Information on the tax exemption under section 87 of the Indian Act

Throughout the following text, for purposes of the tax exemption under section 87 of the Indian Act, the Canada Revenue Agency (CRA) uses the term “Indian” because it has a legal meaning in the Indian Act.

We want you to be aware of tax benefits and requirements that apply to you as an individual who is an Indian as defined in the Indian Act. On these pages, you will find general information on income tax, the goods and services tax/harmonized sales tax (GST/HST) and excise tax. There may be exceptions to the information we have provided here, and we have not dealt with all situations.

Table of contents

Overview

Throughout the following text, for purposes of the tax exemption under section 87 of the Indian Act, the CRA uses the term “Indian” because it has a legal meaning in the Indian Act.

As an Indian, you are subject to the same tax rules as other Canadian residents unless your income is eligible for the tax exemption under section 87 of the Indian Act. That exemption applies to the income of an Indian that is earned on a reserve or that is considered to be earned on a reserve, as well as to goods bought on, or delivered to, a reserve.

Daniels decision

The 2016 Supreme Court of Canada decision in Daniels v. Canada, 2016 SCC 12, declared that Métis and non-status Indians are “Indians” for the purpose of federal Parliament’s law-making jurisdiction under subsection 91(24) of the Constitution Act, 1867. However, this decision did not change who is an “Indian” in the Indian Act.

The tax exemption available under the Indian Act only applies to an individual who is an “Indian” as defined in the Indian Act. Therefore, the Daniels decision does not change the group of individuals currently eligible for the tax exemption. We will continue to apply and administer the Indian Act tax exemption in the same way as prior to the Daniels decision.

Benoit legal decision

On June 11, 2003, the Federal Court of Appeal ruled that Treaty 8 does not provide a general tax exemption.

Refer to the Federal Court of Appeal reasons for judgment in the Benoit case.

Mr. Benoit and the Treaty 8 plaintiffs subsequently filed an application for leave to appeal the decision to the Supreme Court of Canada. On April 29, 2004, the Supreme Court of Canada dismissed the application for leave to appeal. The Court of Appeal's decision is now valid and binding.

While it is now clear that Treaty 8 Indians are not entitled to a general tax exemption, if the property of a Treaty 8 Indian is situated on a reserve, it continues to be eligible for the tax exemption under section 87 of the Indian Act.

Self-governing agreements

If you are a member of a First Nations group that has negotiated a self-governing or tax agreement with the Government of Canada, the information on these pages may not apply to you. To find out, contact your First Nations government.

For more information

If you have questions, call us toll free at 1-800-959-8281.

Tax exemption

If you have personal property-including income-situated on a reserve, that property is exempt from tax under section 87 of the Indian Act. Contact your local band office to find out if a tract of land is a reserve for purposes of this exemption. If your band is not certain about the status of the land, contact Indigenous and Northern Affairs Canada.

Facts

  • A tax exemption for Indian property situated on reserves has existed since before Confederation.
  • The Supreme Court of Canada has stated that this exemption is linked to the protection of reserve land and property.
  • The Court has concluded that the purpose of the exemption is to make sure tax does not erode the use of Indian property on reserves.
  • The Court has indicated that this tax exemption is not intended to remedy the economically disadvantaged position of Indigenous people in Canada or bring economic benefits to them.

Also, based on Supreme Court decisions, Indian property not situated on a reserve will generally be subject to tax just like property held by other Canadians.

Bill C-3

If you are entitled to be registered as an Indian under Bill C-3 (also known as the Gender Equity in Indian Registration Act, SC 2010, c.18), you may qualify for the section 87 tax exemption for property situated on a reserve starting on January 31, 2011. This is the date that Bill C-3 came into effect. Only income you earn, or purchases you make on a reserve, on or after January 31, 2011, may be exempt from tax.

Proof of registration with Indigenous Services Canada (ISC) is required by the CRA to claim the tax exemption.

For general information about Bill C-3 including how to register as an Indian with ISC, please visit Indigenous Services Canada.

Bill S-3

Bill S-3, An Act to amend the Indian Act in response to the Superior Court of Quebec decision in Descheneaux c. Canada (Procureur général), SC 2017, c.25, makes two sets of amendments, each with its own effective date.

The first set of amendments made by Bill S-3 came into force on December 22, 2017, and addressed issues resulting from the Descheneaux decision including specific situations of residual sex-based inequities in Indian registration. These inequities involve issues with respect to siblings, cousins, omitted minor children, and instances where parentage is unknown or unstated.   

If you are entitled to be registered as an Indian under the first set of amendments, you may qualify for the section 87 tax exemption for property situated on a reserve starting on December 22, 2017. Only income you earn, or purchases you make, on a reserve, on or after December 22, 2017, may be exempt from tax.

The second set of amendments made by Bill S-3 came into force on August 15, 2019, and ensures that all descendants born prior to April 17, 1985 (or of a marriage before that date) of women who lost status or were removed from band lists because of their marriage to a non‑Indian man going back to 1869 will be entitled to registration.

If you are entitled to be registered as an Indian under the second set of amendments of Bill S‑3, you may qualify for the section 87 tax exemption for property situated on a reserve starting on August 15, 2019. Only income you earn, or purchases you make, on a reserve, on or after August 15, 2019, may be exempt from tax.

Proof of registration with Indigenous Services Canada (ISC) is required by the CRA to claim the tax exemption.

For general information about Bill S-3 including how to register as an Indian with ISC, please visit Indigenous Services Canada.

Qalipu Mi'kmaq First Nation

The Qalipu Mi’kmaq First Nation was established in 2011 as a landless band.

Founding members

If you are entitled to be registered as an Indian under the Indian Act because of the creation of the Qalipu Mi’kmaq First Nation, you may qualify for the section 87 tax exemption for property situated on a reserve starting from the coming into force date of the Order in Council adding your name to the Founding Members List. There are five Orders in Council that have come into force on September 22, 2011, October 12, 2011, March 30, 2012, June 20, 2012, and June 25, 2018. Only income you earn, or purchases you make on a reserve, on or after the date of the specific Order in Council that added your name to the Founding Members List may be exempt from tax.

