26 October 2005 External T.I. 2005-0141321E5 - Taxation of employment income of a status Indian

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: Would Guideline 4 apply in a particular fact situation?

Position: Question of fact; however, likely not.

Reasons: Consistent with the Indian Act Exemption for Employment Income Guidelines - the "exclusively" test in element (b) of the requirements of Guideline 4 does not appear to be met as only 75% of the student population is status Indian

2005-014132
XXXXXXXXXX Kimberly Duval
(613) 599-6054
October 26, 2005

Dear XXXXXXXXXX:

Re: Application of Guideline 4 of the Indian Act Exemption for Employment Income Guidelines

This is in response to your letter of April 20, 2005 which was forwarded to us by the Surrey Tax Centre on July 8, 2005 requesting further comments on the application of Guideline 4 of the Indian Act Exemption for Employment Income Guidelines (the "Guidelines") with respect to the XXXXXXXXXX (the "Institution"), as an employer of status Indian individuals. Specifically, as a follow-up request to our letter dated March 1, 1994, you have asked us to confirm that the Institution would be considered a qualifying employer for purposes of the application of Guideline 4 such that income earned by its status Indian employees would be tax-exempt.

In your letter, you provide the following details:

1. Since inception in XXXXXXXXXX, the Institution has been Indian-owned and operated under the XXXXXXXXXX.

2. The Institution's administration and the operation of all classes are held at their campus location off reserve; however, the Board of Directors meet and conduct their business regularly on reserve.

3. The Institution is dedicated to the social, cultural, educational and economic development of Aboriginal peoples. Currently, the student population is made up of 75% status Indian and 25% Metis, Inuit, non-status or non-Aboriginal individuals.

4. The Institution offers programs that have a direct and meaningful connection to Indian bands and issues affecting the reserves as most of the status Indian students attending the Institution ordinarily reside on reserve.

Our Comments

The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, Advance Income Tax Rulings (which can be accessed on the Canada Revenue Agency ("CRA") website at the following address: http://www.cra-arc.gc.ca), it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, the following general comments, which are not binding on the CRA, may be of assistance.

As you are aware, paragraph 81(1)(a) of the Income Tax Act (the "Act") and section 87 of the Indian Act provide a tax exemption for an Indian's personal property situated on reserve. The courts have previously determined that, for purposes of section 87 of the Indian Act, the reference to personal property includes employment income. Because of the nature of income, it can be difficult to determine whether it is situated on a reserve. In this regard, the Supreme Court of Canada established the general principle in the 1992 Williams decision that all of the factors connecting income to a reserve must be identified and analyzed to determine what weight they should be given in determining the location of the property. If the most significant factors connect the income to a location on a reserve, the income will be tax-exempt.

Based on the guidance provided by the decision in Williams and after receiving representations from interested Indian groups and individuals, the CRA identified a number of connecting factors that can be used to determine whether employment income is situated on a reserve. Generally, the most common factors connecting employment income to a reserve are the place where employment duties are performed, the residence of the employee, and the residence of the employer. Although the Guidelines do not cover every employment situation, they are a useful administrative tool for status Indians and for CRA employees to be able to work with the very broadly worded tax exemption provided by the Indian Act and the Act.

Whether any of the Guidelines apply in a particular situation is a question of fact which would require a review of all of the pertinent information and details of the situation. In the case of Guideline 4, it will apply to exempt the employment income of a status Indian if all of the following elements are satisfied:

(a) the employer is resident on a reserve,

(b) 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) 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 a reserve.

An employer is resident on a reserve, for purposes of element (a) above, if 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 the 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 at a place other than the principal administrative office of the organization.

Where an organization, which would otherwise not be considered to be resident on a reserve, is asserting that it satisfies the definition because it holds its board of directors meetings on a reserve, it would generally be considered to satisfy element (a) provided its management and control is legitimately exercised during those meetings on reserve. A review of all the facts surrounding this situation including a review of the minutes of the board of directors' meetings and resolutions or by-laws passed thereat would be required to conclusively resolve this question of fact.

For purposes of element (b) above, the intention of the word "exclusively" is to restrict Guideline 4 to those organizations, which are dedicated solely to the social, cultural, educational or economic development of Indians, as defined in subsection 2(1) of the Indian Act to mean " a person who is registered as an Indian or who is entitled to be so registered". Where an organization offers services which are not exclusively for the benefit of status Indians, the organization will not qualify under Guideline 4. We note that only 75% of the current student population enrolled with the Institution consists of status Indian students. Because of this fact, the "exclusively" test would not be met.

As we have not been provided sufficient details regarding the employment duties of each employee, we are unable to establish whether element (c) of Guideline 4 would be met in the circumstances. Further, we are unable to establish whether the duties carried out by the Institution's employees' are carried on for the benefit of Indians who for the most part live on a reserve. Such a determination would require a review of all the Indians enrolled with the Institution, to determine the percentage of students living off reserve.

We trust that these comments will be of assistance.

Yours truly,

John Oulton, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch