Jamie Golombek looks at a recent case that dealt with the exemption and how it is applied

NationTalk: The Financial Post: There’s a common misconception that Indigenous people in Canada simply don’t pay tax, but that’s generally not true since in order to be exempt from tax, the income earned must be situated on a reserve.

A recent case, decided earlier this month, dealt with the exemption and how it is applied. The case involved an employee who is a Haudenosaunee Iroquois Confederacy Treaty Indian from the Six Nations of Grand River in Ontario who lives on the reserve and works as a clerk at a hospital just outside the reserve. She took the position that the income she earned from working at the hospital was exempt from tax.

The employee is a “Status Indian” within the meaning of the Indian Act. Under the act, the personal property of an Indigenous person situated on a reserve is exempt from tax. Prior jurisprudence has concluded that the employment income of such a person is personal property, and so if the taxpayer’s employment income from her work at the hospital was situated “on a reserve,” it would be exempt from tax.

The purpose of the exemption for income earned on a reserve, as articulated by the Supreme Court, is to “preserve the entitlement of Indians to their reserve lands and to ensure that the use of their property on their reserve lands (is) not eroded by the ability of governments to tax, or creditors to seize.” Its purpose is “not to confer a general economic benefit.”

In the recent case, the key question was whether the employee’s income could be considered to be earned on a reserve and, if so, be exempt from tax. A 1991 Supreme Court decision held that whether income is situated “on a reserve” is determined based on whether there are sufficient connecting factors to the reserve.

The court set out a two-step test: identify the potentially relevant connecting factors that connect the income to the reserve, and then analyze those factors to determine how much weight ought to be given to each of them.

Prior jurisprudence has established five connecting factors that are potentially relevant in the context of determining whether employment income can be said to have been earned on a reserve: the residence of the employer, the residence of the employee, the location where the employee is paid, the location where the work is performed and the nature of the services performed.

The judge noted that since the central management and control of the hospital did not occur on the Six Nations reserve, this argues for taxation. On the other hand, the employee lives on the reserve, about a 10-minute drive from the hospital, which argues for exemption from taxation. The employee was also paid by direct deposit to her bank account on the reserve, which also argues for exemption from taxation.

But things got a bit more complicated when evaluating the location of the work and the nature of the services performed.

The employee performed the vast majority of her work at the hospital, which is not on the reserve, but on private land that was donated to the hospital in 1961. The employee took the position that the hospital land belongs to the Six Nations, having been given to them in 1784 under the Haldimand Proclamation in recognition of their service to the Crown during the American Revolution. She said the proclamation gave the Six Nations all the land within six miles of the Grand River, which is a massive swath of land described as being “approximately 9,000,000 acres, only five per cent of which is covered by the Six Nations reserve.”

The taxpayer produced a Google Earth map purporting to show that the hospital was within six miles of the reserve, but, based on the distances on the map and the map’s scale, it appeared the hospital may have been located about 8.4 miles from the reserve. Nonetheless, the judge felt this was irrelevant since he wasn’t being asked to decide whether the hospital’s land rightfully belongs to the Six Nations, but whether the hospital itself is located on the reserve.

The term “reserve” is defined in the Indian Act as a “tract of land, the legal title to which is vested in His Majesty, that has been set apart by His Majesty for the use and benefit of a band.” While the judge was willing, for the purpose of the appeal, to accept that the hospital is located on disputed land, legal title to the hospital land is not vested in “His Majesty” and concluded it is still not located on the Six Nations reserve, so the location-of-work factor argues for taxation.

The final factor to be weighed was the nature of the services performed. The employee’s role was to process doctors’ orders, answer phones and call bells, do scheduling, order supplies, relieve other employees on switchboard duties and move beds when required.

The hospital serves the surrounding community, including people who live on the reserve and is one of five hospitals in the area. People living on the reserve will generally go to whichever hospital is closest to where they live. There was no evidence to suggest that the bulk of the hospital’s patients came from the reserve. Similarly, only three of the hospital’s approximately 100 employees lived on the reserve.

The employee was unable to point to anything about the nature of the services she performed or the operations of the hospital that would in any way connect her services to the reserve. She felt that considerable weight should be given to the fact that the hospital is on disputed land, but the judge noted that this fact “might have been relevant if the nature of (her) work had been closely tied to the reserve.”

In the end, the judge gave moderate weight to the employee’s residence and that of her employer, little weight to the place of payment and significant weight to the location and nature of her work. Based on this, he found that the employee’s employment income was taxable.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.