3 September 2025 External T.I. 2025-1055081E5 - Indian Act Tax Exemption & 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: 1) Whether the employment income of certain employees is exempt under section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act. 2) Whether the employer is required to make payroll withholding and remittances under paragraph 153(1)(a) of the Act in respect of salaries paid to these employees.

Position: 1) Likely no. 2) Likely yes.

Reasons: 1) Based on the information provided, the Guidelines do not appear to apply, and the connecting factors identified by the representative are not sufficient to situate the income on a reserve. 2) Based on the information provided, the employer is likely required to withhold income tax from the employees’ employment income and remit those amounts to the Receiver General.

XXXXXXXXXX									2025-105508
										Phyllis Chiu

September 3, 2025

Dear XXXXXXXXXX:

RE: Off-reserve employment and the tax exemption under section 87 of the Indian Act

This is in response to your enquiry asking whether the employment income of certain employees of the XXXXXXXXXX (Employer) who are working off-reserve at the Employer’s health clinic is exempt from income tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act (Act). You would also like to know whether the Employer may refrain from making income tax withholdings and remittances under paragraph 153(1)(a) of the Act in respect of salaries paid to these employees if their employment income is determined to be exempt from income tax.

Our understanding of the information provided is as follows:

• Approximately 90% of the employees are registered or entitled to be registered under the Indian Act (Employees), and some reside on a reserve.
• The Employer is a society incorporated under the Societies Act (XXXXXXXXXX) and its object is to provide health and health-related services to the population of XXXXXXXXXX, which is predominantly Indigenous. All or substantially all of the Employer’s patients are First Nations or Métis individuals, most of whom reside on reserves in the vicinity of XXXXXXXXXX.
• The members of the Employer are the XXXXXXXXXX. The board of directors (Board) is comprised of a representative from each of the members. The Employer’s bylaws require Board meetings be held on a reserve, and the Board regularly meets at premises on the XXXXXXXXXX reserves.
• The Employer receives annual funding from the First Nations and XXXXXXXXXX, which enables the Employer to provide health care services not covered by provincial health insurance and for which the Government of Canada would otherwise be obligated to provide.
• The Employer carries on its activities from a health clinic located off-reserve in XXXXXXXXXX (Off-Reserve Clinic).
• The ability of the members of XXXXXXXXXX to live on reserves or in the nearby community of XXXXXXXXXX would be diminished without the health services provided by the Employer.

In your view, the Indian Act Exemption for Employment Income Guidelines (Guideline) (footnote 1) , in particular Guideline 2 or 4, apply to the employment situation of the Employees such that their employment income is exempt from tax under the Indian Act and the Act.

It is also your view that the employment income of the Employees is situated on a reserve under the connecting factors test, as significant weight should be given to the residence of the Employer, the nature of the services performed, the special circumstances in which the services are performed, and, where an employee is resident on a reserve, the residence of the employee. You indicated that the nature of the services performed and the funding sources strengthen the Employer’s connection to a reserve. On the other hand, it’s your view that little weight should be given to the fact that the services are performed at the Off-Reserve Clinic because providing services on-reserve rather than in the central location of XXXXXXXXXX would undermine the Employer’s ability to provide care to the entire local community which is predominantly Indigenous.

Our Comments

This technical interpretation provides general comments about the provisions of the 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 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Employment income earned by an individual who is registered or entitled to be registered under the Indian Act (First Nations individual) is exempt from income tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Act only if the income is situated on a reserve. The courts have established that determining whether income is situated on a reserve, and thus exempt from income tax, requires identifying the various factors connecting the income to a reserve and weighing the significance of each factor. This is referred to as the connecting factors test.

To simplify the application of the connecting factors test with respect to common employment situations, the Canada Revenue Agency (CRA) together with interested First Nations organizations, developed the Guidelines. The Guidelines are an administrative tool. There are four Guidelines and they only apply to employees who are First Nations individuals.

Guideline 1

Under this guideline, when at least 90% of a First Nations individual’s employment duties are performed on a reserve, all their income from that employment will usually be exempt from income tax. 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 and only the portion of the income related to the duties that are performed on a reserve will be exempt (the proration rule).

Based on our understanding of the information provided, the Employees perform some administrative duties from their on-reserve home offices. However, it appears that 90% or more of their employment duties are performed at the Off-Reserve Clinic. As a result, Guideline 1 would not apply to the employment situation of the Employees and their employment income would not be fully tax-exempt. However, the proration rule may apply, as explained above.

Guideline 2

Under this guideline, when a First Nations individual lives on a reserve and their employer is resident on a reserve, then all of the income of the First Nations individual from that employment will usually be exempt.

Whether the Employer is resident on a reserve is a question of fact. You indicated that the Employer’s operations are primarily conducted at the Off-Reserve Clinic while its Board meetings take place on-reserve.

Consistent with jurisprudence, the Guidelines define the term employer is resident on a reserve to mean “that the reserve is the place where the central management and control over the employer organization is actually located.” As noted in the Guidelines, “[T]he 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. 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.” There must be sufficient control exercised from a reserve for the organization to be considered to be resident on a reserve. It is a question of fact where the actual central management and control is exercised. A review of all the facts, including the minutes of the board of directors’ meetings and resolutions or by-laws passed at the meetings, would be required to determine whether the Employer is resident on a reserve.

In determining whether an organization is resident on a reserve, there is always some concern where the board meetings take place on a reserve while the main operations are carried out off-reserve. Based on the information provided, we are unable to determine if the Employer is resident on a reserve.

For purposes of the Guidelines, a First Nations individual lives on a reserve where they live in a domestic establishment on a reserve that is their principal place of residence and that is the centre of their daily routine. Whether an employee lives on reserve is a question of fact to be determined on an individual basis.

Guideline 3

Under this guideline, when more than 50% of the First Nations individual’s employment duties are performed on a reserve and either the employer is resident on a reserve or the individual lives on a reserve, all the employment income of the individual will usually be exempt from income tax.

Based on the information provided, it does not appear that the Employees perform more than 50% of their employment duties on a reserve, therefore, Guideline 3 would not apply to their employment situation.

Guideline 4

Under this guideline, where all the conditions below are met, all the income of a First Nations individual from that employment will usually be exempt even if they do not live or work on a reserve.

a) The employer is resident on a reserve;

b) The employer is:

i. a First Nations band which has a reserve (FNR), or a tribal council representing one or more FNRs; or

ii. an organization controlled by one or more such FNRs or tribal councils (First Nations Organization) and which is dedicated exclusively to the social, cultural, educational, or economic development of First Nation individuals who for the most part live on reserves; and

c) The duties of employment are in connection with the employer's non-commercial activities carried on exclusively for the benefit of First Nation individuals who for the most part live on reserves.

It is the CRA's view that Guideline 4 is a generous interpretation of the connecting factors test established by the courts. Therefore, it is appropriate to restrict the application of Guideline 4 to situations that squarely fit the criteria. In other words, all the conditions of Guideline 4 must be satisfied in order for it to apply. As noted above, we are unable to determine if the Employer is resident on a reserve. However, even if the Employer was determined to be resident on a reserve, conditions (b) and (c) of Guideline 4 must also be met.

The Employer does not meet condition (b)(i) of Guideline 4 as it is not one of the entities described therein, but it appears to be a First Nations Organization as described in the first part of condition (b)(ii) of Guideline 4. However, the exclusivity requirement in the second part of condition (b)(ii) and in condition (c) of Guideline 4 does not appear to have been satisfied. Since the Off-Reserve Clinic serves the public (both First Nations and non-First Nations individuals) (footnote 2) , the Employer’s activities are neither dedicated exclusively to nor carried on exclusively for the benefit of First Nations individuals who for the most part live on reserves. Consequently, Guideline 4 does not apply to the Employees’ employment situation.