A number of individuals who no longer meet the criteria for founding membership were removed from the updated Founding Members List under the June 25, 2018 Order in Council. Individuals who were removed from the Founding Members List were also removed from the Indian Register if they were unable to retain their registered Indian status under a different provision of the Indian Act. If you were removed from the Indian Register on August 31, 2018, you are no longer registered as an Indian under the Indian Act. Income you earn, or purchases you make on or after August 31, 2018 will not qualify for the exemption from tax. The CRA will not be seeking repayment of any tax exemption for which you qualified while you were registered as an Indian.

If you do not know when you were added to the Founding Members List or when you were entitled to be registered, please visit the Canada Gazette website and enter your name in the search function to obtain your effective date of registration or entitlement to registration. If you were added to the Founding Members List in 2018, you will not be able to use the search function to obtain your date of registration; however, you would have received a letter from Crown-Indigenous Relations and Northern Affairs Canada (CIRNAC) dated July 31, 2018, confirming your registration under the Indian Act. Your effective date of registration is June 25, 2018. Similarly, if you were removed from the Founding Members List and the Indian Register in 2018, you would have received a letter from CIRNAC dated August 31, 2018, advising of the removal of your name from the Indian Register. Your effective date of removal is August 31, 2018.

Children of the founding members

If you are entitled to be registered because you are a child of a founding member of the Qalipu Mi’kmaq First Nation, you will be entitled to be registered on the same date your parent was entitled to be registered unless you were born after that date. In that case, you would be entitled to be registered at the date of your birth. If you are no longer entitled to be registered because your parents were removed from the Founding Members List on August 31, 2018, your entitlement to be registered and your eligibility to receive the tax exemption will expire on August 31, 2018, unless you are added as a founding member on the Founding Members List. Only income you earn, or purchases you make on a reserve, on or after the date you are entitled to be registered may be exempt from tax.

Proof of registration with Indigenous Services Canada (ISC) is required by the CRA to claim the tax exemption.

For more information about how to register as an Indian with ISC, please visit Indigenous Services Canada.

To learn more about the Qalipu Mi’kmaq First Nation enrolment process and the 2018 updates to Founding Members List, visit Have you applied to join the Qalipu Mi'kmaq First Nation.

Employment income

Throughout the following text, for purposes of the tax exemption under section 87 of the Indian Act, the CRA uses the term “Indian” because it has a legal meaning in the Indian Act.

Employment income 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. If your employment income is exempt from tax, you do not have to include that income when you file your personal income tax return. If you live in a province that provides child and family benefits which are based on family income, it may be to your advantage to report your exempt income when you file your personal income tax return in order to maximize your provincial benefit entitlements. To ensure that you retain tax-exempt status in respect of the reported amounts, you should contact us toll free at 1-800-959-8281 for instructions on how to report the amounts.

The courts have established that determining whether income is situated on a reserve, and thus exempt from tax, requires identifying the various factors connecting the income to a reserve and weighing the significance of each factor. This is referred to as the “connecting factors test”.

The Indian Act Exemption for Employment Income Guidelines will help you determine whether your employment income is considered to be situated on a reserve. The guidelines are an administrative tool and deal with the most common employment situations. After each guideline, there are examples showing how the guideline applies.

Uncommon employment situations

In some situations, there are other uncommon factors that result in employment income being treated differently than the typical scenarios the Guidelines describe. In such cases, any factors connecting the income to a reserve must be analysed in accordance with the various court decisions to determine if the tax-exemption applies. The following link provides Examples of uncommon employment situations where the guidelines do not apply.

If you need help, call us toll free at 1-800-959-8281.

Expenses such as union dues and registered pension plan contributions are deducted from the specific source of employment income that they relate to. The net amount of this employment income will be exempt from taxes if the employment income is considered to be situated on a reserve. Any expenses that relate to employment income that is tax-exempt cannot be claimed as deductions against other taxable sources of employment income.

Note

A number of court decisions have dealt with tax-planning arrangements using section 87 of the Indian Act. Please follow this link for a discussion of “employee leasing” arrangements.

Employment-related income

Throughout the following text, for purposes of the tax exemption under section 87 of the Indian Act, the CRA uses the term “Indian” because it has a legal meaning in the Indian Act.

Employment Insurance benefits, Canada Pension Plan benefits, Quebec Pension Plan benefits, registered pension plan benefits, retiring allowances, and wage-loss replacement plan benefits you receive are treated in the same way as the employment income that gave rise to the particular income. In other words, if your employment income is exempt from income tax under section 87 of the Indian Act, your employment-related income will also be exempt. If part of your employment income is exempt, any employment-related income arising from that exempt income will also be exempt from income tax.

Registered pension plan benefits

If you receive registered pension plan (RPP) benefits as a result of employment income that was exempt from income tax under section 87 of the Indian Act, the RPP benefits will also be exempt from income tax. If a portion of your employment income was exempt, then a similar portion of the related registered pension plan benefits will be exempt from income tax.

Pension transfers from an RPP to an RRSP/RRIF

If you transferred an amount from your registered pension plan (RPP) to a registered retirement savings plan (RRSP), and the registered pension plan related to employment income that was wholly or partially exempt from income tax under section 87 of the Indian Act, the amounts you receive from the RRSP will also be wholly or partially tax-exempt in the same proportion. This also applies to payments from a registered retirement income fund (RRIF). Any RRIF payments you receive will be taxed in the same manner as payments from the particular registered plan from which property was transferred to the RRIF.

Pension benefits on marriage breakdown

If you are an Indian and receive your share of your former spouse’s or common-law partner’s pension benefits as a result of the breakdown of your marriage or common-law partnership, and it relates to your former spouse’s or common-law partner’s employment income that was wholly or partially exempt from income tax under section 87 of the Indian Act, the amounts you receive will also be wholly or partially exempt from income tax. In addition, to be eligible for the exemption, you must have a right to an interest in the pension benefits and be legally entitled to the pension income.

