Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Whether a status Indian's entire severance pay and amount in lieu of earnings would be exempt from tax because he's now living on a reserve whereas his employment income was 20% exempt.
Position: General Comments
Reasons: Based on Rulings letters and correspondence with the taxpayer.
December 17, 2001
XXXXXXXXXX
Dear XXXXXXXXXX:
The Honourable Martin Cauchon, Minister of National Revenue, has asked me to reply to your letter addressed to XXXXXXXXXX, concerning your claim for tax exemption. XXXXXXXXXX sent a copy of your correspondence to Mr. Cauchon on October 19, 2001. This is also in reply to your letter of September 30, 2001, to Ms. Lily Caron, Client Services, Shawinigan Tax Centre.
Paragraph 81(1)(a) of the Income Tax 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 previously concluded that the reference to personal property in section 87 of the Indian Act includes income. In the 1992 case of Glenn Williams v. Her Majesty the Queen, the Supreme Court of Canada reconsidered the approach to use in determining whether income should be considered to be situated on a reserve and therefore tax exempt. The proper approach is to evaluate the various connecting factors that tie the property to one location or another. In Williams, the Court also agreed with the proposition in the Supreme Court of Canada case of Mitchell v. Peguis Indian Band, which states that the purpose of the Indian Act is not to remedy the economically disadvantaged position of Indians by ensuring that Indians may acquire, hold, and deal with property in the commercial mainstream on different terms than their fellow citizens.
Based on the guidance provided in Williams, and after receiving representations from interested Indian groups and individuals, the Canada Customs and Revenue Agency (CCRA) 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 CCRA developed the Indian Act Exemption for Employment Income Guidelines, incorporating the various connecting factors that describe the employment situations covered by the Indian Act. I understand that you have a copy of these Guidelines. As indicated in the Guidelines, employment-related income, such as severance pay, is exempt in the same proportion as the employment income to which it relates. Pay in lieu of notice would also be exempt in the same proportion.
I understand that the Income Tax Rulings Directorate, in a letter to you of February 21, 2001, explained the tax treatment of registered retirement saving plan (RRSP) withdrawals by status Indians. I would note that when the amounts in an RRSP relate solely to amounts contributed from an eligible retiring allowance, a portion of which related to tax-exempt employment income, withdrawals from the RRSP would be exempt in the same proportion.
I trust the information I have provided will be of assistance.
Yours sincerely,
Bill McCloskey Assistant Commissioner Policy and Legislation Branch
C. Rystenbil
941-6547
November 30, 2001
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