In Baldwin et al v the Queen, 2014 TCC 284,
the Tax Court of Canada had an opportunity to consider section 87
of the Indian Act and when employment income is
"situated on a reserve" for tax purposes.
Each of the five Appellants was employed by Native Leasing
Services (NLS). NLS is owned and operated by a status Indian who
resides on a reserve. NLS provides employment placement services to
not-for-profit Aboriginal organizations, and offers support
services, including payroll services, human resource support,
employee leasing/outsourcing, bookkeeping and staffing. Only
NLS' administrative staff provided services on the reserve.
None of the Appellants worked on a reserve, and only one of them
had a residence on a reserve, which she lived in on weekends. Each
provided services to various Aboriginal organizations through NLS
in various cities in Ontario and Quebec.
The Court rejected an approach to s. 87 of the Indian
Act that focused on the situs of the employment
income, finding that this test had been overturned by the Supreme
Court of Canada in Williams v Canada,  1 SCR 877, and confirmed in Bastien
Estate v Canada, 2011 SCC 38.
Both of those decisions establish that the "connecting factors
test" now applies to determine the location of intangible
personal property under s. 87.
The "connecting factors test" has two steps: 1)
identify potentially relevant factors tending to connect the
property to a location, and 2) determine the weight that should be
given to the factors in light of three considerations: the purpose
of the exemption from taxation, the type of property and the nature
of the taxation of that property.
In this case, the Court examined the following factors: the
location of the employer, the location where the Appellants were
paid, the Appellants' residence, and the location, nature of
the services performed and the special circumstances in which they
were performed. The Court concluded that the most important factor
to consider in this case was the location and nature of the work
performed by the Appellants given the type of property at issue,
namely employment income.
The Court concluded that none of the Appellants' employment
indicated any connection to a reserve. All services were performed
off-reserve and to Aboriginal peoples living in the city in which
the organization was located. Any work done with people on-reserve
was merely incidental to the main services provided. As a result,
the Appellants' employment income was found to be situated
off-reserve and thus, taxable.
The Take Away
This decision confirms that the test to be applied in
determining whether employment income is situated on a reserve is
the connecting factors test. This test essentially looks at the
strength of the connection between the employment (and the
employment income) to a reserve. Where that connection is weak, the
employment income will be situated off a reserve and subject to
tax. As a result, it is likely that if the employment is undertaken
almost exclusively off-reserve, with no substantive connection to a
reserve (i.e., the reserve or its residents benefit from
the employment), any resultant income will be taxable.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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