Examples of uncommon employment situations where the guidelines do not apply
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.
The following are examples of uncommon employment situations that result in employment income being treated differently than the typical scenarios the Guidelines describe. In these kinds of situations, a different tax treatment of the employment income is warranted.
Each of the individuals in the following examples is registered as an Indian under the Indian Act.
Examples where exempt
Marion does not live on a reserve and works at a lumber mill located on land that was once part of her First Nation’s reserve. In 1968, Marion’s First Nation surrendered to the Crown some of its reserve land for sale to a private lumber company to build the lumber mill. As part of the surrender for sale, the private lumber company agreed to provide employment for members of the First Nation at the mill.
Since Marion does not live on a reserve, her employer is not resident on a reserve, and her duties of employment are not performed on a reserve, the Guidelines do not apply to exempt her employment income from income tax. However, the connecting factors that are given the most weight in this situation are:
- the circumstances in which the mill came to be built and operated on land (that was once part of the reserve but was surrendered to the Crown for sale to permit the mill to be built) and
- the fact that there were reasonable expectations at that time that the mill would provide employment for members of the First Nation.
Marion’s employment income is therefore considered situated on a reserve and is exempt from income tax.
François lives on a reserve and is employed as an administrator in a hospital located beside his reserve. The hospital was located on his reserve but was rebuilt off-reserve after it was destroyed by a fire. The hospital services primarily First Nations people who are residents on the reserve.
After the hospital was rebuilt, the employer was no longer resident on a reserve and the duties of employment were no longer performed on a reserve, therefore the Guidelines no longer applied to exempt the employment income from tax. However, the unique history of the hospital, the circumstances surrounding the employment, the nature of the work performed, and the residence of the taxpayer, are all factors that have great weight in this case and François’s income is found to be exempt. In this situation, the residence of the employer and the location where the duties are performed are given less weight than in other cases.
Examples where not exempt
Jim lives on a reserve and he is a dentist with a dental practice in a dental clinic located off-reserve in a small town. Jim incorporated a professional corporation for his dental practice, of which he is the sole shareholder, director and officer. Jim has an office in his home on reserve where he does clerical duties for his professional corporation. Jim receives a salary equal to the total income earned by the corporation and he believes it is exempt from tax under Guideline 2 since both Jim and the professional corporation are resident on a reserve.
However, Guideline 2 does not apply because minimal weight is given to the employer’s residence on a reserve when it has no tangible significance to the reserve and provides no direct, significant benefits to the reserve. In addition, when determining relevant connecting factors for the compensation paid to a controlling shareholder and director of a corporation, the courts have looked at the location of a corporation’s income-earning activities as a significant factor.
Since Jim sees patients and makes all decisions about his dental practice off-reserve at the dental clinic, the dental clinic is considered to be the place where the income-earning activities take place. Therefore, Jim’s employment income is taxable because it is earned from his duties as a dentist at a dental clinic that is off-reserve.
Kelly lives on a reserve and manages an indigenous homeless shelter off-reserve in a large city. Kelly performs all of her employment duties off-reserve and reports on a daily basis to the shelter’s administrative office off-reserve. Kelly works for the shelter through a contract with an employee-placement/leasing agency. The agency resides on a reserve, but has no tangible connection to the reserve except the fact that its head office is located on the reserve.
Kelly believes that Guideline 2 exempts her employment income from tax because her employer, which is the employee-placement/leasing agency, is resident on a reserve and she lives on a reserve. However, the courts have given little weight to the location of an employer on a reserve if it has no tangible significance to the reserve and provides no direct, significant benefits to the reserve. Since there is no connection between Kelly’s employer, the employee-placement/leasing agency, and the reserve, Guideline 2 does not apply.
The nature and the location of the employment duties are factors that are given the most weight in this case. The nature of Kelly’s employment is to assist homeless individuals who are off-reserve and her employment duties are performed off-reserve. The residence of the employee-placement/leasing agency on a reserve is not a strong connecting factor because its income-earning activities result from the work of its leased employees, which is performed off the reserve. Kelly’s income is situated off-reserve and is not exempt from tax.
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