Does section 87 of the Indian Act apply to an individual’s employment income in two situations? In each situation, the individual is an "Indian" as defined in section 2 of the Indian Act. The following additional questions are asked:
a. Would the answer be different if the individual worked 90 % of the time from his home located on a reserve?
b. Does the fact that the activities of the minister employing the individual may have an impact on the Canadian indigenous communities affect the analysis?
c. Would the taxation exemption apply if the individual did not live on a reserve, considering his functions as a government employee?
Position: Situation 1: Question of fact, but based on Guideline 3, the taxation exemption in section 87 of the Indian Act may apply to the individual’s employment income, provided that a formal telework arrangement is in place.
Situation 2: Question of fact, but based on Guideline 3, the taxation exemption in section 87 of the Indian Act may apply to the individual’s employment income, provided that a formal telework arrangement is in place.
Additional questions:
a. Question of fact, but based on Guideline 3 and Guideline 1, the taxation exemption in section 87 of the Indian Act may apply to the individual’s employment income, provided that a formal telework arrangement is in place.
b. No.
c. No.
Reasons: Wording of the Indian Act; jurisprudence on section 87 of the Indian Act.
XXXXXXXXXX 2024-102633 François Fournier-Gendron
November 28, 2024
Dear Mr. XXXXXXXXXX,
Subject: Section 87 of the Indian Act
This is in response to your email of June 27, 2024, in which you requested our view regarding the application of paragraph 81(1)(a) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the “Act”) and section 87 of the Indian Act, R.S.C. 1985, c. I-5 (the “IA”) to an individual's employment income. We apologize for the delay in responding to your question.
Specifically, you are asking us to determine whether the employment income of an individual who is an Indian within the meaning of section 2 of the IA (an “Indian”) would qualify for the exemption from taxation provided for in paragraphs 81(1)(a) of the Act and 87(1)(b) of the IA in each of the following situations:
Situation 1
- The individual's home is located on a reserve within the meaning of section 2 of the IA, so that the individual resides on a reserve.
- The individual's employer is the Government of Canada, which serves the Canadian population as a whole, including Canada's aboriginal community.
- The work establishment of the individual's employer is not located on a reserve, but in XXXXXXXXXX.
- Under a telecommuting agreement with the employer, the individual works three days a week from his home on a reserve, so that more than 50% of his employment duties are performed on a reserve.
Situation 2
- The individual's home is located on a reserve within the meaning of section 2 of the IA, so that the individual resides on a reserve.
- The individual's employer is XXXXXXXXXX, whose mandate is to improve access to high-quality services for First Nations, Inuit and Métis.
- The individual's employer is not located on a reserve, but is centrally located in relation to several reserves.
- The individual works three days a week from his home on a reserve, so that more than 50% of his employment duties are performed on a reserve.
You added additional questions for the situations presented, as follows:
a. Would the answer be different if the individual performed more than 90% of his duties from his home on a reserve?
b. Does it matter if the activities of the Department employing the individual have an impact on the Canadian aboriginal community?
c. Could the tax exemption apply to the individual's employment income even if the individual did not reside on a reserve, given the duties of the employment?
Our Comments
This technical interpretation provides general comments about the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R12, Advance Income Tax Rulings and Technical Interpretations ("IC 70-6R12").
Paragraph 81(1)(a) of the Act and section 87 of the IA together provide an exemption from tax for an Indian's personal property when it is situated on a reserve. The courts have found that, for the purposes of this exemption, employment income constitutes personal property. Thus, the employment income of an employee who is an Indian (“Employee”) could be exempt from tax if it can be determined that this income is “situated on a reserve”.
The courts have established that to determine whether income is situated on a reserve, 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 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. This two-step test, which involves identifying and analyzing the factors connecting the intangible personal property (the income) to a given location, is often referred to as the “connecting factors test”.
Based on case law (footnote 1), the most relevant connecting factors when determining whether an Indian's employment income is located on a reserve are the following:
-
- the Employee's place of residence
- the employer's location or place of residence
- the place of work, and
- the nature of the work and the circumstances in which it is performed.
