Principal Issues: Can the percentage of “career average” be adjusted beyond the ten year limitation period for purposes of calculating the tax exempt portion of pension benefits?
Position: Question of fact, but in this case no.
Reasons: It depends on when the individual was entitled to be registered under the Indian Act.
November 17, 2021
Wynn Coates Business and Employment Division A/Junior Policy Analyst Income Tax Rulings Directorate Indigenous Affairs Section Ananthy Mahendran Federal, Indigenous and Quebec Affairs Division (647) 326-0241 Service, Innovation, and Integration Branch
2021-090965
Determining career average for purposes of calculating tax exempt pension benefits
This is in response to your email of August 12, 2021, asking whether the career average of a particular individual can be adjusted beyond the ten year limitation period for purposes of calculating the tax exempt portion of pension benefits.
It is our understanding that the individual is entitled to be registered under the Indian Act pursuant to the second set of amendments made by Bill S-3, An Act to amend the Indian Act in response to the Superior Court of Quebec decision in Descheneaux c. Canada (Procureur général). Detailed information about Bill S-3 and its effective dates are provided by Indigenous Services Canada (ISC) on its webpage “Bill S-3: Eliminating known sex-based inequities in registration ” (endnote 1) .
Our Comments
It is the view of the Canada Revenue Agency (CRA) that income which is ancillary to employment income, such as pension benefits, is treated in the same way as the employment income itself. In other words, if the employment income earned by a First Nations individual was exempt from income tax under section 87 of the Indian Act, any pension benefits relating to that exempt employment income will usually be exempt from income tax. If a portion of the employment income was exempt from income tax, then a similar portion of the pension benefits will also be exempt from income tax. For more information, go to our webpages “Indian Act Exemption for Employment Income Guidelines” (endnote 2) and “Information on the tax exemption under section 87 of the Indian Act” (endnote 3) .
The determination of whether the career average could be adjusted beyond the ten year limitation period to calculate the tax exempt portion of pension benefits, is ultimately a question of fact and will depend on when the Indian Act tax exemption is available to the individual.
It is the longstanding position of the CRA that the Indian Act tax exemption is available to an individual on the earliest date that the individual is registered or entitled to be registered under the Indian Act. August 15, 2019 is the earliest date that individuals are entitled to be registered under the second set of amendments made by Bill S-3. This date applies for purposes of the Indian Act tax exemption regardless of when ISC registered the individual. Therefore, only income earned on a reserve on or after August 15, 2019 may be exempt from income tax. This means that these individuals cannot get a refund of income taxes on employment income they earned before that date, regardless of where they earned the income. This is consistent with the CRA’s application of the Indian Act tax exemption for individuals registered under Bill C-31, An Act to amend the Indian Act (endnote 4) , and Bill C-3, Gender Equity in Indian Registration Act (endnote 5) . For more information regarding Bill S-3 and the Indian Act tax exemption, see our webpage “Information on the tax exemption under section 87 of the Indian Act” (endnote 6) .
In the present situation, the individual is retired and was registered by ISC on November 13, 2019, under the Indian Act pursuant to the second set of amendments made by Bill S-3, and therefore, the individual will not qualify for the Indian Act tax exemption for employment income earned prior to August 15, 2019. If the date of the individual’s retirement was prior to August 15, 2019, their career average cannot be adjusted for purposes of calculating the tax exempt portion of the pension benefits. However, if the individual earned employment income after August 14, 2019, that income may be exempt from income tax. Consequently, the individual may request a refund of income tax for that period and their career average may be adjusted for that same period.
Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure.
We trust these comments will be of assistance to you.
Yours truly,
Ms. Nerill Thomas-Wilkinson, CPA, CA
Manager
Non-Profit Organizations and Indigenous Issues Section
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES
1 https://www.sac-isc.gc.ca/eng/1467214955663/1572460311596
2 https://www.canada.ca/en/revenue-agency/services/indigenous-peoples/indian-act-exemption-employment-income-guidelines.html
3 https://www.canada.ca/en/revenue-agency/services/indigenous-peoples/information-indians.html
4 https://www.rcaanc-cirnac.gc.ca/eng/1540405608208/1568898474141#_Bill_C-31_and
5 https://www.canada.ca/en/revenue-agency/services/indigenous-peoples/information-indians.html#hdng2-2
6 https://www.canada.ca/en/revenue-agency/services/indigenous-peoples/information-indians.html