Principal Issues: Is an Indian’s employment income exempt from income tax under paragraph 81(1)(a) where a part of the employer’s business is from employee leasing activities?
Position: None.
Reasons: Question of fact.
XXXXXXXXXX 2018-075082 I. Landry, M. Fisc. April 23, 2019
Dear Mr. XXXXXXXXXX,
Subject: Exemption from employment income of an Indian
This letter is in response to your letter of March 20, 2018, in which you requested our comments on the application of paragraph 81(1)(a) of the Income Tax Act ("the Act") and section 87 of the Indian Act respecting employment income of an Indian where part of the activities of the employer corporation are employee lease-out services. You gave us the following example. The employer is located on a reserve and carries on a construction business. In addition, the employer provides employee lease-out services as to approximately 10% of its total activities.
The question of whether an Indian's employment income is exempt from tax is a question of fact that can only be determined by taking into account all relevant facts. We cannot therefore make a definitive determination solely on the basis of the summary provided. We can, however, provide you with the approach we would take in a situation similar to the example presented if we had all the relevant facts.
Unless otherwise indicated, all statutory references in this letter are to the provisions of the Act.
General Comments
When Indians receive income, paragraph 81(1)(a) in conjunction with section 87 of the Indian Act provides for a tax exemption for an Indian's personal property located on a reserve. The courts have found that for the purposes of that exemption, income constitutes personal property. Thus, an Indian's income could be tax-exempt if it can be determined that the individual is "on-reserve". In that regard, the Supreme Court of Canada considered this issue in Williams (footnote 1). By virtue of that decision, the Court indicated that it is first necessary to identify the various connecting factors that are relevant to the property. Those factors must then be analyzed to determine the weight to be assigned to them in order to identify the location of the property. If the most significant connecting factors link the location of the property to a reserve, the income will be exempt from income tax.
Taking into account the principles established in Williams, as well as through consultations with interested Indian groups or individuals, the Canada Revenue Agency ("CRA") identified a number of connecting factors that can be used to determine if employment income is located on-reserve. Those factors are described in the CRA's Indian Act Exemption for Employment Income Guidelines ("Guidelines"). However, those Guidelines are designed to assist with the majority of employment situations, so they may not apply to unusual or exceptional cases. Thus, the question of whether there are sufficient connecting factors linking income to a reserve remains a question of fact that can only be determined by taking into account all relevant facts.
Separate businesses
In the case of a corporation, some of whose activities are employee lease-out services, that is, that the employee's services are retained by that corporation but the employee's duties are performed, in whole or in part, for another organization, we are of the view that it is necessary to determine whether the corporation is carrying on a separate business.
That determination is necessary because, where a corporation carries on separate business, the employment income of an Indian from each of the businesses of such a corporation is, in our view, a separate property for the purposes of paragraph 81(1)(a) and section 87 of the Indian Act.
As discussed in Interpretation Bulletin IT-206R, Separate Businesses, the question of whether a corporation is conducting one or more businesses is dependent upon the degree of interconnection, interlacing or interdependence of the business operations.
We are of the opinion that a corporation's employee lease-out services generally do not relate to its activities other than the provision of employees. As a result, we are of the view that employee lease-out services should generally be considered a separate business from other activities of the corporation.
Where a corporation carries on separate businesses, the employment income of an Indian from each business must be treated as separate property for the purposes of paragraph 81(1)(a) and section 87 of the Indian Act. If the employment income is derived solely from the corporation's employee lease-out services, that income will be analyzed without regard to the corporation’s activities other than the employee leasing. Similarly, where an Indian works in several businesses of such a corporation, the employment income from the employee lease-out services business will be analyzed independently of the income the Indian otherwise earns from the business other than the employee lease-out services business.
Employee leasing
If the employee leasing-out is considered to be a separate business from the other activities of a corporation, we would apply our position published in the document Employee Leasing: Tax-Planning Arrangements Based on Section 87 (footnote 2) on employment income from employee leasing activities.
As with all employment situations, where employment is through an employee leasing-out business, we are of the view that the factors connecting the income to a reserve must be identified and weighed to determine if the employment income is taxable or exempt.
The place where the employee lives, the place of residence of the employer and the place where the duties of an employment are performed are usually important connecting factors in determining whether employment income is located on-reserve.
In order to determine the location of residence of an employer, we usually analyze where the location is from which the business is actually directed and administered. Where the location from which the business is actually directed and administered is located on a reserve, the employer will generally be considered to reside on that reserve. However, that connecting factor will be less important if the residence of an employer does not bring direct and significant benefits to the reserve. That determination remains a question of fact that can only be determined by taking into account all the relevant facts.
As we noted in our publication Employee Leasing: Tax-Planning Arrangements Based on Section 87, the location of the employer on a reserve is not a connecting factor strong enough, on its own, to exempt the employment income from tax where an Indian is employed through an on-reserve employer but performs the duties of employment off-reserve. Section 87 will therefore not apply to exempt the employment income, in whole or in part, unless one of the following applies:
- other factors connect the income to a reserve; or
- there is specific evidence that would give greater weight to the employer as a connecting factor.
We hope that the process described above will be of assistance to you.
Best regards,
Michel Lambert, CPA, CA, M. Fisc.
Manager
Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Directorate
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 Williams v. The Queen, 92 DTC 6320.