25 July 2006 External T.I. 2006-0190171E5 - Employment Income of a Status Indian Guideline 4

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: Is the employment income earned off reserve by status Indian employees of an Indian band exempt from taxation by virtue of Guideline 4?

Position: No

Reasons: All the requirements of Guideline 4 have not been met in the circumstances

								2006-019017
XXXXXXXXXX 							Kimberly Duval, CA
(613) 599-6054
July 25, 2006

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

This is in reply to your letter dated June 1, 2006, where you requested our comments with respect to the tax-exempt status of employment income earned by specific status Indian employees the XXXXXXXXXX (the "First Nation"). Specifically, you have asked for our opinion as to whether Guideline 4 of the Indian Act Exemption for Employment Income Guidelines would be applicable to exempt from income tax, employment income for prior years of employees working on the XXXXXXXXXX for the First Nation.

The situation outlined in your letter relates to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. However, as we explained to you in our letter of May 25, 2006, we are unable to provide a ruling in this case as your request relates to completed transactions relating to several prior periods. In addition, the request is primarily one of fact and the circumstances surrounding the application of Guideline 4 are such that all the pertinent facts cannot be established at any one time.

Although we have already discussed our general concerns with respect to the application of Guideline 4 in the circumstances with your associate, XXXXXXXXXX, we are prepared to provide the following written comments, which may be of assistance. Copies of our publications referred to in this letter are available on our web site at http://www.cra-arc.gc.ca/formspubs/menu-e.html.

Paragraph 81(1)(a) of the Income Tax Act (the "Act") and section 87 of the Indian Act provide a tax exemption for a status Indian's personal property situated on reserve. Because income is not a physical object, determining its location can be difficult. The Supreme Court of Canada addressed this problem in the 1992 case of Williams v. the Queen. The decision in Williams requires the identification of various factors connecting the particular income to a location either on or off a reserve. These factors are then analyzed to determine what weight they should be given in identifying the location of the property. If the most significant factors connect the property to a location on a reserve, the income will be tax exempt.

To facilitate this complex connecting factors determination, the Canada Revenue Agency ("CRA") consulted with interested Indian groups and individuals and developed the Guidelines. 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.

Guideline 4 exempts the employment income of a status Indian individual if certain conditions are met. As Guideline 4 is a generous interpretation of the direction provided by the Courts in Williams, it is appropriate to restrict its application to situations that fit squarely within it. Specifically, Guideline 4 requires that:

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 reserves.

All of these conditions must be met for the Guideline to apply.

Specifically, we draw your attention to the requirement listed in (c) above. This requirement of Guideline 4 requires that the individual's duties of employment must be 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.

First, it is questionable whether or not the duties of employment of employees working on the XXXXXXXXXX are in connection with the non-commercial activities of the band. XXXXXXXXXX.

Second, it seems unlikely that the duties of employment of the employees working on the XXXXXXXXXX are "exclusively" for the benefit of Indians. XXXXXXXXXX.

The final requirement of Guideline 4 requires that the employment duties of the employees benefit Indians "who for the most part live on reserve". Given that the majority (XXXXXXXXXX) of the First Nations registered members live off reserve, this requirement has not been met.

We trust our comments will be of assistance to you.

Yours truly,

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