Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
ADM'S OFFICE (2) ADM972874
RETURN TO 15TH FLOOR, ALBION TOWER
January 26, 1998
XXXXXXXXXX
Dear XXXXXXXXXX:
I am replying to your letter of November 10, 1997, concerning the application of the Indian Act exemption for employment income. You have asked for an update of my letter of December 29, 1992, a copy of which you had attached. You also made reference in your letter to an objection and appeal process involving a particular taxpayer, XXXXXXXXXX.
The confidentiality provisions of the Income Tax Act (the “Act”) prohibit officials of the Department from discussing the income tax affairs of particular taxpayers, without their written authorization. However, I can generally address your questions concerning the Indian Act exemption for employment income.
Paragraph 81(1)(a) of the Act and section 87 of the Indian Act provide a tax exemption for an Indian’s personal property situated on a reserve. The Courts have determined that employment income is personal property. Therefore, what must be determined is whether the employment income is situated on a reserve.
In determining where the employment income of a status Indian is “situated”, prior to the Williams case (92 DTC 6320), direction was provided by the Nowegijick case (83 DTC 5041), when it was found that the situs of the debtor determined whether income was situated on a reserve and, therefore, exempt from taxation. In Williams, however, the Supreme Court of Canada rejected the situs of the debtor test as the sole test for determining whether personal property of an Indian was situated on a reserve, indicating that “an overly rigid test which identified one or two factors as having controlling force...would be open to manipulation and abuse”. The approach adopted in Williams requires the examination of all factors connecting income to a reserve to determine if the income is located on the reserve. The December 29, 1992 letter, a copy of which you had enclosed, was issued to inform the Indian community that the Department was changing the way in which it applied the Indian Act exemption.
Based on the guidance provided in Williams and after receiving representations from interested Indian groups and individuals, the Department identified a number of connecting factors that can be used to determine whether employment income is situated on a reserve. With a view to assisting the Indian community, the Department developed the Indian Act Exemption for Employment Income Guidelines (the “Guidelines”), incorporating the various connecting factors that describe the employment situations covered by the Indian Act. A copy of the Guidelines is enclosed for your information.
Generally, the Guidelines provide that the tax exemption will apply to exempt all the employment income of a status Indian from a particular employment:
1) where substantially all the duties of employment are performed on a reserve;
2) where the Indian lives on a reserve and the employer is resident on a reserve;
3) where more than half the duties are performed on a reserve and either the Indian lives on a reserve or the employer is resident there; and
4) where the employer is resident on a reserve, the duties are part of certain non-commercial activities of the employer and the employer is an Indian band, tribal council or Indian organization described in Guideline 4.
There is a proration rule to Guideline 1 which, where less that substantially all the duties of employment are performed on reserve, applies to exempt the portion of the income related to duties that are performed on a reserve. The Guidelines also include definitions for some of the terms used. For instance, “Indian lives on the reserve” and “employer is resident on a reserve” are defined terms. In addition, the Guidelines are not intended to apply when it can reasonably be considered that one of the main purposes for the existence of an employment relationship is to establish a connecting factor between the income in question and a reserve.
Whether any of the Guidelines apply in a particular situation is a question of fact which is best resolved by a Taxation Services Office based on a review of all the pertinent information and details of a situation. Where the Guidelines apply and where the facts of a particular situation satisfy the requirements of a Guideline, the employment income should be exempt.
I trust that the comments will be of assistance.
Yours sincerely,
Denis Lefebvre Assistant Deputy Minister Policy and Legislation Branch