you have advised that the Board of Directors meets on reserve, you have also indicated that the Board of Directors receives its mandate from the Province of XXXXXXXXXX. As noted above, it would be a question of fact whether the role of the Province and its degree of control and influence would be such as to cause the Corporation's residency to be off-reserve.
Thirdly, the employer organization must be exclusively dedicated to the social, cultural, educational, or economic development of status Indians who for the most part live on reserves. This condition imposes a two-fold test regarding the organization's clients. Not only must all of the beneficiaries of the organization's activities be status Indians, these status Indians must "for the most part" live on reserves. The latter requirement is not so stringent as to preclude the application of Guideline 4 because of the incidental existence of non-reserve resident beneficiaries. However, the more non-reserve residents that benefit; the less the income of an employer's employees can be said to be connected to a reserve and the less likely that Guideline 4 would apply to exempt the income from tax.
The determination of an individual's place of residence is a question of fact to be ascertained following a review of that individual's circumstances. In ascertaining an individual's principal place of residence, we generally look to the location where the person ordinarily resides in a permanent home and with which he or she has closer social and economic ties. You have indicated that a "substantial" amount of off-reserve clients are served by the Corporation. In fact, your letter suggests that only XXXXXXXXXX% of the Corporation's clients are reserve residents. This proportion would be unlikely to satisfy the requirements of Guideline 4.
Finally, the individual's duties of employment must be 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. Where the employer has not met the third requirement described above, the employee would not be able to meet this condition.
We trust that these comments will be of assistance. As we were not able to provide an advance income tax ruling we have closed our file on this matter and a refund of your deposit will be sent to you under separate cover.
Yours truly,
John Oulton, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch