Principal Issues: Would the employment income of status Indian employees be tax-exempt?
Position: No
Reasons: There must be connecting factors sufficient to connect the employment income to a reserve. Such factors do not exist in this case.
Signed on February 21, 2005
XXXXXXXXXX
Dear XXXXXXXXXX:
The Honourable John McCallum, Minister of National Revenue, has asked me to reply to your correspondence of October 1, 2004, regarding your obligation to withhold income tax from the employment income earned by your Status Indian employees. This is also further to your correspondence addressed to the Honourable Andy Scott, Minister of Indian Affairs and Northern Development and Federal Interlocutor for Métis and Non-Status Indians. Minister Scott forwarded a copy of your correspondence to Minister McCallum on December 21, 2004.
Under certain circumstances, a Status Indian's employment income will be exempt from income tax in accordance with the Income Tax Act and in connection with the Indian Act. In order to be tax exempt, the employment income must be situated on a reserve. Since income is intangible property, as opposed to a physical object, it can be difficult to determine whether it is situated on a reserve. The Supreme Court of Canada addressed this problem in the case of Williams v. the Queen. The decision in Williams requires that the various connecting factors that are relevant to the particular property be identified. These factors should then be 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.
Based on the guidance provided by the decision in Williams and after receiving representations from interested Indian groups and individuals, the Canada Revenue Agency (CRA) identified a number of connecting factors that can be used to determine whether employment income is situated on a reserve. With the intention of assisting the Indian community, the CRA developed the Indian Act Exemption for Employment Income Guidelines, incorporating the various connecting factors that describe the employment situations covered by the Indian Act. Although not binding by law, the Guidelines are a useful administrative tool for taxpayers and for CRA employees to be able to work with the broadly worded tax exemption provided by the Indian Act and the Income Tax Act.
If a situation does not fit within the Guidelines, it is possible that unique or extenuating circumstances may provide additional factors connecting the income to a reserve. The relevant tax services office will consider the factors and determine whether a tax exemption is appropriate. In so doing, CRA officials constantly strive to apply the law in a fair and consistent manner. Furthermore, each case must be determined on its own facts.
I understand that in the case of employees of the XXXXXXXXXX, there are few factors of sufficient weight to connect their employment income to a reserve. Consequently, there can be no tax exemption and you, as the employer, are required to withhold income tax from the wages paid to these individuals.
Although I cannot grant the relief requested, I trust that my comments have explained the CRA's policy on this matter.
Yours sincerely,
Ed Gauthier Deputy Assistant Commissioner Tax and Regulatory Affairs Policy and Planning Branch
c.c.: Minister's Office
Political Assistant
Renée Shields
948-5273
2004-010742