Survivor pension benefits

If you are an Indian and, as a beneficiary, receive survivor pension benefits that relate to the deceased member’s employment income that was wholly or partially exempt from tax under section 87 of the Indian Act, the amount you receive will also be wholly or partially exempt from income tax in the same proportion as the employment income to which it relates.

Business income

Throughout the following text, for purposes of the tax exemption under section 87 of the Indian Act, the CRA uses the term “Indian” because it has a legal meaning in the Indian Act.

A business is an activity that you intend to carry on for profit and includes:

  • a profession
  • a calling
  • a trade
  • a manufacture
  • an undertaking of any kind
  • an adventure or concern in the nature of trade.

For more information about calculating and reporting your business income or loss, see Small business and self-employed income.

The information on this page is for sole proprietorships, partnerships, and self-employed individuals with business income that may be exempt from tax if that income is situated on a reserve. If your business is incorporated, this information does not apply to you because section 87 of the Indian Act does not apply to corporations, even if they are owned or controlled by an Indian.

Connecting factors for business income

If your business income is situated on a reserve, it is exempt from tax under section 87 of the Indian Act. The courts have established that determining whether income is situated on a reserve, and thus exempt from tax, requires identifying the various factors connecting the income to a reserve and weighing the significance of each factor. This is referred to as the “connecting factors test”.

Your business income is generally exempt from tax when the actual income-earning activities of the business take place on a reserve. If your business activities are mostly carried on off a reserve, your business income would generally be considered taxable because the exemption under section 87 does not apply.

When applying the connecting factors test to business income, the courts have indicated that the most significant connecting factors are:

  • where the income earning activities of the business take place
  • the type of business and the nature of the business activities
  • where the management and decision making activities of the business take place
  • where the customers are located

Other connecting factors that the courts have found to be less significant are:

  • whether or not you live on a reserve
  • whether you maintain an office on a reserve or take business orders from a location on a reserve
  • whether your books and records are kept on a reserve
  • whether your administrative, clerical, or accounting activities take place on a reserve

The above listing of connecting factors is not an exhaustive listing since there are other potential connecting factors that could apply depending on the fact situation. In addition, a connecting factor will have different relevance and weight depending upon the specific facts of each case. As a result, there is no standard test that can be used to determine if business income is situated on a reserve.

The following examples may help you determine if your business income is situated on a reserve, and thus exempt from tax.

Note 

Each of the individuals in the following examples is registered as an Indian under the Indian Act. The examples concern income tax only and do not discuss GST/HST implications. 

Business Income – Example 1

John lives on a reserve and operates an independent logging business as a sole proprietorship. He cuts timber on land off the reserve for a logging company that is located and sells it off the reserve. In the absence of other factors, John's income from this business is considered to be taxable, because his income-earning activities and customer is off the reserve.

Business Income – Example 2

Delia owns a retail store on a reserve. The store sells goods to both Indian and non-Indian customers. Since Delia's business activities take place on a reserve, her income from this business is tax-exempt.

Business Income – Example 3

Peter operates a trucking business that hauls logs from cutting sites located off-reserve to logging mills located off-reserve.  His only customer is a logging company that is not located on a reserve. Peter has a garage on a reserve where he stores his trucks and an on-reserve office where he keeps the books and records for the business.  Peter travels 20 kms from his off-reserve home each day to pick up his truck from the on-reserve garage. He then travels to the off-reserve cutting sites. Peter spends a few hours each week doing the bookkeeping for the business at the on-reserve office.

Peter’s self-employed income is considered to be taxable. The following factors are the most significant and connect the income off-reserve:

  • The income-generating activities of hauling lumber occurs off-reserve.
  • The business’ only customer is located off-reserve.
  • Most of the business decisions are made off-reserve.
  • Peter does not live on-reserve.

The on-reserve activities are limited to providing a place to park the trucks when not in use and maintain the books and records. These factors are not significant enough to connect the business income to a reserve.

Business Income – Example 4

Ronald operates a business that clears land off-reserve for oil and gas companies. He has always lived on a reserve and is an active member of his First Nation’s community. He started and grew his business with his wife from a home office on-reserve. It is from this office that Ronald bids on contracts for new business, negotiates contracts, and completes pre-qualifying questionnaires for the potential customers in order to qualify for the bidding process. The workers are hired, trained and dispatched to off-reserve work-sites from the home office on-reserve. While the workers are at work-sites, Ronald ensures from the home office on-reserve that the workers are managed properly and that they have the equipment and supplies needed to carry out their duties. All equipment for the business is stored on-reserve when not in use and all of the books and records for the business are stored and maintained at the home office on-reserve.
This type of business has been characterized by the courts as “nomadic”, as it has a base in one area (on-reserve), while engaging in work activities in other areas (off-reserve). The courts have held that the fact that the work activities were undertaken off-reserve would not in and of itself result in the income earned being situated off-reserve.
In this scenario, Ronald’s self-employed business income is tax-exempt. The following factors are given the most weight and connect the income to a reserve:

  • On-reserve effort expended obtaining contracts since the nature of the business is performing contracts obtained on a competitive bid process.
  • On-reserve location where the management and decision-making activities take place.
  • The owner not only lives on the reserve but has a strong connection to the community on the reserve and started and grew the business on the reserve.

Note

All of the connecting factors have to be considered when determining whether or not business income is connected to a reserve. If you need help, call us toll free at 1-800-959-5525

Prorating business income and expenses

If some of your revenue-generating activities take place on a reserve and the rest off a reserve, the tax exemption under section 87 of the Indian Act may be prorated. Part of your income will therefore be taxable, and part will be exempt from tax. In such a case, your business expenses will generally be allocated to the taxable part of your income in the same ratio, unless another allocation can be shown to be more reasonable.

Business Income (Proration) – Example 5

Arnold works as a self-employed plumber. Arnold lives off a reserve, and operates out of an office that is located off a reserve. He earns 60% of his revenue from providing plumbing services to customers who live on a nearby reserve. As a result, 60% of Arnold's plumbing income is tax-exempt. Arnold can deduct 40% of his business expenses from the 40% of his plumbing income that is subject to tax, unless the facts indicate that it would be more reasonable to allocate his revenue and expenses differently.

Partnership

If you are a member of a partnership, your partnership income will be taxed in the same way as any other business income. For purposes of section 87 of the Indian Act, the key factors to consider will be similar to those set out above under the heading Connecting factors for business income.

Under the Income Tax Act, partnership income is first calculated as if the partnership were a separate person. Your share of the partnership income from each source will be allocated to you, and will retain its characteristics as to source and nature.

Business Income (Partnership) – Example 6

Gayle is a 50% partner in a partnership that runs a gas station and convenience store on a reserve. The other 50% of the partnership is owned by an individual who is not registered as an Indian. The gas station and convenience store earns all of its income from sales to customers on the reserve. There is a small office in the convenience store where the books and records are kept and where all business decisions are made.

The following factors show a strong connection to the reserve:

  • All of the partnership’s income generating activities are on-reserve.
  • All sales are made on-reserve.
  • All of the business decisions are made on-reserve.

The partnership’s income that is allocated to Gayle is tax-exempt.

Fishing

Throughout the following text, for purposes of the tax exemption under section 87 of the Indian Act, the CRA uses the term “Indian” because it has a legal meaning in the Indian Act.

If you carry on a commercial fishing business, your income from that business is generally treated the same as any other business income. Determining whether your business income is exempt from tax is based on the factors that connect income to a reserve.

In determining whether your commercial fishing business income is connected to a reserve, factors that may connect your business income to a reserve are (i) the location of your fishing activities – catching, preparing and transporting the fish and (ii) the location of your selling activities - including the location of your customers, and the location of the sale of the fish. Your income from a commercial fishing business is generally exempt from tax if the actual fishing activities of your business take place within the geographic boundaries of a reserve. If your fishing activities take place mainly off-reserve and your customers are located off-reserve, your fishing income may not qualify for the exemption under section 87 of the Indian Act. However, other connecting factors, described below, may apply to exempt your fishing income from tax.

On March 20, 2012, the Federal Court of Appeal (FCA) released its decisions in the cases of Ron Ballantyne v. Her Majesty the Queen and Her Majesty the Queen v. Ronald Robertson and Roger Saunders (leave to appeal to the Supreme Court of Canada denied October 25, 2012). In both cases, the FCA found that the fishing income earned by the taxpayers was situated on a reserve and exempt from tax.

The CRA will apply these decisions in similar situations, where the connections between the reserve and the fishing income are bona fide and there is no artificial manipulation of the connecting factors, to exempt all of your fishing income from tax for the 2012 and following tax years.

A similar situation means that all of the following conditions are met:

  • Your fishing activities in waters near or abutting the reserve have a significant historical and continuing important economic connection to the reserve; and
  • You are a member of a cooperative of band members or a member of a band that owns and operates an organization located on the reserve that has a predominant role in your fishing and selling activities and an important role in the general economic life of the reserve.

Where the above conditions are not met and your fishing and selling activities take place off-reserve, your income from fishing will likely be taxable. Where these activities take place both on- and off-reserve, the tax exemption provided for under section 87 of the Indian Act may be prorated. Some of the revenue-generating activities may include preparing the fish for market (e.g., filleting, shelling, icing, canning, freezing, smoking, salting, cooking, and pickling). If this type of processing takes place on a reserve, part of your business income may be exempt, depending on the extent and complexity of the processing done.

The allocation of income between off-reserve fishing activities and on-reserve fish-processing activities is determined on a case-by-case basis and should be reasonable in the circumstances. Since your main revenue-generating activities are catching and selling the fish, the exemption, if any, would usually apply only to that portion of your fishing income that specifically relates to the value-added processing activities that are conducted on a reserve. Your business expenses are generally allocated in the same proportion as your revenues, unless another allocation is more reasonable in the circumstances.

Business Income (Fishing) – Example 7

Grant is a self-employed Indian who lives on a reserve. The fishing activities of the reserve’s Band members in ocean waters near the reserve have a significant historical role in the life of the reserve. Grant is a member of a cooperative of Band members that has a predominant role in the fishing activities on the reserve. Although he sells his catch to off-reserve customers, it is through the cooperative, whose on-reserve activities play a predominant role in the fishing activities of the Band members of the reserve. He keeps his boat and equipment on the reserve. He earns his income from fishing in the ocean waters near the reserve. Therefore, Grant’s fishing income is exempt because he meets all of the above conditions.

Business Income (Fishing) – Example 8

Mike is a self-employed Indian fisher who does not live on-reserve. Mike fishes in waters near a reserve. Each season Mike leases his fishing license from an Indian organization that has an office on a reserve. Mike catches and prepares his fish off-reserve and stores his boat, equipment and supplies at his home off-reserve. Mike also sells his catch directly to off-reserve customers. Therefore, Mike’s fishing income is taxable because his fishing and selling activities take place off-reserve and he does not meet all of the above conditions.

Note

We will treat the income of an employee of your commercial fishing business according to the Indian Act Exemption for Employment Income Guidelines.

Farming

Throughout the following text, for purposes of the tax exemption under section 87 of the Indian Act, the CRA uses the term “Indian” because it has a legal meaning in the Indian Act.

If you earn farming income, your income from that business is treated the same as any other business income. If your farming activities take place on a reserve, your farming income is generally tax-exempt. If your farming activities take place mainly off a reserve, you have to pay tax on your farming income.

If you are a grain, vegetable, or fruit farmer, the location of the land where your crops are grown or harvested is the most important factor in connecting your income to a reserve. If you are a cattle rancher, the location of your rangeland is the most important connecting factor. If you are involved in other types of farming, the location of your farmland may vary in importance, depending on the nature of your business and the facts of your case. For instance, if your income is from a dairy operation, the location of your milking activities is likely more important than the location of your pastures or hayfields.

