Principal Issues: If a status Indian works for the federal government and 100% of the employment duties are performed on a reserve, what are the taxation implications?
Position: Guideline 1 would likely apply to exempt the employment income.
Reasons: General information provided
2005-011447
XXXXXXXXXX Renée Shields
(613) 948-5273
February 24, 2005
Dear XXXXXXXXXX:
Re: Employment income of a status Indian
This is in response to your facsimile of February 3, 2005 inquiring about the taxation of employment income of a status Indian who performs all employment duties on a reserve.
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. Although we cannot comment on your 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. In order to determine whether intangible property such as income is situated on a reserve, we use the "connecting factors test" which was established in a Supreme Court of Canada case called Williams v. the Queen. This test requires that we first identify the various connecting factors that are relevant to the particular property. 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.
In consultation with other government departments as well as interested Indian groups and individuals, the CRA identified a number of connecting factors that can be used to determine whether employment income is situated on a reserve. The result was the development of the Indian Act Exemption for Employment Income Guidelines (the "Guidelines"). Although not binding in law, the Guidelines are a useful administrative tool for taxpayers and for CRA employees to be able to work with the very broadly worded tax exemption provided by the Indian Act and the Act.
Although there are four Guidelines, which can be viewed in their entirety on our website at http://www.cra-arc.gc.ca/aboriginals/guidelines-e.html, Guideline 1 is the one generally applicable to status Indian individuals who work on a reserve. Guideline 1 exempts all of the employment income of a status Indian if at least 90% of the employment duties are performed on a reserve. When less than 90%, but more than an incidental proportion of the duties are performed on a reserve, and none of the other Guidelines apply, only the portion of income relating to duties performed on a reserve is exempt from tax.
In any particular situation, the determination of the tax status of an individual's employment income can only be made following a thorough review of all applicable facts pertaining to each individual employee.
Form TD1-IN can assist a status Indian employee and his or her employer in determining if a tax exemption on employment income is applicable. Additional information regarding the preparation of T4 slips and payroll deductions is available in Chapter 6 of the Employer's Guide to Payroll Deductions (T4001). These documents are also available on our website at http://www.cra-arc.gc.ca/formspubs/type/menu-e.html.
We trust that these comments will be of assistance.
Yours truly,
Roxane Brazeau-LeBlond, C.A.
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch