24 April 2003 External T.I. 2003-0012285 - TAXATION OF STATUS INDIANS EI BENEFITS

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 CCRA.

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

Principal Issues: Would a status Indian's EI payments be exempt from tax?

Position: Probably not, based on the information provided.

Reasons: EI benefits can be tax exempt if the employment income to which they relate was tax exempt. This individual was working off reserve, for off-reserve employers. The employment income was likely not connected to reserve and not tax exempt.

Gillian Shaw
Human Resources Development Canada
Human Resource Centre 2003-001228
50 Andrew Street South Renée Shields
Orillia ON L3V 7T5 (613) 948-5273

April 24, 2003

Dear Ms. Shaw:

Re: Taxation of Employment Insurance (EI) Benefits Paid to Status Indian

This is in response to your facsimile received on April 2, 2003 requesting our comments as to whether a status Indian is taxable on EI benefits paid with respect to certain periods of employment.

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. In Williams (92 DTC 6320), the Supreme Court of Canada reconsidered the approach to use in determining whether income is situated on reserve. The proper approach in determining the situs of personal property is to evaluate the various connecting factors which tie the property to one location or another.

Based on the guidance provided by Williams and after receiving representations from interested Indian groups and individuals, the Canada Customs and Revenue Agency ("CCRA") identified a number of connecting factors that can be used to determine whether employment income is situated on reserve. With a view to assisting the Indian community, the CCRA 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. In addition, the CCRA has developed a web site that provides information for status Indians. You can access the Guidelines and the Aboriginal web site at www.ccra-adrc.gc.ca/aboriginals/menu-e.html.

With respect to employment-related income, the Guidelines provide that employment insurance benefits will be exempt when received as a result of employment income that was exempt from tax. If a portion of the employment income was exempt, then a similar portion of these amounts will be exempt.

Accordingly, in order to determine if a status Indian's EI benefits are exempt from income tax, one has to determine if the employment income that created the EI entitlement was exempt from income tax. Because the confidentiality provisions of the Act prevent us from disclosing taxpayer information to unauthorized persons, we cannot disclose whether or not a specific individual's income from employment was taxable. We can, however, offer our general comments on the situation in the context of the Guidelines. We note that a conclusive determination of the Taxpayer's status is a question of fact that would have to be ascertained by his Tax Services Office. Our comments are therefore of a general nature and are not binding on the CCRA.

Guideline 1 would apply to exempt all of the income of an Indian if at least 90% of the employment duties are performed on a reserve. When less than 90% of the duties are performed on a reserve and none of the other guidelines apply, only the portion that is performed on a reserve is exempt from tax (the proration rule).

Guideline 2 would apply to exempt the employment income of employees who live on reserve provided that the employer is resident on reserve.

Guideline 3 would apply to exempt all of the income of an Indian if more than 50% of the employment duties are performed on a reserve and the employer is resident on a reserve or the Indian lives on reserve.

Guideline 4 requires that the employer is resident on a reserve. It also requires 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 that the duties of the employment are in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indian who for the most part live on reserve. These elements must all be satisfied in order for Guideline 4 to apply.

Where it is clear that a status Indian did not reside on a reserve and all of the individual's employment duties were performed off-reserve for an off-reserve employer, the employment income would not be exempt from taxation under paragraph 81(1)(a) of the Act and section 87 of the Indian Act. As a result, the EI benefits relating to that employment would be taxable.

In determining whether EI benefits are tax exempt, we suggest that you require the claimant to prove that his or her related employment income was tax-exempt under paragraph 81(1)(a) of the Act and section 87 of the Indian Act. The claimant could provide you with a copy of his or her T4, which would indicate if the employment income was exempt from income tax. Alternatively, the claimant could provide you with a copy of his or her income tax return with the appropriate Notice of Assessment accepting the individual's claim for the tax exemption. Finally, the claimant may request some form of approval from his or her local Tax Services Office.

We trust that these comments will be of assistance.

Yours truly,

Mickey Sarazin, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch