Dear Mr. Garman:
Re: Taxation of Status Indians
We are writing in reply to your letter of December 9, 1991 and further to a telephone conversation (Couchman/Albert) of December 18, 1991 wherein you requested our assistance in obtaining clarification of certain matters relating to the Indian Remission Order (the "Order").
Our Comments
Paragraph 81(1)(a) of the Income Tax Act exempts from taxation an amount which is declared to be exempt from income tax by any other enactment of the Parliament of Canada. In the case of a status Indian, this entitlement arises from the Indian Act. Employment income earned by a status Indian from an employer located on a reserve is exempt from tax regardless of where the services are performed. Since 1983, the Order also effectively exempts from tax certain types of income which are reasonably attributable to duties performed on a reserve by a status Indian whose employer is not situated on a reserve.
A status Indian living on or off the reserve who receives pension payments from a source on the reserve receives such payments as tax exempt income. The pension payments may be received directly from his employer on the reserve, from a trust resident on the reserve, or from any other entity, the head office of which is on the reserve. Pension payments received directly from a source off the reserve would be subject to taxation, unless effectively exempted by the Order. The Order effectively exempts pensions paid out of a registered pension plan where the contributions were in respect of income that was itself exempt from taxation under the Order.
Similarly, the Order applies to lump-sum payments and retiring allowances arising from tax exempt income and to training allowances.
In our view, the words `duties performed on a reserve' include only those duties which are physically performed on the reserve. They would not include duties performed off the reserve that relate directly to on-reserve issues. Nor do they include time spent in travelling to and from the reserve to perform duties on the reserve.
In our view, the Order contemplates an allocation of employment income for the year, which would include annual and sick leave, based on the performance of duties both on and off the reserve. To illustrate, assume a status Indian (whose employer does not reside on the reserve), earns a salary of $2,000 monthly ($24,000 annually), earns one month paid annual leave in the year, works on the reserve for 8 months and away from the reserve for 3 months (which together with 1 month of paid annual leave taken, equals 12 months). The portion exempt pursuant to the Order, ie., the portion that is reasonably attributable to duties performed on the reserve, could be calculated as 8/11 x $24,000 or $17,455. In this example, the annual leave is simply allocated as part of the total income for the year.
As another example, assume that out of a total of 260 working days, a status Indian worked 41 days on a reserve and a total of 23 days of vacation/sick leave was taken during the total working period. The number of days not taxable in this example is calculated as follows:
41 days + (41 days/260 days x 23 days) = 41 + 4 (rounded from 3.6) = 45 days
Assume the annual salary was $45,000, the exempt income would be:
45 days/260 days x $45,000 = $7,788.
While actual situations will vary, the same principles would apply. Revenue Canada, Taxation has a publication called `Employers Guide to Source Deductions' which sets out guidelines for `Status Indian employees' on pages 49-50. We have enclosed a copy of these pages for your information.
We trust that these comments will be of assistance. If you have any further questions, do not hesitate to contact us.
Yours truly,
E. Wheeler for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch