Employee Leasing: Tax-Planning Arrangements Based on Section 87 [Updated- 2012-12-12]

"Employee leasing" arrangements are arrangements where an Indian is employed through an on-reserve employment agency but works off-reserve for an off-reserve organization.

The Federal Court of Appeal and the Tax Court of Canada have considered these arrangements and, in the majority of cases, have concluded that the employment income at issue was not exempt from tax under section 87 of the Indian Act. Recent decisions have confirmed that, as with all employment situations, the factors connecting the income to a reserve must be identified and weighed to determine if the employment income is taxable or exempt. The location of the employer on a reserve is not a connecting factor strong enough, on its own, to exempt the employment income from tax.

As a result, when an employee is “leased” by an on-reserve employer, but carries on duties of employment off-reserve, section 87 of the Indian Act (and Guideline 2 of the Indian Act Exemption for Employment Income Guidelines) will not apply to exempt the employment income unless:

1. other factors connect the income to a reserve; or
2. there is specific evidence that would give greater weight to the employer as a connecting factor.