20 February 2014 External T.I. 2014-0518771E5 - Indian - Employment Income

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether income of Indian employees would remain exempt should the company relocate off-reserve?

Position: Question of fact.

Reasons: See below.

XXXXXXXXXX
2014-051877
R. Meers
(613) 957-2100
February 20, 2014

Dear XXXXXXXXXX:

Re: Indian Act Exemption for Employment Income Guidelines ("Guidelines")

This is in response to your e-mail of January 13, 2014, inquiring as to whether the income of an Indian, as that term is defined in section 2 of the Indian Act, would be situated on a reserve and thus exempt from tax for purposes of section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act (the "Act"). In particular, you have asked us to comment whether the income of Indian employees of XXXXXXXXXX ("Society") would remain exempt should your office relocate off-reserve.

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). 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 IC 70-6R5, Advance Income Tax Rulings. Although we cannot comment on your specific situation, we are able to provide the following general comments, which may be of assistance.

Based on phone conversations we have had with you, it is our understanding that the Society is currently resident on a reserve but is considering relocating. The Society is responsible for XXXXXXXXXX. You were uncertain as to whether the employment duties performed on a reserve would amount to more than 50% of the employee's time.

The location of the duties of employment is usually the key factor in determining whether an Indian's employment income is situated on a reserve and exempt from tax. However, the courts have recognized that employment income may be situated on a reserve, even where many or all of the duties of employment are carried on off-reserve, as long as other connecting factors of significant weight connect the employment income to a reserve. These factors may include the circumstances surrounding the employment, the residence of the employer and the residence of the employee.

In consultation with other government departments as well as interested Indian groups and individuals, the Canada Revenue Agency identified a number of connecting factors that can be used to determine whether a person's employment income is situated on a reserve. This initiative resulted in the development of the Guidelines.

• Guideline 1 exempts the employment income of an Indian when at least 90% of the employment duties are performed on a reserve. When less than 90%, but more than an incidental proportion of the duties are performed on a reserve, and none of the other Guidelines apply, the exemption is prorated to apply to the portion of income related to the duties that are performed on a reserve (the proration rule).

Should the office relocate off the reserve, it is unclear whether any of the employees would perform more than 90% of their duties on a reserve and thus qualify for the full exemption. Employees who perform less than 90% but more than an incidental proportion of their duties on a reserve would qualify for a pro-rated exemption on their employment income. Administrative employees who perform all of their duties in the office would likely not qualify for the exemption under Guideline 1.

• Guideline 2 exempts the employment income of an Indian employee when the employer is resident on a reserve and the Indian lives on a reserve. The term employer is resident on a reserve, as used in the Guidelines, means that the reserve is the place where the central management and control over the employer organization is actually located.

The central management and control of an organization is usually considered to be exercised by the group that performs the function of a board of directors of the organization (it is not the residency of the individual directors that is relevant, but the location at which major organizational decisions are made). However, it may be that the real management and control of an organization is exercised by some other person or group. Generally, management and control is exercised at the principal place of business but it is recognized that this function may be legitimately exercised in a place other than the principal administrative office of the organization. It is a question of fact where the central management and control is exercised.

Based on the information you gave us, it would appear that the organization is currently resident on a reserve. It is unclear as to whether the organization would be considered resident on a reserve should the office be relocated off the reserve. If the organization is not considered resident on a reserve, then Guideline 2 would not apply. If the organization is resident on a reserve, then the employment income of the Indian employees who live on a reserve would be exempt.

• Guideline 3 exempts the employment income of an Indian employee if more than 50% of the employment duties are performed on a reserve and either the employer is resident on a reserve or the Indian lives on a reserve.

Guideline 3 would apply to exempt the income from employment of the Society's Indian employees who live on a reserve and perform more than 50% of their employment duties on a reserve. Indian employees who perform more than 50% of their duties on a reserve and who do not live on a reserve, the residency of the employer again becomes a determining factor as to whether or not their employment income is exempt. Administrative employees would likely not qualify for the exemption under Guideline 3 if the organization relocates off-reserve as their employment duties would not be performed at least 50% on a reserve.

• Guideline 4 allows an exemption for the employment income of an Indian where certain conditions are met. Specifically, Guideline 4 requires that:
  • The employer is resident on a reserve; and
  • The employer is:
    • an Indian band which has a reserve, or a tribal council representing one or more Indian bands which have reserves; or
    • 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; and
  • The duties of employment are 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.

All of these conditions must be met for Guideline 4 to apply. It is unclear whether the conditions would be met. As discussed, it remains a question of fact as to whether the Society would be considered resident on a reserve if the relocation off-reserve took place. While it appears the Society is dedicated exclusively to the social, cultural, educational or economic development of Indians who for the most part live on reserves, it is unclear if the organization is in fact controlled by one or more of the bands. You have indicated that the Board of Directors consists of XXXXXXXXXX people with one representative from each Band that is represented by the Society, but it is unclear as to whether the Bands in fact control the Society.

In addition, you wanted to know what impact there might be if the Society was to enter into a contract XXXXXXXXXX. Guideline 4 clearly indicates that all of the conditions must be met. XXXXXXXXXX, it would likely not meet all of the conditions of Guideline 4. The Society would no longer be dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves. Furthermore, the employees' duties of employment would no longer 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.

We trust that these comments will be of assistance.

Yours truly,

Roger Filion
Manager
Non-Profit Organizations and Aboriginal Issues
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch