Transcript - Payroll: Section 87 and First Nations Workforces

Hello and welcome to Payroll: Section 87 and First Nations Workforces.

I’m Lori, your host for today.

I will begin by acknowledging that the land on which I am located is the traditional unceded territory of the Algonquin Anishinaabeg People. The Algonquin peoples have lived on this land since time immemorial. I am grateful to have the opportunity to be present in this territory. Given that we are meeting virtually, I also want to acknowledge the lands on which you are gathered from coast to coast to coast and invite you to take a moment to acknowledge the territory in which you find yourself.

For today, please click on the question icon in the tool bar at the top of the screen to ask a question related to Payroll: Section 87 and First Nations Workforces. We’ll answer as many as we can during the webinar. For any other tax related questions, please call the business enquiries line at 1-800-959-8281.

If you are a business hiring First Nations employees, and you have internet access, this webinar may be for you.

Let’s get started.

Today, we’ll talk about:

• Payroll operations
• Payroll differences for businesses with First Nations employees
• Section 87 of the Indian Act
• Income Tax
• Canada Pension Plan (CPP)
• Employment Insurance (EI)
• Registered pension plan benefits
• Reporting
• Payroll Obligations

First, though, the CRA recognizes that many Indigenous peoples in Canada prefer not to be described as Indians. However, the word Indian is used in the presentation due to its legal meaning in the Indian Act, hereinafter called the Act.

If you are a newly appointed member of a band council and your job involves payroll, then the first step will be to access your First Nations band profile, which is a collection of information

that describes individual First Nation communities across Canada.

Ensure that the information listed is up to date. Indigenous Services Canada maintains the First Nations Profiles that also contain lists of council officials, and expiry dates. This information is updated every 24 hours.

First Nations Public Administration employers will need to verify the information on that website to have accounts updated with CRA. This can be done at Change of owners, partners or directors.

Should your First Nation group share a tribal council with other First Nation groups, once the proper council members have been updated, any of the council members listed with CRA can authorize a representative for your First Nation account, if needed.

If you are an employer, with employees registered under the Act or entitled to be registered under the Indian Act and whose employment income “is situated on a reserve”, in accordance with the criteria established by the jurisprudence, their income may be tax exempt.

Employment income of someone registered or entitled to be registered under the Indian Act is exempt from income tax under paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian 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 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 CRA together with interested First Nations organizations, developed the Indian Act Exemption for Employment Income Guidelines.

There are four Guidelines, and they only apply to employees who are First Nations individuals however, it is important to note that those guidelines are only 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.

If you have questions about a particular situation, please call us at 1-800-959-5525.

Guidelines:

When at least 90% of the duties of an employment are performed on a reserve, all of the income of a First Nation employee from that employment will usually be exempt from income tax.

When less than 90%, of the duties of an employment are performed on a reserve and the employment income is not exempted by another guideline, the exemption is to be prorated. The exemption will apply to the portion of the income related to the duties performed on the reserve.

The employer is resident on a reserve; and the First Nation employee lives on a reserve; all of the income of a First Nation employee from an employment will usually be exempt from income tax.

More than 50% of the duties of an employment are performed on a reserve; and the employer is resident on a reserve, or the First Nation employee lives on a reserve; all of the income of a First Nation employee from an employment will usually be exempt from income tax.

The employer is resident on a reserve; and the employer is:

• a First Nation band which has a reserve
• or a tribal council representing one or more First Nations bands, which have reserves
• or a First Nation 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 First Nations, who, for the most part live on reserves; and the duties of the employment are in connection with the employer's non-commercial activities carried on exclusively for the benefit of First Nations, who, for the most part, live on reserves; all of the income of a First Nation employee from an employment will usually be exempt from income tax.

Where it is established that employment income paid to a First Nations employee is exempt from tax, the employee can ask his or her employer not to deduct income tax at source. Form TD1-IN, Determination of Exemption of an Indian's Employment Income, will help employers determine the appropriate tax treatment for employees. Form T90, Income Exempt from Tax Under the Indian Act, will help employees report on tax exempt income.

Where employers determine that all or a proportion of a First Nation employee's employment income is exempt under section 87 of the Act, the employers have to keep a completed copy of Form TD1-IN for each of these employees, in case the CRA asks them to see the forms later.