If some of your revenue-generating activities from farming take place on a reserve and the rest off a reserve, the exemption may be prorated. Part of your income will therefore be taxable, and part will be exempt from tax. In such a case, your business expenses will generally be allocated to the taxable part of your income in the same ratio, unless another allocation is more reasonable.

Note

We treat the income of an employee of your farming business according to the Indian Act Exemption for Employment Income Guidelines.

Interest and investment income

Throughout the following text, for purposes of the tax exemption under section 87 of the Indian Act, the CRA uses the term “Indian” because it has a legal meaning in the Indian Act.

If your investment income is situated on a reserve, it is exempt from tax under section 87 of the Indian Act. The courts have established that determining whether income is situated on a reserve, and thus exempt from tax, requires identifying the various factors connecting the income to a reserve and weighing the significance of each factor. This is referred to as the “connecting factors test”.

On July 22, 2011, the Supreme Court of Canada (SCC) released its decisions in the cases of Estate of Rolland Bastien v. Her Majesty the Queen and Alexandre Dubé v. Her Majesty the Queen (Bastien and Dubé cases). In both cases, the SCC found that the interest income was situated on a reserve and exempt from tax.

The CRA will apply these decisions in similar situations to exempt an Indian's interest income from tax for the 2011 and following tax years.

A similar situation means that all of the following conditions are met:

  1. you earn interest income from a savings or chequing account, or from a term deposit or guaranteed investment certificate (GIC);
  2. you opened the savings or chequing account, or entered into a contract for a term deposit or GIC, with a financial institution (including a bank branch) located on a reserve;
  3. the financial institution is required to pay the interest income to you at a location of the financial institution on a reserve; and
  4. if your investment is a term deposit or GIC, then the interest rate is fixed or can be calculated at the time you obtain the investment.

The purchase of a fixed-rate term deposit or GIC provides the purchaser with the right to receive a certain fixed amount of income. The income-generating activities of the financial institution that issued the fixed-rate term deposit is not an important factor to consider when determining where the interest income is situated when the 4 conditions mentioned above are present.

However, the investment income earned from mutual funds does not have the same factors connecting it to a reserve that the SCC found connected the interest income to a reserve in the Bastien and Dubé cases. This is because the mutual fund managers are normally not resident on a reserve. Their products may be sold through financial institutions with branches on reserve but this does not make the mutual fund resident on reserve.

In general, mutual fund managers are located at the bank’s head office or other locations that are not on a reserve and the investment income earned is not at a fixed rate but is reliant on the fund’s performance and investment decisions made off-reserve by the mutual fund managers. Usually, the purchase of a unit in a mutual fund is not considered to result in a contractual obligation to pay set sums of money. The income-generating activities of the mutual funds, which entirely determine the rates of return of the investors, are in general commercial markets off the reserve.

Therefore, the investment income generated from a mutual fund is not situated on a reserve and not exempt from tax unless there are other factors present that connect the income to a reserve.

The CRA will continue to review other situations based on the facts of each case. The examples provided below may help you determine if your income is situated on a reserve, and thus exempt from tax.

Note

Each of the individuals in the following examples are registered as Indians under the Indian Act.

Investment Income – Example 1

Charles does not live on a reserve. He invested in a fixed-rate term deposit for a 1-year term with a credit union located on a reserve. At the end of the term, the credit union deposited the interest into Charles’ account with the credit union, located on a reserve.

The interest income earned by Charles meets all of the conditions to be exempt from tax. It was earned from a term deposit entered into with a financial institution located on a reserve, the interest income was paid into a location on a reserve, the interest rate was fixed, and the interest could be calculated at the time the investment was obtained.

Investment Income – Example 2

Carla invested in units of a mutual fund through an account she set up at a financial institution located on a reserve. The mutual fund is a global bond fund that invests in corporate and government debt securities from anywhere around the world. The mutual fund is not located on a reserve. Distributions are deposited in Carla’s account with the financial institution located on a reserve.

The mutual fund manager is not resident on reserve. The units in the mutual fund are sold through a financial institution with branches on reserve but this does not make the mutual fund resident on reserve. The mutual fund managers are located at the bank’s head office or other locations that are not on a reserve and the investment income earned is not at a fixed rate but is reliant on the fund’s performance and investment decisions made by the mutual fund managers.

The purchase of these units in a mutual fund is not considered to result in a contractual obligation to pay set sums of money. The income-generating activities of the mutual fund, which entirely determine Carla’s rate of return, were in general commercial markets off the reserve. Therefore, the investment income generated from Carla’s mutual fund is not situated on a reserve and not exempt from tax unless there are other factors present that connect the income to a reserve.

Dividend income

If you are a shareholder of a corporation that operates only on a reserve, any dividends you receive from the corporation will be eligible for the tax exemption under section 87 of the Indian Act. This applies when the head office, management, and principal income-generating activities of the corporation that pays your dividends are situated on a reserve.

Rental income and other income from property

If you earn income on a reserve from your reserve property, your income will be exempt under section 87 of the Indian Act. For example, if you rent out a home located on a reserve, your rental income will be exempt from tax. Generally, your income from rental property will not be taxed if the physical location of the property is on a reserve.

If you own moveable property that you store on a reserve and you rent it to someone off the reserve for use off the reserve, your rental income will be considered to be off-reserve and will be taxable. Generally, we only consider rental income to be exempt when it comes from renting out rights to occupy or use real property located on a reserve. In any other case, we would have to review all of the connecting factors.

Royalty income

The source of royalty income corresponds to the location where the underlying right is exploited or can be enforced. If you receive royalty income from an on-reserve source, your royalty income is exempt from tax.

Other income

Throughout the following text, for purposes of the tax exemption under section 87 of the Indian Act, the CRA uses the term “Indian” because it has a legal meaning in the Indian Act.

Registered retirement savings plan (RRSP) income

If you earn exempt income only and you have contributed to an RRSP, you cannot deduct your contributions on your tax return. By the same token, any withdrawals of your original RRSP contributions will not be taxable. However, since your exempt income did not create any RRSP contribution room, you will have to pay a penalty under Part X.1 of the Income Tax Act for your non-deductible contributions to your RRSP. Any investment earnings you withdraw from the RRSP will be taxed in the same way as interest and investment income.

