C. Higgins 957-2103
MAR 23 1988
Dear Ms Beaudoin:
Re: Taxable Income - Indians
This is in reply to your letter of December 23, 1987, concerning the tax implications for Indians (as defined in the Indian Act) terminating their employment with the Public Service.
Specifically, you ask the following questions:
1. Does salary include payments such as severance pay, cash-out in lieu of unfulfilled surplus period (six months pay maximum), paid unused annual leave, paid overtime and the return of superannuation contributions?
2. Would the Indian Remission Order apply to Indian employees working outside a reserve who terminate their employment and move to a reserve? That is, would the Remission Order exempt the Indians from paying taxes at source on final benefits, payouts (final salary, paid unused annual leave, severance pay, cash-out in lieu of unfulfilled surplus period, and return of superannuation contributions?
3. When and will the Remission Order be approved for 1987 and is it the intent to extend this Order to cover the 1988 taxation year?
OUR COMMENTS
We have responded to your questions in the order in which they appear above. However, before addressing these questions, we have provided a general summary of the taxation of Indians for purposes of the Income Tax Act (the "Act").
Paragraph 81(1)(a) of the Act exempts from taxation an amount that is declared to be exempt from income tax by any other enactment of the Parliament of Canada. In this regard, section 87 of the Indian Act exempts from tax, revenue from the ownership of real or personal property situated on a reserve.
An Indian's employment income is exempt from income tax under the Act where the income is reasonably attributable to duties performed on a reserve or where the residence of the employer is on the reserve and the salary or wages are payable at that place. With respect to income other than employment income received by an Indian on termination of his employment, it is the Department's position that such income will be included in income for tax purposes unless the payor is resident on the reserve and the income is payable at that place.
1. Income from employment includes salary, wages and other remuneration, received by a taxpayer in the year from an office or employment. Salary or wages in most cases includes all fees for services received by the taxpayer, other than those received related to a taxpayer's business, but does not include any superannuation or pension benefits or retiring allowances. "Other remuneration" would be restricted to remuneration of the same type as salary and wages.
Paragraph 1 of Interpretation Bulletin IT-337R2 provides that amounts received by a former employee arising out of or in consequence of the termination of employment are usually included as income from employment under subsection 5(1), alone or together with paragraph 6(3)(b) of the Act, or as a retiring allowance under subparagraph 56(1)(a)(ii).
A retiring allowance, for purposes of the Act, is basically an amount paid by an employer to an employee in recognition of his long service or in respect of a loss of office or employment. In most cases, the Department views the cessation of employment for any reason, as being retirement or loss of employment, except in situations where an employee leaves to take a similar position with one of his former employer's affiliates. Also, in the Department's view, payments in respect of unused sick leave credits qualify as a retiring allowance whereas payments in respect of accumulated vacation leave not taken prior to the retirement or termination are considered to be ordinary remuneration and included in the employee's employment income in the year of receipt. The Department considers a payment in respect of loss of office or employment normally refers to the elimination or expiration of a particular office or employment. In this regard, the Department considers the term "loss of office or employment" to include situations where an employee is released from an office or employment whether unilaterally or not. Also, the Department accepts payments made under "early retirement incentive plans" as being in respect of a loss of office or employment.
Based on the foregoing, it is our view that paid unused annual vacation leave and paid overtime will be considered as income from employment. Severance pay, cash-out in lieu of unfulfilled surplus, and unused sick leave payments on the other hand will be considered as retiring allowances. As such they are excluded from employment income but are included in income under paragraph 56(1)(a) of the Act. Superannuation payments, as indicated above, are also excluded from employment income and are taxable under paragraph 56(1)(a) of the Act.
2. The fact that an Indian moves to a reserve is irrelevant for purposes of the Indian Remission Order. As indicated above, the Remission Order applies only "to income that is reasonably attributable to employment duties performed on the reserve, regardless of where the Indian ordinarily resides. Also, it is the Department's view that amounts received by an Indian on termination of his employment which are considered as retiring allowances or superannuation benefits will be included in income for tax purposes unless the payer of such amounts is resident on the reserve and the amounts are payable at that place.
3. As indicated in the Minister of Finance's February 1987 budget speech, the Indian Remission Order will be extended for 1987. The Minister of Finance also indicated at the time of his speech that he and the Minister of Indian Affairs and Northern Development were developing proposals to rationalize the treatment of employment income of Indians on reserves, in order to eliminate the need for future Remission Orders. These proposals have not yet been made public. It is expected however that the Remission Order for 1987 will be approved in the near future. Information is not available at this time with respect to the 1988 taxation year.
We trust the foregoing adequately addresses your questions.
Yours truly,
ORIGINAL SIGNED BY
Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch