15 October 1997 External T.I. 9719905 - INDIAN ACT EXEMPTION - GUIDELINE 2

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) Status Indian wishing to start a tree removal business. Client refers to a Revenue Canada letter of 1988 in which he is advised that the sole criterion is whether the employer resides on a reserve, in which case employment income was considered exempt. Client wishes to know whether this is still our position.

Position:

(1) Although position has changed, in this particular situation exemption could be granted provided certain conditions are met. The change in position resulted from court cases in which the exemption and the cases in which it is applicable, have been more precisely determined.

Reasons:

(1) Tax exemption may be granted under Guideline 2 provided the main purpose for the existence of the employer-employee relationship is not to establish a connecting factor between the employment income and a reserve. Guidelines 1 to 4 are the result of the guidance received from the courts in the Williams case which interprets the exemption under paragraph 81(1)(a).

5-971990
XXXXXXXXXX P.-A. Sarrazin

October 15, 1997

Dear XXXXXXXXXX:

Re: Indian Act Exemption for Employment Income

This is in reply to your letter dated September 7, 1997, in which you requested that we provide you with our comments on the applicability of the Indian Act exemption to your situation.

You mention that you wish to start a tree-removal business on the reserve, XXXXXXXXXX, and that you are a status Indian residing in XXXXXXXXXX.

You refer to a 1988 letter concerning employment income written by Mrs. A. Adams from the Department, in which she advises that "when the location of an employer is on a reserve, income earned by a status Indian for services on or off the reserve is non-taxable". You wish to find out whether this is still our position.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Department.

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 Supreme Court of Canada in the case of Williams v. The Queen, 92 DTC 6320, has directed that all factors connecting income to a reserve must be examined to determine if the income is located 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.

Based on the information submitted in your letter, it appears that you are contemplating a situation where employment income would be exempt from income tax by virtue of Guideline 2.

Please note that 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.

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. As regards Guideline 2, the Tax Services Office is in a better position to determine whether an employer is resident on a reserve and whether an Indian employee lives on a reserve.

It must also be established that one of the main purposes for the existence of the employer-employee relationship is not to establish a connecting factor between the employment income and a reserve. This determination would be a question of fact, which we cannot make from the information provided in your letter. This question of fact would need to be resolved by your Tax Services Office.

We trust that these comments will be of assistance. For further information on tax exemption, please contact your XXXXXXXXXX Tax Services Office at XXXXXXXXXX

Yours truly,

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

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