If you earn taxable income and contribute to an RRSP, the normal rules on claiming RRSP deductions apply to you (i.e., contributions will be deductible within the allowable limits based on earned income, and all withdrawals will be taxable).

Note

However, if your RRSP income is a result of a transfer of exempt RPP income, see Pension transfers from an RPP to an RRSP/RRIF.

Old Age Security (OAS) benefits

If you receive OAS payments, including the Guaranteed Income Supplement (GIS), the amounts you receive are not eligible for the tax exemption under section 87 of the Indian Act. Since OAS and GIS payments are not related to any previous employment and are not considered to have any connection to a reserve, the payments are considered to be off-reserve. The fact that you live on a reserve is not significant enough to connect the income to a reserve. Therefore, normal rules apply to these payments.

United States (U.S.) Social Security benefits

If you receive U.S. Social Security benefits, the benefits do not qualify for the exemption under section 87 of the Indian Act, even if you live on a reserve in Canada.

Pension income from the U.S.

If you receive pension income from U.S. sources, your U.S. pension does not qualify for the exemption under section 87 of the Indian Act, even if you live on a reserve in Canada. Your pension income from a U.S. source and the employment that gave rise to the pension are not connected to a reserve in Canada.

Education allowances and scholarships [Updated: 2015-01-30]

The full amount of scholarships, fellowships, or bursaries that are received by you as a student with respect to enrolment in a program that entitles you to claim the full-time education tax credit is not taxable and is not reported as income on your tax return. If you are a part-time student, the amount that may be excluded from income with respect to scholarships, fellowships, or bursaries received in 2010 and later tax years is limited to the cost of materials related to the program and the fees paid to the designated educational institution in respect of the program. However, this limitation does not apply to taxpayers who are eligible for the disability tax credit or cannot be enrolled in an educational program on a full-time basis because of a mental or physical impairment. For more information regarding the scholarship exemption, please see Income Tax Folio: S1-F2-C3, Scholarships, Research Grants and Other Education Assistance. For more information regarding the full-time and the part-time education tax credit please see Income Tax Folio: S1-F2-C1, Education and Textbook Tax Credits.

If you are not eligible for the full-time education tax credit, your scholarship, bursary or fellowship may still be tax-exempt if it came from Indigenous and Northern Affairs Canada (INAC) (either directly or through your band) as part of INAC’s Post-Secondary Education Program. This means that amounts you received from either INAC’s Post-Secondary Student Support Program or its University and College Entrance Preparation Program are treated as tax-exempt. This position is under review but continues to be applied by the CRA. There is currently no requirement to issue T4A slips for these amounts.

In the event that your scholarship, bursary, or fellowship income is not fully or partially exempt under one of the situations described above, only the part of the post-secondary scholarship, fellowship or bursary that is more than $500 must be reported on your income tax return.

For general tax information relevant to students, see our Students page.

For information with respect to issuing T4As for scholarships, bursaries, and fellowships, please see Income Tax Folio: S1-F2-C3, Scholarships, Research Grants and Other Education Assistance and Guide T4130, Employers’ Guide - Taxable Benefits and Allowances.

Training allowances

Any training allowances you receive under the Employment Insurance Act or a general Government of Canada training program will be taxable, unless the training takes place on a reserve. In this case, the exemption under section 87 of the Indian Act may apply. Since each case is different, call us at
1-800-959-8281 to find out whether you should include your training allowances in your income.

Capital gains

If you disposed of property that was located on a reserve, your gain from the sale or disposition of the property is not taxable. However, if your gain is from the sale or disposition of business assets that were used to generate both exempt and non-exempt income, we consider it reasonable to prorate the exemption accordingly. Even if your gain from the sale or disposition of property may not be taxable, you have to file an income tax return. The Income Tax Act requires all individuals that dispose of capital property to file an income tax return.

Support payments

If you live on a reserve and receive support payments (for you as a spouse or common-law partner, or for a child), the payments will be exempt under section 87 of the Indian Act. If you do not live on a reserve, you may have to include such support payments in your income. For more information, call us toll free at 1-800-959-8281.

Corporations and trusts

Throughout the following text, for purposes of the tax exemption under section 87 of the Indian Act, the CRA uses the term “Indian” because it has a legal meaning in the Indian Act.

Section 87 of the Indian Act does not apply to corporations or trusts, even if they are owned or controlled by an Indian. A corporation or trust is treated as a separate taxpayer. As such, neither would be considered an Indian for purposes of the exemption.

Trust income

Income earned by a trust is taxable. However, the trust can deduct the amounts paid or payable to its beneficiaries in the year in calculating its taxable income. The amount the trust deducts has to be included in the income of the particular beneficiaries who received a payment or who are entitled to receive a payment from the trust.

If a trust has claimed a deduction for amounts that were paid or payable to you, you have to include these amounts in your income, unless the connecting factors indicate that the trust income is located on a reserve. The primary connecting factor is the source of the trust's income, which might be business income and/or investment income depending on the particular trust involved.

Benefit programs

The Canada child benefit (CCB) and the Goods and services tax/Harmonized sales tax (GST/HST) credit are two programs delivered under the Income Tax Act.

As of July 1, 2016, the CCB has replaced the Canada child tax benefit (CCTB), the national child benefit supplement (NCBS), and the universal child care benefit (UCCB). The CCB is a tax-free monthly payment made to eligible families to help them with the cost of raising children under the age of 18. In order to receive the CCB, you have to apply for it. However, if you already received the CCTB or the UCCB for a child prior to July 1, 2016, you do not need to apply for the CCB for that child. In addition to the CCB, you can receive the child disability benefit (CDB) if your child meets the criteria to claim the disability tax credit (DTC) and if we approved Form T2201, Disability Tax Credit Certificate, for that child. The CDB is a tax-free monthly benefit for families who care for a child under the age of 18 with a severe and prolonged impairment in physical or mental functions. To qualify for the CCB and the CDB, both you and your spouse or common-law partner, if applicable, must file an income tax and benefit return every year, even if there is no income to report.

The GST/HST credit is a tax-free quarterly payment that helps individuals and families with low and modest incomes to offset all or part of the GST or HST that they pay. In order to receive the GST/HST credit, you have to file an income tax and benefit return, and tick the “Yes” box on page one of the return. By applying for the CCB and the GST/HST credit, you may also be eligible to receive related provincial or territorial benefits and credits.

For more information

If you have questions regarding the CCB, see Guide T4114 (E), Canada Child Benefit and related provincial and territorial programs, go to Canada child benefit, or call us at 1-800-387-1193.

If you have questions regarding the CDB, go to Child disability benefit or call us at 1-800-387-1193.

If you have questions regarding the DTC, go to Disability tax credit, see Income Tax Folio, S1-F1-C2, Disability Tax Credit, or call us at 1-800-387-1193.

If you have questions regarding the GST/HST credit, go to Goods and services tax/Harmonized sales tax (GST/HST) credit, see Guide RC4210, GST/HST Credit including related provincial credits and benefits, or call us at 1-800-387-1193.

Employer source deductions

Throughout the following text, for purposes of the tax exemption under section 87 of the Indian Act, the CRA uses the term “Indian” because it has a legal meaning in the Indian Act.

Tax deductions at source

For general information, see Payroll. Income tax deductions at source do not apply to income that is exempt under section 87 of the Indian Act. Where it is established that employment income paid to an Indian is exempt from tax, the employee can ask his or her employer to waive the tax deductions at source. Form TD1-IN, Determination of Exemption of an Indian's Employment Income, will help employers determine the appropriate tax treatment for employees. Where employers determine that an Indian's employment income is exempt under section 87 of the Indian Act and they grant the waiver requested by the employee, the employers have to keep a completed copy of Form TD1-IN for each of these employees, in case we ask them to see the forms later.

If you need help, call us toll free at 1-800-959-5525.

Canada Pension Plan (CPP) contributions

Income from employment or self-employment (a business) that is exempt from tax under section 87 of the Indian Act is also exempt from CPP contributions. However, an employer can elect to participate in the CPP. See Form CPT 124, Application for Coverage of Employment of an Indian in Canada under the Canada Pension Plan. If an employer has chosen not to cover the employment under the CPP, an employee can elect to participate in the CPP by filing Form CPT 20, Election to Pay Canada Pension Plan Contributions. For information about the Quebec Pension Plan, contact the Ministère de Revenue de Quebec.

Employment Insurance (EI) premiums

EI premiums are not taxes and are not exempt under section 87 of the Indian Act. Accordingly, tax-exempt salary or wages paid to an Indian employee are subject to EI premiums. As noted earlier, EI benefits received by an Indian are not taxable if the benefits relate to employment that was exempt under section 87.

Reporting exempt income

Employers have to report on a T4 slip employment income that is exempt under section 87 of the Indian Act. On the slip, an employer will enter code "71" in the area called "Other information." However, the employee does not have to report the exempt employment income on his or her income tax and benefit return. Pensionable earnings must be reported in Box 26 of the T4 slip if an employer has elected to cover exempt employment income of an Indian under the Canada Pension Plan.

Excise duties and taxes [Updated: 2012-07-04]

Throughout the following text, for purposes of the tax exemption under section 87 of the Indian Act, the CRA uses the term “Indian” because it has a legal meaning in the Indian Act.

Excise duties and taxes apply to certain products. The manufacturer or distributor, not the consumer, pays these taxes. The CRA administers the legislation which regulates the products to which these taxes apply. The CRA also licenses the manufacturers of these products. Although an amount equal to the tax may be included in the price, the courts have confirmed that Indian individuals are not exempt from such an indirect tax.

Federal excise duty applies to alcohol and tobacco products. The Excise Act, 2001 is the legislation that imposes excise duty on spirits, wine and tobacco products while the Excise Act governs beer. For information about licensing and paying excise duty, contact the office in your region listed in Excise Duty Memorandum 1.1.2, Regional Excise Duty Offices.

The Excise Tax Act imposes federal excise tax on motive fuel products, automotive air conditioners and certain fuel-inefficient vehicles and insurance premiums. For more information, including where to send requests for excise tax licences, see ETSL74 Notice to all Excise Tax Licensees and Tax Professionals – Excise Tax Licensing and Related Enquiries.

If an Indian, an Indian band, or a band-empowered entity wants to manufacture or produce goods that are subject to excise duty or tax, it must first apply for the proper licence or registration. Licensees or registrants must file monthly returns and pay the duty or tax that applies. The tax exemption set out in the Indian Act does not exempt an on-reserve manufacturer from paying excise duty or tax on tobacco, fuel and other products.

Excise duties and taxes - Example

Marc is an Indian individual who buys cigarettes and gasoline from a gas bar situated on a reserve. Marc's Indian status does not exempt him from paying the excise duty and tax amounts that are included in the retail price of the cigarettes and gas. Therefore, Marc must pay the retail price which includes excise duty and tax amounts. However, Marc will not pay the GST/HST on the cigarettes and gas if he shows his Certificate of Indian Status card to the retailer.

Goods and services tax/Harmonized sales tax (GST/HST) [Updated: 2010-10-13]

Throughout the following text, for purposes of the tax exemption under section 87 of the Indian Act, the CRA uses the term “Indian” because it has a legal meaning in the Indian Act.

Generally, the same rules apply to the HST on goods and services sold in Nova Scotia, New Brunswick, Newfoundland and Labrador, British Columbia, and Ontario as apply to the 5% GST on goods and services sold in the rest of Canada.

The Government of Ontario has announced that, effective September 1, 2010, point-of-sale relief equal to the 8% provincial part of the HST will be provided on eligible purchases made by qualifying First Nation purchasers. For more information, please see the "Ontario point-of-sale relief" section located below.

For information about First Nations taxes, see our guide called First Nations Tax (FNT).

