Principal Issues: Will the employment income earned by a status Indian be tax-exempt pursuant to 81(1)(a) of the Income Tax Act in the circumstances?
Position: Ultimate determination should be made by the TSO once all the facts have been determined; however, based on the information provided, it seems unlikely
Reasons: Employment Income Guidelines do not apply in the circumstances as the status Indian individual does not work on reserve, nor is the employer located on reserve.
December 7, 2005
SUMMERSIDE TAXATION CENTRE HEADQUARTERS Income Tax Rulings Attention: Wilma Bell Directorate Kimberly Duval (613) 599-6054
2005-015507
Taxation of Status Indian Employment Income
This is in response to your memorandum of September 28, 2005, requesting our opinion as to whether employment income earned by XXXXXXXXXX, a status Indian employee, would be considered tax-exempt in the circumstances. Specifically, you have asked for our comments as to whether the employment income earned by XXXXXXXXXX for the XXXXXXXXXX and subsequent taxation years would be considered tax exempt based on the fact that she is a status Indian and her employment duties in the period related solely to Aboriginal people.
We confirm our conversation of November 22, 2005 (Bell/Duval) during which you advised that you were not aware of the particular aspects of this situation as you were just recently re-assigned the file. From the original letter written by XXXXXXXXXX, it appears that she resides on the XXXXXXXXXX Reserve and is currently employed with XXXXXXXXXX (the "Employer") with whom she has been so employed since XXXXXXXXXX. Apart from the fact that XXXXXXXXXX is responsible for working with Aboriginal people on a daily basis, it is not clear to us whether the Employer is resident on reserve, nor do we have any information as to the location of the employment duties performed by XXXXXXXXXX herself.
In our opinion, an investigation into the particular facts of the situation is warranted in order to determine whether XXXXXXXXXX employment income would be exempt from tax by any of the Indian Act Exemption for Employment Income Guidelines (the "Guidelines"). These Guidelines are an important administrative tool for taxpayers and for CRA employees to be able to work with the very broadly worded tax exemption provided by the Act and the Indian Act and as such, we believe that the Guidelines should be followed unless compelling reasons exist to conduct a case-specific connecting factors analysis. The Guidelines can be summarized as follows:
Guideline 1 would apply to exempt all of the income of a status Indian if at least 90% of the employment duties are performed on a reserve. When less than 90% of the duties are performed on a reserve and none of the other Guidelines apply, only the portion that is performed on a reserve is exempt from tax (the "Proration Rule"). The Proration Rule to Guideline 1 may apply to exempt the portion of the employment income that relates to the employment duties performed on a reserve.
Guideline 2 would apply to exempt the employment income of status Indian employees who live on a reserve provided that the employer is also resident on a reserve. As stated in the Guidelines, an employer is resident on a reserve if the reserve is the place where the central management and control over the employer organization is actually located.
Guideline 3 would apply to exempt all of the income of a status Indian if two conditions are met. Firstly, more than 50% of the employment duties must be performed on a reserve. Secondly, either the employer must be resident on a reserve or the status Indian must live on a reserve.
Guideline 4 requires that the employer be resident on a reserve. It also requires 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, if the organization is dedicated exclusively to the social, cultural, educational, or economic development of status Indians who for the most part live on reserves, and 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 reserve. These elements must all be satisfied in order for Guideline 4 to apply.
It would be a question of fact for determination by your local office whether XXXXXXXXXX was performing her employment duties on a reserve such that Guideline 1 would apply for the years in question. With respect to Guideline 2, as noted above, it is similarly a question of fact for determination by your office as to whether XXXXXXXXXX and the Employer resided on a reserve at that time. A determination of the foregoing factual matters is also required in order to ascertain whether Guideline 3 would apply. Finally, in our view Guideline 4 would not apply to XXXXXXXXXX employment situation.
We trust that these comments will be of assistance. We have enclosed the original information sent to us by Ms. Lori Burnell of your office, as it is our understanding that you do not have copies of the original request sent in by XXXXXXXXXX.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
John Oulton, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch