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Indigenous income tax issues : CRA and COVID-19

Guidance on the application of the Indian Act Exemption for Employment Income Guidelines to issues raised by the COVID-19 crisis

The following guidance will provide additional information on the Canada Revenue Agency’s (CRA) administrative position on the application of the Indian Act Exemption for Employment Income Guidelines as a result of the COVID-19 crisis. The CRA will continue to apply the guidelines in a similar manner as prior to the COVID-19 workplace restrictions except as described in the circumstances below.

Where an individual’s regular place of employment (full time or part time) was located on a reserve and changed solely because of the COVID-19 workplace restrictions, the CRA will continue to apply the guidelines as if the individual was still reporting to their regular workplace on a reserve.

Where central management and control of an employer was located on a reserve and has temporarily moved off reserve solely because of the COVID-19 workplace restrictions, the CRA will continue to treat that employer as a resident on the reserve.

Where an individual’s residency was on the reserve and temporarily changed to a location off reserve solely because of the COVID-19 territorial restrictions, the CRA will continue to treat the individual’s residency as if the individual was still living on the reserve.

The COVID-19 crisis has resulted in the imposition of safety measures by governments around the world, including Canadian governments, to protect the health of their citizens. Similarly, businesses have imposed safety measures to protect their employees. These measures include workplace closures and a reduction in the number of in-office workers (the COVID-19 workplace restrictions) to promote physical distancing and teleworking across an organization. The workplace restrictions have raised concerns about how to apply the Indian Act Exemption for Employment Income Guidelines to employment income.

This document describes potential issues considered by the Canada Revenue Agency (the CRA) and outlines the CRA’s approach to address each one. The issue may result from the workplace restrictions set by a federal, provincial, territorial, municipal, or Indigenous government. Also, some of the restrictions could have effect past the date on which they are officially lifted. The CRA will consider whether a tax issue has resulted due to the workplace restrictions on a case by case basis. The guidance in this document applies from March 16, 2020 to June 30, 2021. If necessary, the CRA may extend the application of this guidance.

The CRA’s administrative approach in addressing the issue is to help taxpayers during this time of crisis. This approach is not an interpretive position or an intention to establish any broader policy. Any taxpayer who tries to misuse the CRA’s temporary-relief positions stated in this document to claim a tax exemption that would not otherwise apply can expect the CRA to use all its compliance tools to protect the integrity of Canada’s tax system.

Eligibility for the tax exemption under section 87 of the Indian Act

The employment income of Indians, as that term is defined in 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 whether income is situated on a reserve, and exempt from tax, requires identifying the various factors connecting the income to a reserve and weighing the significance of each factor. To simplify the application of this connecting factors test for common employment situations, the CRA, together with interested First Nations organizations developed the Indian Act Employment Income Guidelines. The guidelines are an administrative tool intended to approximate the connecting factors test described by the Supreme Court of Canada in
Williams v. The Queen, 92 DTC 6320. The guidelines were intended to apply in common employment situations to help First Nations employees determine if their employment income was taxable. Unlike the connecting factors test, each guideline relies on only two or three elements, which are implicitly given significant weight in determining whether employment income is exempt from tax.

I. Employee who normally works on a reserve and Guideline 1 or 3 applies to exempt all of the employment income from tax

I. Employee who normally works on a reserve and Guideline 1 or 3 applies to exempt all of the employment income from tax

Guideline 1 exempts from tax all of the employment income if at least 90% of the duties of employment are performed on a reserve. Guideline 3 also exempts from tax all of the employment income if more than 50% of the employment duties are performed on a reserve, and either the employer is resident on a reserve or the employee lives on a reserve.

Under the guidelines, it is the CRA’s view that when determining the location where the duties of employment are performed, the most relevant location is the one where the employee has to perform the duties of employment under the terms of employment. In the case of telework arrangements, where the terms of an employment agreement require the employee to work for a certain period of time from a particular location, such as from a home office, this is the location where the employee has to perform the duties of employment. Generally, if the home office is located off reserve, the employment duties are considered to be performed off  reserve.

Potential issue

As a result of the workplace restrictions, employees who otherwise would have worked in the employer’s on-reserve location now have to telework from home offices off reserve. Since they are no longer performing their employment duties on a reserve, could this temporary move result in their employment income being taxable?

CRA position

The fact that an individual has been working off reserve only because of the workplace restrictions, will not, of itself, cause the CRA to reject the exemptions of guidelines 1 and 3. As an administrative matter and under the extraordinary circumstances, the CRA will consider the days during which an individual worked off-reserve only because of the workplace restrictions to count towards the 90% requirement for Guideline 1 and the 50% requirement for Guideline 3 for calculating the percentage of employment duties performed on a reserve. This will be the CRA’s position where, among other things, the individual usually performs the duties of employment on a reserve and intends to work, and does work, at the on-reserve location as soon as the restrictions are lifted.

II. Employee who normally performs a part of their employment duties on-reserve

II. Employee who normally performs a part of their employment duties on-reserve

Guideline 1 provides for a prorated exemption of employment income where an employee performs less than 90%, but more than an incidental proportion, of their duties on a reserve and none of the other guidelines apply to that income. The amount of the prorated exemption is based on the percentage of duties that are performed on a reserve.

Potential issue

As a result of the workplace restrictions, some employees, who would otherwise have performed part of their duties of employment on a reserve, now have to telework from home offices off-reserve. Since they are no longer performing any duties of employment on-reserve, the employees will lose the prorated exemption under Guideline 1 for the percentage of duties that would have been performed on a reserve.

CRA position

The fact that an individual has been working from an off-reserve home office only because of the workplace restrictions, will not, of itself, cause the CRA to reject the prorated exemption in Guideline 1. As an administrative matter and under the extraordinary circumstances, the CRA will consider the number of days or hours, as the case may be, during which an individual was forced to work off reserve only because of the workplace restrictions, to count towards the prorated exemption under Guideline 1. This will be the CRA position where, among other things, the individual usually performs part of their duties of employment on a reserve and intends to work, and does work, at the on-reserve location as soon as the restrictions are lifted.

III. Employer who normally resides on a reserve

III. Employer who normally resides on a reserve

For purposes of guidelines 2, 3, and 4, employers that have established offices on a reserve will be considered resident on a reserve only if their central management and control is located on a reserve throughout the year. One of the key factors typically considered in applying this concept is the location in which the meetings of the board of directors take place.

It is important to note that, notwithstanding that the CRA’s comments below that focus on the location of board meetings, there are more factors to consider when determining where central management and control of an employer is located.

The determination of the central management and control of a corporation is based on a number of factors, of which the location of board meetings is only one element. The CRA may still conclude that an employer is resident off reserve where the actual management and control takes place even though the board meetings have taken place on reserve.

Potential Issue

The workplace restrictions might have resulted in central management and control of a corporation having moved off reserve. For example, the directors may not have been able to physically attend board meetings on a reserve. If the directors of such employers participate virtually in board meetings while physically present in off-reserve locations, will the CRA consider the employer’s central management and control to be off reserve? This consideration relates to the income exemptions under guidelines 2, 3 and 4.

CRA position

Under the extraordinary circumstances and as an administrative matter, where central management and control is moved off reserve, the CRA will not consider the employer to become resident off reserve, as long as the central management and control was clearly and generally established on a reserve before the workplace restrictions. However, determinations of employer residency, involving multiple factors, will be determined on a case-by-case basis.

IV. Employee who normally resides on a reserve

IV. Employee who normally resides on a reserve

Guideline 2 exempts from tax all of the employment income of an employee when the employer is resident on a reserve and the employee lives on a reserve, regardless of where the duties of employment are performed. Under the guidelines, the phrase Indian lives on the reserve means the Indian lives on the reserve in a domestic establishment that is his or her principal place of residence and that is the center of his or her daily routine.

Potential issue

Individuals that rely on Guideline 2 and perform their duties of employment off-reserve, may be restricted from returning to their homes on-reserve because of travel restrictions put in place by a First Nation to prevent the spread of COVID-19 on its reserve (the COVID-19 territorial restrictions). Could this temporary move from on-reserve residence to off-reserve housing result in employment income being taxable?

CRA position

Where employees, who normally live on-reserve, are staying in off-reserve housing only because of the territorial restrictions, the employees will be considered resident on a reserve for the exemption under Guideline 2. As an administrative matter for the purposes of the Guidelines and under the extraordinary circumstances, the CRA will not consider an employee to be resident off-reserve during the period of time in which they stayed in off-reserve housing because they could not return to the reserve only because of the territorial restrictions. This will be the CRA’s position where, among other things, the employee usually resides on a reserve and returns to their home as soon as the restrictions are lifted.

Contact the CRA with your questions

If a taxpayer or an employer has a question about the above guidance or has a situation that is not addressed, please contact the CRA at [S87ECOVIDG@cra-arc.gc.ca].

Use of this mailbox is to allow the CRA to receive questions about the COVID-19 workplace restrictions and the exemption from tax under section 87 of the Indian Act. This may involve information up to the level of Protected B. Please include a phone number where the CRA can reach you.

The CRA will contact you, either at the number you provide if your question involves protected or personal information, or at the email address you provide if your question is only related to general information. The CRA will not respond through this mailbox to enquiries that are not related to the COVID-19 workplace restrictions.

The CRA does not provide assurance about the protection, confidentiality, or security of unsecured email. Using this mailbox, you accept the risks of sending information by unsecured email. You understand that all messages sent through this mailbox may be accessed and disclosed to unknown third parties anywhere in the world. You agree not to hold the CRA or its employees liable for any damage or loss resulting from the communication of personal information through this unsecured mailbox.

History

This section identifies any amendments made to the guidance.

Original issue date – November 27, 2020.

Update – January 11, 2021

The application of the guidance was extended from March 16, 2020 - December 31, 2020 to March 16, 2020 - June 30, 2021.

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