General guidelines

The GST/HST does not apply to goods bought on a reserve by Indians, Indian bands, and unincorporated band-empowered entities.

Goods bought off a reserve by Indians, Indian bands, and unincorporated band-empowered entities are subject to GST/HST, unless the goods are delivered to a reserve by the vendor or the vendor's agent.

The exemption under section 87 of the Indian Act does not apply when an Indian, an Indian band, or a band-empowered entity buyer takes possession of goods off a reserve and self-delivers the goods to the reserve. However, we may waive the delivery requirement for qualifying remote stores that deal mainly with customers who are Indians, Indian bands, and band-empowered entities.

Incorporated band-empowered entities are not entitled to tax relief on goods bought on a reserve or delivered to a reserve unless the goods are purchased for band management activities.

Services

Generally, the GST/HST does not apply to services provided to Indians if the services are performed totally on a reserve (such as haircuts or small appliance repairs), or if the services are performed off a reserve and relate to real property interests located on a reserve.

Services acquired on or off a reserve by Indian bands or band-empowered entities for band management activities or for real property on a reserve are not subject to GST/HST. Exception: Indian bands or band-empowered entities will pay the tax on off-reserve purchases of transportation, short-term accommodation, meals and entertainment. However, a General Rebate application may be filed to recover the GST/HST paid on these purchases when acquired for band management activities or for real property located on reserve.

GST/HST on goods imported by Indians

The exemption under section 87 of the Indian Act does not apply to goods imported by Indians. We collect GST/HST on goods when they are imported, and as an Indian you have to pay GST/HST on the goods you import unless some other provision exempts them from tax. The goods are subject to GST/HST even when they are delivered to a reserve by the vendor's agent or Canada Post.

Administrative requirements

Throughout the following text, for purposes of the tax exemption under section 87 of the Indian Act, the CRA uses the term “Indian” because it has a legal meaning in the Indian Act.

Buyer

To buy goods or services without paying GST/HST, you have to show the vendor proof that you are registered under the Indian Act (e.g., your Certificate of Indian Status).

Vendor

As a vendor, you have to keep adequate evidence that the sale was made to an Indian and, if applicable, delivered to a reserve. For instance, on the sales invoice you should write the registry number or band name and family number from the Certificate of Indian Status. You should also keep proof of delivery to a reserve, such as a waybill, postal receipt, freight bill, dispatch record, or mileage log.

Refund of GST/HST

When an Indian is incorrectly charged GST/HST, he or she is entitled to a refund under the general rebate program. For example, if you are an Indian and you paid GST/HST on property that you acquired off a reserve and that was delivered to the reserve by the vendor or the vendor's agent, you were incorrectly charged. To apply for a refund of the GST/HST you paid, complete Form GST189. You will have to provide proper documents to support your claim.

Sales to non-Indians

The exemption under section 87 of the Indian Act does not apply to sales or supplies made to non-Indians on a reserve. All businesses operating on reserves have to meet the general registration requirements for GST/HST, and collect and remit GST/HST on the taxable sales they make to any person who is not an Indian.

For more information, see Technical Information Bulletin B-039R, GST Administrative Policy: Application of GST to Indians.

GST/HST - Example 1

Joseph is an Indian who lives in Saskatoon, Saskatchewan. He buys a computer from a dealer located on a reserve in Saskatchewan and takes the computer back to his home in his own automobile. Even though Joseph lives off a reserve, he does not have to pay GST on the computer since he bought it on a reserve. After a sale, the place where the goods are used or consumed is not relevant.

GST/HST - Example 2

Nancy is an Indian who lives on a reserve in Nova Scotia. She buys a washing machine from a dealer located off the reserve, in Halifax. She arranged with the dealer to have the machine delivered to her. She does not have to pay HST because of the delivery rule.

Ontario Point-of-Sale Relief

Where relief of the GST/HST is not provided for under section 87 of the Indian Act or GST/HST Technical Information Bulletin B-039R, relief of the provincial part of the HST may apply as the Government of Ontario has announced that effective September 1, 2010, status Indians, Indian bands and councils of Indian bands are entitled to an exemption from paying the 8% Ontario part of the HST on qualifying property or services at point of sale. For information on qualifying property and services, who is eligible for relief, how to apply for the Ontario-administered refund for the period of July 1, 2010 to August 31, 2010, and the documentary requirements to support amounts credited to status Indian purchasers, contact the Government of Ontario at 1-866-668-8297.

As well, for GST/HST registrant suppliers who provide the Ontario First Nation Point-of-Sale Relief, GST/HST Info Sheet GI‑-106, Ontario First Nations Point-of-Sale Relief -  Reporting Requirements for GST/HST Registrant Suppliers provides additional information concerning the Ontario point-of-sale relief. There is also a videocast of this information accessible at Ontario First Nations Point-of-Sale Relief - Reporting Requirements for GST/HST Registrant Suppliers.

If you need help, call us toll free at 1-800-959-5525.

Glossary

Indian

For purposes of the tax exemption under section 87 of the Indian Act, the Canada Revenue Agency uses the term “Indian” because it has a legal meaning in the Indian Act. This term is defined in the Indian Act as a person who is registered as an Indian or is entitled to be registered as an Indian. Determining whether a person is entitled to be registered as an Indian is a question of fact. To grant tax benefits to you as an Indian, we need confirmation of your entitlement from Indigenous and Northern Affairs Canada.

Reserve

This has the meaning assigned by the Indian Act. To find out if a tract of land is a reserve under the Act, contact your band office. If your band does not have the answer, contact Indigenous and Northern Affairs Canada.

Vendor's agent

This includes any person (i.e., an individual, a partnership, or a corporation) under contract with the vendor to act as the vendor's agent for making deliveries. It is a question of fact and law whether a person is acting as an agent. A vendor must be able to demonstrate that the required contractual arrangement exists between him or her and the person who is delivering the goods.

Providing delivery services may be considered to be a taxable supply in the course of commercial activities in Canada. In this case, the person making deliveries as an agent of the vendor may have to register for GST/HST, as well as to charge, report, and remit the tax.

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