The Canada Revenue Agency (“CRA”) has identified a number of connecting factors that can be used to determine whether employment income is located on a reserve. Those factors are described in the CRA document entitled Indian Act Exemption for Employment Income Guidelines (“Guidelines”) (footnote 2).
However, the Guidelines were designed as an administrative tool to simplify the application of the “connecting factors test” to employment income to help deal with the most common employment situations, and therefore may not apply to unusual or exceptional cases. Thus, whether there are sufficient connecting factors to determine whether income is located on a reserve is still 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 when more than 50% of the duties of an employment are performed on a reserve, and the employer is resident on a reserve, or the Indian lives on a reserve.
In order to determine where the employment duties are performed for the purposes of the guidelines, the CRA is of the view that the most relevant location is where the Employee is required to perform the employment duties under the terms and conditions of employment.
Usually, an express requirement under a written employment contract or the existence of a formal hybrid work arrangement would be necessary to show that the Employee is required to perform the Employee’s duties from certain locations, such as a home office located on a reserve. Although an arrangement can be entered into voluntarily, once an employer and Employee have entered into a formal hybrid work arrangement, the Employee would be deemed to be required to perform duties from the location agreed to in the arrangement. The formal hybrid working arrangement need not be in writing, provided that the details of the arrangement are agreed and clearly understood by both the Employee and the employer. The existence of such an arrangement is a question of fact and will depend on the circumstances of each situation.
If an Employee is not required to do so, but performs the Employee’s duties on a reserve for reasons of convenience, the Employee will not be considered to have performed the Employee’s duties on a reserve for the purposes of the Guidelines. Furthermore, the Guidelines are not applicable where it is reasonable to consider that one of the principal reasons for the existence of an agreement mandating work at home on a reserve is to establish a connecting factor between the employment income and the reserve.
Based on the facts of situation 1 and situation 2, the Employee would perform more than 50% of the employment duties from his home located on a reserve. Consequently, Guideline 3 could apply to exempt the employment income from tax, subject to our previous comments, including the requirement for a formal hybrid work arrangement with the employer.
Additional questions
Question a.
The answer would not be different if the Employee performed more than 90% of his duties from his home located on a reserve. Guidelines 1 and 3 could then apply to both situations, subject to our previous comments, notably the requirement for a formal hybrid work arrangement with the employer that would allow the Employee to perform more than 90% of the Employee’s duties from home.
Question b.
The courts have held that the fact that the employment duties benefit individuals living on a reserve is not in itself sufficient to locate the income on a reserve. In other words, even if an Employee's work contributes to maintaining and improving the quality of life on a reserve for members living there, this factor alone is not sufficient to link the Employee's income to that reserve (footnote 3).
Furthermore, Guideline 4 requires that, in order for all income derived by an Indian from employment to be tax-exempt, not only must the duties of the employment be in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on reserves, but additional conditions must also be satisfied. In fact, the employer must be resident on a reserve and must be, as the case may be: (i) an Indian band which has a reserve, (ii) a tribal council representing one or more Indian bands which have reserves, or (iii) an Indian organization controlled by one or more such bands or tribal councils, if the organization is dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves.
Thus, the impact that the activities of a Government of Canada department may have on the Canadian aboriginal community or, more specifically, on Indians resident on a reserve, does not mean that the employment income of an employee of that department would automatically be located on a reserve.
Question c.
As stated in sub-question b, an Employee's duties alone cannot determine whether the Employee's income is located on a reserve. In the situations presented, if the Employee was not resident on a reserve and therefore did not perform any duties of an employment on a reserve, none of the Guidelines would be applicable. The Employee's employment income would generally not be tax-exempt in that case.
We remind you that Form TD1-IN, Determination of Exemption of an Indian’s Employment Income, can help you determine the type of exemption that applies to Indian income under the Guidelines.
We hope you find our comments helpful.
Best regards,
XXXXXXXXXX
Sophie Larochelle, LL.B., M. Fisc., MBA
Section Manager
Specialized Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Due to the requirements of our systems, the footnotes contained in the original document are reproduced below:
1 See Shilling v. The Queen, 2001 FCA 178.
3 Canada v. Monias, 2001 FCA 239; Canada v. Akiwenzie, 2003 FCA 469; Ozawagosh v. The Queen, 2013 TCC 311.