The connecting factors test

As noted above, the Guidelines are an administrative tool created to address the most common employment situations. There may be situations where there are other connecting factors that may result in employment income being treated differently than under the Guidelines. In such situations, it is necessary to apply the connecting factors test as established by the courts.

In applying the connecting factors test, the courts have established that the weight assigned to each connecting factor is determined by considering the purpose of the exemption, the type of property in question, and the nature of the taxation of the property.

Connecting factors that have been considered and given weight by the courts in cases involving employment income include: the residence of the employer; the residence of the employee; and the nature, location, and special circumstances of the work performed by the employee. The weight assigned by the courts to each of these factors has varied according to the facts of each case.

It is your view that, the Employer is resident on a reserve, and this, along with the nature of the services provided and the funding sources are factors that connect the employment income related to the employment duties performed at the Off-Reserve Clinic to reserves. However, the courts (footnote 3) have held that such factors cannot be given significant weight in a connecting factors test where the employer’s operations are primarily conducted off-reserve.

You are also of the view that for employment income, the situs of the income is the residence of the recipient, thus the employment income of the Employees residing on reserve is tax-exempt despite that their employment duties are performed at the Off-Reserve Clinic. Further, it is your view that the taxation of such income would erode the recipient’s use of such property. Although the residence of an employee may be potentially relevant, the courts (footnote 4) have held that it should generally be given little weight in a connecting factors test where the employment duties are performed primarily off-reserve.

Regarding the nature, location, and special circumstances of the work performed by the Employees, the Employees appear to perform all or substantially all of their employment duties at the Off-Reserve Clinic. You are of the view that the location where the employment duties are performed should not be given significant weight in the present situation because providing services on-reserve would undermine the Employer’s ability to provide care to the entire local community which is predominantly Indigenous. This is in effect the necessity argument which says that the employer, employee, and place of employment would be on a reserve if that were possible and therefore the employment income should be treated as if it were located on a reserve. However, this argument has not been accepted by the courts (footnote 5) as a significant connecting factor to situate employment income on a reserve.

Furthermore, the nature of the services performed and the special circumstances you mentioned indicate that the health care services provided benefit First Nations individuals who live on-reserve. However, the courts (footnote 6) have concluded that the fact that an employee’s duties are beneficial to reserves is not, in and of itself, sufficient to situate the employee’s income on a reserve where the employment duties are performed primarily off-reserve.

Therefore, in the absence of the identification of other connecting factors, the employment income earned by the Employees working at the Off-Reserve Clinic is not situated on a reserve and is not exempt from income tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Act. Consequently, the Employer is required to withhold income tax from the employment income of the Employees. Where the Employer fails to withhold and remit the amounts to the Receiver General, as required by subsection 153(1) of the Act, the Employer is liable to a penalty and interest under subsections 227(8) and 227(8.3) of the Act, respectively.

We trust these comments will be of assistance.

Yours truly,

Ms. Nerill Thomas-Wilkinson, CPA, CA

Manager
Non-Profit Organizations and Indigenous Issues Section
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Indian Act Exemption for Employment Income Guidelines - Canada.ca

2 WELLNESS — Athabasca Tribal Council

3 Canada v. Monias, 2001 FCA 239 and Morriseau et al v The Queen, 2020 TCC 5.

4 Horn et al v. The Queen et al, 2007 FC 1052; Baldwin et al v The Queen, 2014 TCC 284 and Ozawagosh et al v. The Queen, 2013 TCC 311.

5 Desnomie v. The Queen, 2000 DTC 6250; Naponse v. The Queen, 2001 DTC 414; and Canada v. Monias.

6 Ozawagosh et al v. The Queen; Canada v. Akiwenzie, 2003 FCA 469; Canada v. Monias; and Desnomie v. The Queen