All the examples below involve individuals, who are registered or entitled to be registered under the Indian Act.

Mrs. G lives off reserve and works for a stationery store located off reserve. On rare occasions, Mrs. G delivers some of the store's goods to customers on reserve. None of her income is exempt. The trips to the reserve are merely occasional and are not a meaningful connecting factor.

Mrs. H works for a logging company that is resident on a reserve. Mrs. H lives on a reserve, but performs her duties at lumber camps located off the reserve. Her employment income is exempt from income tax because the place where she lives and the residence of her employer are factors connecting her income to a reserve.

Mr. E lives off reserve and works for a government department, mostly at a location off reserve. He spends one-half day per week on a regular basis working in a clinic on a reserve. Since one- tenth of Mr. E's work is performed on a reserve, 10% of Mr. E's income from this employment is exempt.

Income from employment or self-employment, that is exempt from tax under section 87 of the Act is also exempt from CPP contributions. However, an employer may decide to participate in the CPP on behalf of all their employees by filing Form CPT124. Once the employer makes the election, they cannot revoke it. This is the same for Public Administration accounts, even if new band leaders are elected. See Form CPT 124, Application to Cover the Employment of an Indian in Canada under the Canada Pension Plan whose Income is Exempt under the Income Tax Act.

If an employer has chosen not to cover the employment under the CPP, an employee can elect to participate in the CPP by filing Form CPT 20, Election to Pay Canada Pension Plan Contributions. The employee will then make CPP contributions on the income as part of their personal income tax and benefit return.

For information about the Quebec Pension Plan, contact Revenu Québec.

EI premiums are not considered taxes and are not exempt under section 87 of the Act. Accordingly, tax-exempt salary or wages paid to a First Nation employee are subject to EI premiums. As well, EI benefits received by a First Nation employee are not taxable if the benefits relate to employment that was exempt under section 87.

If you receive registered pension plan benefits as a result of employment income that was exempt from income tax under section 87 of the Act, the registered pension plan benefits will also be exempt from income tax.

If a portion of your employment income was exempt, then a similar portion of the related registered pension plan benefits will be exempt from income tax. This exemption also applies to

CPP, QPP, EI benefits, retiring allowances and wage-loss replacement benefits received as a result of tax exempt employment income.

Employers have to report on a T4 slip employment income that is exempt under section 87 of the Act. On the slip, an employer will enter code "71" in the area called "Other information." Other useful codes include:

• Code 88 Indian Act (exempt income) - Self-employment
• Code 94 Indian Act (exempt employment income) - RPP contributions
• Code 95 Indian Act (exempt employment income) - Union dues.

Nevertheless, for the employee to calculate their Canada workers benefit for the tax year and for provincial or territorial benefits, they will need to report the income using Form T-90 Income Exempt from Tax Under the Indian Act.

Pensionable earnings must be reported in Box 26 of the T4 slip if an employer has elected to cover exempt employment income of a First Nation employee under the Canada Pension Plan.

Employers and payers have a legal obligation to report all income paid to and deductions withheld from First Nations workers (employees or self-employed workers) on a T4 or T4A slip

regardless of whether the income is taxable or exempt. For more information, go to:

Payments to First Nations workers - Calculate payroll deductions and contributions.

Employers are expected to meet their payroll obligations, including those specific to employees with tax-exempt income.

Today we discussed:

• Payroll operations
• Payroll differences for businesses with First Nations employees
• Section 87 of the Indian Act
• Income Tax
• CPP
• EI
• Registered pension plan benefits
• Reporting
• Payroll Obligations

Tax administration is as complex as life itself. If the content today doesn’t quite fit your situation, please:

• Visit our web site.
• Visit Payments to First Nations workers Calculate payroll deductions and contributions - Canada.ca
• Visit Taxes and benefits for Indigenous peoples - Canada.ca
• Visit Canada.ca/cra-liaison-officer to get free tax help from a liaison officer.
• Visit Assisted Compliance program - Canada.ca
• Call CRA’s business enquiries line at 1-800-959-5525.

You can also go to canada.ca/cra-videos where you’ll find all our business webinars.

We’ve come to the end of our webinar. Please click on the survey icon in the tool bar at the top of the screen to fill out the evaluation form for this webinar. Thanks for joining me today. I hope it’s been helpful. Stay tuned for more webinars in the coming months! Good bye.