19 February 1998 Internal T.I. 9733337 - INDIAN ACT EXEMPTION - G4

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

(1) Indian Organization moving its head office from XXXXXXXXXX reserve to a XXXXXXXXXX reserve. Tax implication for its employees. Indian Organization only controlled indirectly by Indian Bands. Can Guideline 4 apply?

Position:

(1) Guideline 4 cannot apply since it contemplates direct control. Comments reiterated on potential application of Guideline 2 to employees working off-reserve but residing on a reserve, provided the central management and control is effectively located on reserve.

Reasons:

(1) Guideline 4 applies to Indian Organizations which are directly controlled, as opposed to indirectly controlled, by Indian Bands or Tribal Councils. Guideline 2 applies to Indians residing on a reserve and working for an employer which also resides on a reserve, regardless of where the duties are performed.

		February 19, 1998
	XXXXXXXXXX 	HEADQUARTERS
	XXXXXXXXXX  Tax Services Office	P.-A. Sarrazin
(613) 957-2058
		7-973333

Indian Act Exemption for Employment Income

This is in reply to a letter dated December 10, 1997 (attached), from XXXXXXXXXX His letter, addressed to your office and requesting clarification of our letter dated November 21, 1997, was forwarded to us for review. Accordingly, we are providing our comments to you so that you may respond to XXXXXXXXXX.

The employer, XXXXXXXXXX, currently has its head office on a reserve in XXXXXXXXXX and is considering moving it to a XXXXXXXXXX reserve. XXXXXXXXXX wants to know the tax implications of this move for the XXXXXXXXXX employees of XXXXXXXXXX working off-reserve. In his letter XXXXXXXXXX states that XXXXXXXXXX is an Indian organization serving XXXXXXXXXX Indian cultural centres. Its head office is located on reserve and it receives direction from a Board of Directors which in turn received direction from the Indian cultural centres which form the membership of XXXXXXXXXX. These members are all First Nations centres located almost entirely on reserve. XXXXXXXXXX activities are dedicated exclusively to the cultural and educational development of Indians who for the most part live on reserves.

XXXXXXXXXX also states that each Board member of XXXXXXXXXX is elected from one of the First Nations cultural centres which are required to obtain Band Council Resolutions (BCRs) of support in order to operate. Since each cultural centre operates under the mandate of its Chief and Council, and in many cases are personally directed by the local Chief and Council, XXXXXXXXXX is of the opinion that XXXXXXXXXX qualifies as an "Indian organization controlled by one or more such bands or tribal councils".

Our Comments

Paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act provide a tax exemption for an Indian's personal property situated on a reserve. The Courts have determined that employment income is personal property. Therefore, what must be determined is whether the employment income is situated on a reserve. The approach adopted by the Supreme Court of Canada in the case of Williams v. The Queen, 92 DTC 6320, requires the examination of all factors connecting income to a reserve to determine if the income is situated on the reserve.

Based on the guidance provided in Williams and after receiving representations from interested Indian groups and individuals, the Department identified a number of connecting factors that can be used to determine whether employment income is situated on a reserve. With a view to assisting the Indian community, the Department developed the Indian Act Exemption for Employment Income Guidelines (the "Guidelines"), incorporating the various connecting factors that describe the employment situations covered by the Indian Act. We have enclosed a copy of the Guidelines for your information.

XXXXXXXXXX letter was written on the assumption that Guideline 4 could cover the situation of the XXXXXXXXXX employees' situation. Please note that Guideline 4 requires a) that the employer is resident on a reserve; b) that 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 c) that the duties of the 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. These elements must all be satisfied in order for Guideline 4 to apply.

The term "employer is resident on a reserve" 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. 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. Where an organization, which would otherwise not be considered to be resident on reserve, is asserting that it satisfies the definition because it holds its board of directors meetings on reserve, it should generally be considered to satisfy the definition where management and control over the organization is legitimately exercised during those meetings. The concept of control in Guideline 4 is the kind that exists where there is power to command and direct. Where a band or tribal council can replace the directors of an organization, the band or tribal council could be said to control the organization.

In his letter, XXXXXXXXXX mentions that the XXXXXXXXXX Board of Directors is elected from the XXXXXXXXXX Indian cultural centres which form its membership. It may very well be that XXXXXXXXXX is therefore controlled by these cultural centres rather than by the Indian bands. The fact that the local Chief and Council sometimes directs the cultural centre personally does not necessarily mean that the band he represents controls the cultural centre: when the Chief directs the cultural centre, presumably he does so in his capacity as head of the cultural centre, not as Chief of the band. From the information provided in XXXXXXXXXX letter, we are unable to establish with certainty which entity controls XXXXXXXXXX. It is a question of fact whether the requirements of any particular Guideline are satisfied and the Tax Services Offices are better able to resolve these questions of fact.

Guideline 4 contemplates direct control of an Indian organization by an Indian band, as opposed to indirect control through tiered organizations. Guideline 4 is a generous interpretation of the direction provided by the Courts in Williams, so it is appropriate to restrict its application to situations that fit squarely within it.

In addition, as noted in our November 21, 1997, letter it remains a question of fact to be resolved as to whether almost all of the Indians served by XXXXXXXXXX must live on reserve.

The employment duties of XXXXXXXXXX employees would also have to be considered to determine if, as required under Guideline 4, they were 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. While XXXXXXXXXX may have a non-profit mandate, this does not necessarily mean that all of its activities are non-commercial.

With respect to question B) on page 2 of XXXXXXXXXX letter, we will comment that an organization resides where its central management and control is located and effectively performed. It is not sufficient to set up a head office on reserve and then schedule meetings, where the central management and control is effectively performed, to be held off-reserve.

If it is determined that Guideline 4 does not apply because Indian bands do not directly control XXXXXXXXXX, then some Indian employees of XXXXXXXXXX who live on reserves will wish to have Guideline 2 apply to their situation. Guideline 2 requires a) that the employer is resident on a reserve; and b) that the Indian is resident on a reserve. Both these elements must be satisfied in order for Guideline 2 to apply. Again, XXXXXXXXXX will only be resident on a reserve if its central management and control are effectively performed on a reserve. Again, it is a question of fact whether an Indian or an employer is resident on a reserve and the Tax Services Offices are better able to resolve these questions of fact.

Finally, with respect to XXXXXXXXXX question C), we are of the opinion that as long as the day-to-day financial management (bookkeeping, etc.) does not involve central management and control activities which are usually performed by the Board of Directors, then their relocation off-reserve would not constitute a violation of Guideline 4.

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

Attachments
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