On October 28, 2020, the Canada Revenue Agency ("CRA") released a Technical Interpretation (CRA Views 2020-0864811E5) regarding available income tax exemptions under the Indian Act for certain persons who are working from home during the COVID-19 pandemic.
A Technical Interpretation is a written statement of the CRA that provides generic commentary on Canadian income tax law. Importantly, Technical Interpretations are not legally binding on the CRA but are provided to taxpayers as administrative guidance.
The issue in CRA Views 2020-0864811E5 was whether employees who have status under the Indian Act and who are performing their duties of employment from an on-reserve home office as a result of the COVID-19 pandemic are exempt from taxation pursuant to paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act in respect of their employment income.
Employees who have status under the Indian Act are exempt from tax on their employment income if the income is situated on a reserve. The CRA has administrative guidelines - the Indian Act Exemption for Employment Income Guidelines - that can be applied to determine whether employment income is situated on reserve.
Guideline 3 exempts the employment income of employees who:
- have status under the Indian Act;
- live on a reserve; and
- perform more than 50% of their employment duties on a reserve during the year.
To determine whether an employee is performing their employment duties on reserve, the CRA looks to the location where the employee has to perform the duties of their employment under the terms of their employment.
This means that if a person with status under the Indian Act is required by the terms of their employment to work from their home office, and their home is located on reserve, their employment income from such work will be exempt from tax provided the employee has performed more than 50% of their employment duties from such home office (or other on-reserve location). Of note, there is no requirement under this Guideline for the employer's operations to be on reserve.
If the employee cannot meet the 50% threshold, an employee with status under the Indian Act who is working from an on-reserve home office may still be eligible for a prorated exemption from tax on their employment income under Guideline 1 in respect of that portion of their employment duties that are performed on-reserve.
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.