Principal Issues: Whether employment income earned by an employee who is an Indian under the Indian Act and who is working from on-reserve home offices as a result of the COVID-19 pandemic is exempt from tax.
Position: Yes, provided the employee lives on a reserve.
Reasons: If the terms of an employment require the employee to work for a certain period of time from a particular location, such as from a home office, this location is considered the location where the employee has to perform the duties of employment for this period of time. Generally, if the home office is located on a reserve, the employment duties are considered to be performed on a reserve.
XXXXXXXXXX
2020-087523
S. Thibault, CPA, CA,
LL. M. Fisc.February 4, 2021
Dear Ms. XXXXXXXXXX,
Subject: Exemption of employment income under section 87 of the Indian Act
This is in response to your email of December 3, 2020, in which you asked whether the employment income of an individual, temporarily working from home on a reserve due to the COVID-19 pandemic, is tax exempt. You indicated that prior to the COVID-19 pandemic, that employee worked at a location of the employer that was not on a reserve.
Our Comments
This technical interpretation provides general comments on provisions contained in the Income Tax Act (the "Act") and other related legislation, where applicable. It is not intended to confirm the tax treatment of any particular situation involving a particular taxpayer, but rather to assist you in making that determination. Our Directorate only confirms the tax treatment of a particular taxpayer's transactions in the context of an advance income tax ruling request as described in Information Circular 70-6R10, Advance Income Tax Rulings and Technical Interpretations.
The COVID-19 pandemic crisis has led to the imposition of safety measures by governments and employers to protect the health of employees. Those measures include the promotion of social distancing within an organization and working from home.
Paragraph 81(1)(a) of the Act, together with section 87 of the Indian Act, provide an exemption from taxation of an Indian's personal property within the meaning of the Indian Act where that property is situated on a reserve. The courts have held that for the purposes of that exemption, employment income constitutes personal property. Thus, the employment income of an employee who is an Indian within the meaning of the Indian Act (an "Employee") could be exempt from tax if it can be determined that the income is "situated on a reserve".
The courts have established that in order to determine whether income is situated on a reserve, one must first identify the various connecting factors that are relevant to the property. Those factors must then be analyzed to determine the weight to be given to them in identifying 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.
The Canada Revenue Agency ("CRA") has identified a number of connecting factors that can be used to determine whether employment income is situated on a reserve. Those factors are described in the CRA's document entitled Indian Act Exemption for Employment Income Guidelines ("Guidelines"). However, these guidelines are designed to assist in dealing with the majority of employment situations, so they may not apply to unusual or exceptional cases. Thus, whether there are sufficient connecting factors linking income to a reserve is always a question of fact that can only be determined by considering all the relevant facts.
Guideline 3 exempts from tax all income earned by an Employee from employment if more than 50% of the duties of an employment are performed on a reserve and the employer or employee lives on a reserve. In addition, Guideline 1 provides for an exemption of all income of an employee where the employee performs at least 90% of the duties of an employment on a reserve. Where an Employee performs less than 90% of the duties of an employment on a reserve and the employment income is not exempt under any other guideline, the exemption must be prorated so that only the portion of income related to duties performed on a reserve will be exempt.
In order to determine the location where the employment duties are performed for the purposes of those guidelines, the CRA is of the view that the most relevant location is the location where the Employee is required to perform the employment duties under the terms and conditions of their employment. In work-at-home situations, if the terms and conditions of employment require the employee to work for a certain period of time at a specific location, such as a home office, it is our view that this is the location where the employee is required to perform the duties of their employment during that period. Generally, if the home office is located on a reserve, the employment duties during that period are considered to be performed on a reserve.
Therefore, Guideline 3 may apply in the situation submitted to exempt the employment income of an Employee who resides on a reserve and who performed more than 50% of the duties of employment on a reserve during the year. If the Employee performed less than 50% of the duties of employment on a reserve, the employment income from duties performed on a reserve may be eligible for a partial exemption under Guideline 1.
By virtue of subsection 153(1) of the Act, every person who pays salary, wages, or other remuneration in a taxation year must make the applicable source deductions. As indicated in T4001 Employers' Guide - Payroll Deductions and Remittances, where an employer determines that it is paying taxable income to an employee, the employer must make the applicable deductions including income tax.
However, where it is determined that the employer is paying an employee all or part of the employment income on a non-taxable basis, the employee may apply to the employer for a reduction in the applicable source deductions. To do so, the employee must complete and submit to the employer form TD1-IN, Determination of Exemption of an Indian’s Employment Income. Upon receipt of that form, the employer will be able to make deductions at source based on those facts. The employer should keep a copy of that completed form for their records.
The employer must report employment income that is exempt under section 87 of the Indian Act on a T4 - Statement of Remuneration Paid slip by entering code 71 in the "Other information" area of the slip. The employee does not have to report the exempt employment income on the T1 Income Tax and Benefit Return.
However, if the employer has withheld and remitted income tax in the last taxation year on an Employee's income that turns out to be non-taxable, the Employee will have to file a T1 Income Tax and Benefit Return to obtain a refund.
We hope that our comments are of assistance.
Best regards,
Isabelle Landry
Interim Manager
Business and Employment Income
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch