Indigenous Tax Exemptions
There is a long-standing myth that Indigenous people do not pay taxes while that is not exactly the case. Indigenous people are subject to the same tax obligations of other resident Canadians unless their personal property is exempt from income tax under paragraph 81(1)(a) of the Income Tax Act (ITA) and section 87 of the Indian Act.
For the purposes of section 87 of the Indian Act, employment income is personal property. If employment income is to be exempt from income tax, the location of where an Indigenous employee performs their duties is imperative.
Do you qualify?
For employment income to be exempt under section 87, an employee must have Indian status under the Indian Act. The Supreme Court of Canada held in Williams v. The Queen, 92 DTC 6320 that an exemption of income tax will be appropriate, where the income of an Indigenous employee is earned on a reserve. Earned on a reserve became a very large area for argument, but essentially, the Courts have determined that employment income will be exempt if employment duties can be connected to an “on reserve” location. So earned on a reserve became connected to an on reserve location.
Canada Revenue Agency Guidance of “Connecting Factors”
The CRA recognizes that employees of bands, tribal councils, or organizations may perform most of their activities off reserve. The CRA has developed administrative guidelines for common employment situations where an exemption of income tax may arise. The employment income of an Indigenous employee will typically be exempt from income tax if any of the following conditions are met:
- The employee performs at least 90% of the duties of employment on a reserve. When less than 90% of the income is earned on reserve, the exemption is prorated. The exemption will apply only to the portion of the employee’s income related to the duties performed on the reserve;
- When the employer is a resident on a reserve and the employee lives on a reserve;
- When more than 50% of the duties of employment are performed on reserve, and either the employer is a resident on a reserve, or the employee lives on a reserve; or
- The employer is a resident on a reserve, is an Indian band or organization that meets specific conditions, and the employment duties are connected to certain non-commercial activities of the employer.
An employee is considered to live on a reserve if it is their principal place of residence and centre of daily routine. An employer that only has their office on reserve is typically considered to reside on a reserve only if its central management and control is located on reserve throughout the entire year.
If you have questions regarding your eligibility for an exemption of income tax under the Indian Act, please give us a call today. We are here to help!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.