Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: Is an Indian's employment income exempt from income tax under paragraph 81(1)(a) in a particular situation?
Position: None. General comments.
Reasons: Question of fact.
XXXXXXXXXX
2012-046523
I. Landry, M. Fisc.
November 4, 2013
Dear Sir,
Subject: Exemption of employment income of an Indian
A Band-controlled and managed corporation enters into a contract to perform work off-reserve under supervision of a corporation manager. While working at the site the employees sleep in rooms at or close to the site, but return to the reserve on their days off. Is their employment income exempt? In the course of a general discussion, CRA stated:
We are of the view that the location of the employee, the place of residence of the employer and the location where the employment duties are performed are usually important connecting factors in determining whether employment income is located on a reserve.
In order to determine an employer's place of residence, we usually analyze where the location is from which the business is actually directed and administered. Where the location from which the business is actually directed and administered is located on a reserve, the employer will generally be considered to reside on that reserve. …
In order to determine the place where an Indian lives, we usually analyze whether the Indian lives on a reserve, in a domestic establishment that is his or her main place of residence and the center of his or her daily activities.
This letter is in reply to your letters of April 5, 2012 and November 15, 2012 in which you asked if the employment income of certain Indians (footnote 1) is exempt from tax under paragraph 81(1)(a) of the Income Tax Act (the "Act") and section 87 of the Indian Act in the following particular situation.
Essentially, you indicated that a corporation (the "Corporation") wishes to build XXXXXXXXXX in the XXXXXXXXXX reserve (the "Reserve"). The Corporation is incorporated under the Canada Corporations Act and controlled by the Reserve Band Council.
In order to provide XXXXXXXXXX work experience to its employees, the Corporation has entered into a contract XXXXXXXXXX situated off reserve. XXXXXXXXXX.
When working off-reserve, employees sleep in a room XXXXXXXXXX. They are not allowed to live at their place of work during their holidays. When they return to their residence in the Reserve, the room XXXXXXXXXX.
The supervision of the employees of the Corporation is carried out by a manager of the Corporation on the site XXXXXXXXXX. The latter is supervised by the Chief Executive Officer of the Corporation from the Reserve. In a case of dissatisfaction, the owner XXXXXXXXXX must contact the manager of the Corporation, as the representative of management. Corporation employees are not managed or supervised by the owner XXXXXXXXXX.
Unless otherwise indicated, all statutory references in this letter are to the provisions of the Act.
Our Comments
The situation you have submitted is an actual situation for which we cannot give you a definitive opinion. The question of whether the employment income of certain Indians is exempt from taxation is a question of fact that requires a review and analysis of all the facts, circumstances and documents specific to each situation. However, we are able to offer the following general comments that may be of assistance.
Where Indians receive income, paragraph 81(1)(a) together with section 87 of the Indian Act provide for a tax exemption for the personal property of an Indian situated on a reserve. The courts have ruled that for the purposes of this exemption, the income constitutes personal property. Thus, an Indian's income could be tax-exempt if it can be determined to be "situated on a reserve".
In this regard, the Supreme Court of Canada considered this issue in Williams (footnote 2). By virtue of this decision, the Court indicated that the various connecting factors that are relevant to the property must first be identified. These factors must then be analyzed to determine the weight to be assigned to them in order to identify the location of the property. If the most significant connecting factors link the location of the property to a reserve, income will be exempt from income tax.
Taking into account the principles established in Williams, as well as through consultations with interested Indian groups or individuals, the Canada Revenue Agency ("CRA") identified a number of factors may be used to determine if employment income is located on a reserve. These factors are described in the CRA's Indian Act Exemption for Employment Income Guidelines (the "Guidelines"). You can obtain a copy from the CRA's website at www.cra-arc.gc.ca/brgnls/gdlns-eng.html. However, these Guidelines are designed to help deal with the majority of employment situations, so they may not apply to unusual or exceptional cases. Thus, the question of whether there are sufficient connecting factors linking income to a reserve remains a question of fact that cannot be determined without taking into account all the relevant facts.
We are of the view that the location of where the employee lives, the place of residence of the employer and the location where the employment duties are performed are usually important connecting factors in determining whether employment income is located on a reserve.
In order to determine an employer's place of residence, we usually analyze where the location is from which the business is actually directed and administered. Where the location from which the business is actually directed and administered is located on a reserve, the employer will generally be considered to reside on that reserve. In some situations, however, this connecting factor will be less important if the residence of an employer does not bring direct and significant benefits to the reserve. This determination remains a question of fact that can only be determined by taking into account all relevant facts.
In order to determine the place where an Indian lives, we usually analyze whether the Indian lives on a reserve, in a domestic establishment that is his or her main place of residence and the center of his or her daily activities.
The mere fact that an Indian is absent from a reserve for short periods of time because of his or her employment duties does not necessarily mean that he or she no longer lives on a reserve. It is all the facts of a particular situation that make it possible to determine whether an Indian lives on a reserve. Despite the fact that the employee is off the reserve during work periods, he or she may still be considered to be an Indian living on a reserve, in a domestic establishment that is his or her principal place of residence and the center of his or her daily activities.
By virtue of subsection 153(1), every person paying at any time in a taxation year salary, wages or other remuneration must make the applicable source deductions. As outlined in Guide T4001, Employers' Guide - Payroll Deductions and Remittances, where an employer determines that it is paying taxable income to an Indian, it must make the applicable deductions from income tax and contributions to the Canada Pension Plan and Employment Insurance.
However, where it is determined that the employer is paying employment income to an Indian, that employee may request from his or her employer that the applicable source deductions be reduced. To do this, the employee must complete and return to his or her employer Form TD1-IN, Determination of Exemption of an Indian's Employment Income. Following the receipt of this form, the employer may make deductions at source taking into account these facts.
The employer must keep a copy of this duly-completed on file. An employer is still required to make applicable withholding taxes on the earnings of its employees. Consequently, unless an employer is of the view that income of an Indian is not taxable, in whole or in part, it must generally make the applicable source deductions. If amounts were withheld and remitted respecting an employee's income that subsequently turned out to be non-taxable, the employee will have to file a T1 return or a T1-ADJ, T1 Adjustment Request form, as the case may be, in order to claim a refund of these amounts.
Best regards,
Michel Lambert, CPA, CA, M. Fisc.
Manager
Employment Income Section
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and
Regulatory Affairs Branch
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 For the purposes of the Indian Act, an Indian is a person who is registered as an Indian or is entitled to be registered as an Indian. The question of whether a person has the right to be registered as an Indian is one of fact.
2 Williams v. The Queen, 92 DTC 6320.
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