CRA outlines COVID-19 exceptions for Indigenous tax exemptions

CRA outlines exceptions for Indigenous tax exemptions

The CRA released new guidance to provide additional relief due to COVID-19 restrictions

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The CRA has announced it will generally continue to apply its existing guidelines to determine whether the employment income of certain individuals who live or work on a reserve, or whose employers reside on a reserve, is exempt from income tax. However, the CRA says it will also provide certain welcome administrative relief during the pandemic. The CRA has released new guidance that is intended to address issues that may arise as a result of COVID-19 workplace or territorial restrictions, which may temporarily cause employees or employers to work or reside off-reserve.

The CRA says its new administrative guidance applies from March 16 to December 31, 2020 and may be extended if necessary.

Background

The employment income of an Indian (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, if the income is situated on a reserve. The CRA, together with certain First Nations organizations, developed the Indian Act Exemption for Employment Income Guidelines, which are administrative guidelines to help determine whether employment income is situated on a reserve, and exempt from tax. Generally, under these guidelines, the employment income of an Indian will usually be exempt from tax if any of the following conditions are met:

  • The employee performs at least 90% of their employment duties on a reserve (a pro-rated exemption may apply where the employee performs less than 90% of their employment duties on a reserve)
  • More than 50% of the individual's employment duties are performed on a reserve, and either the employer is resident on a reserve, or the employee lives on a reserve
  • The employer is resident on a reserve and the employee lives on a reserve
  • The employer is resident on a reserve, is an Indian band or Indian organization which meets certain 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 their principal place of residence and the center of their daily routine is on a reserve. An employer that has an established office on a reserve is generally considered to reside on a reserve only if its central management and control is located on a reserve throughout the year. One of the key factors in this determination is the location where the board of director meetings take place (although this is not the only factor).

COVID-19 exceptions

The CRA says that although it will generally continue to apply the Indian Act Exemption for Employment Income Guidelines, it will allow the following exceptions where an employee or employer temporarily works or resides off-reserve due only to COVID-19 workplace or territorial travel restrictions. The CRA notes that this guidance only applies if the employee or employer intends to (and does) work or reside on-reserve as soon as the restrictions are lifted.

Employee who normally works on a reserve

If an employee usually performs all or part of their job on a reserve, but has temporarily been working off-reserve only because of the workplace restrictions, the CRA says this will not necessarily affect their exemption status. The CRA says it will consider the days or hours worked off-reserve only because of the workplace restrictions as if those duties were performed on a reserve. As a result, these days or hours will be included in computing the percentage of employment duties the employee performs on a reserve, for purposes of determining the exemption. The CRA says its position applies where the employee intends to work (and does work) on the reserve as soon as the restrictions are lifted.

Employee who normally resides on a reserve

If an employee who normally lives on-reserve is staying in off-reserve housing only because of territorial travel restrictions, the CRA says the employee will still be considered resident on the reserve, where the individual returns to their home as soon as the restrictions are lifted.

Employer who normally resides on a reserve

For employers who have established head offices with central control on a reserve but have had to move off-reserve due only to workplace restrictions, the CRA says it will generally still consider the employer a resident of the reserve. This exception applies under the condition that central management and control was clearly established on the reserve before the workplace restrictions.

The CRA notes that determining employer residency involves multiple factors and will be determined on a case-by-case basis.

For more information, contact your KPMG advisor.

Information is current to December 15, 2020. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

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