In finding that an “Indian” whose income earned during a taxation year is exempt in accordance with s.87(1)(b) of the Indian Act (the “IA”) and excluded from the individual’s income under ITA s. 81(1)(a) would be a “reporting entity” within the meaning of ss. 233.3 and 233.4 of the ITA, and thus be subject to the obligation to file T1135 and T1134 forms, and to penalties for failures to do so, the Directorate stated:
Generally, the term “reporting entity” for the purposes of sections 233.3 and 233.4 of the ITA excludes a taxpayer “whose total taxable income for the year is exempt from the tax under Part I”. …
[T]he effect of paragraph 81(1)(a) of the ITA is not to exempt the taxpayer’s taxable income from the tax under Part I but rather to exclude an amount exempted under paragraph 87(1)(b) of the IA from the computation of the taxpayer’s income. … In other words, although the effect of paragraph 81(1)(a) of the ITA may be that the taxable income of such an individual, whose income earned in a particular taxation year is exempt from income tax pursuant to paragraph 87(1)(b) of the IA and paragraph 81(1)(a) of the ITA, i.e. nil, it cannot be concluded that the individual’s taxable income is exempt. It follows that such a taxpayer may qualify as a “reporting entity” within the meaning of sections 233.3 and 233.4 insofar as all the other conditions for the application of that definition are otherwise satisfied.
The expression “whose taxable income for the year is exempt from tax under Part I” would refer rather to persons covered by an exemption in one of the paragraphs of subsection 149(1) of the ITA.