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Section 87 of the Indian Act
Section 87 of the Indian Act exempts the personal property of an Indian situated on a reserve, and the courts treat employment income as personal property. So every case comes down to locating the income. The CRA published guidelines in 1994 to settle that for common employment situations; they say nothing about working from home, which is now the question that comes up most. Below: the four guidelines, the proration rule, business and investment income, GST/HST relief, payroll, and the filing points that get missed.
The short version, if you read nothing else.
Having status does not by itself make your income tax free. What matters is where the income was earned. Work done on a reserve is generally exempt. The same work done off reserve generally is not.
If you split your time between the two, the exemption usually splits with it. And if you work from home, the answer depends on whether your home is on the reserve.
Even where everything is exempt, file a return anyway. Your child benefit, GST credit and Trillium benefit are all calculated from it, and they stop if you do not file.
Section 87 of the Indian Act exempts from taxation "the personal property of an Indian or a band situated on a reserve." Paragraph 81(1)(a) of the Income Tax Act is what carries that exemption across into the tax system.
"Personal property" is broader than it sounds. It does not mean furniture and a truck. In law it covers just about everything you own that is not land, and the courts decided long ago that your paycheque counts.
Two things follow from that.
The exemption applies to a person who is registered, or entitled to be registered, as an Indian under the Indian Act, and to a band. It does not extend to Métis or Inuit individuals, who are not "Indians" for the purposes of that Act, and it does not extend to First Nations people who are not registered and not entitled to be. Those are legal questions about status rather than tax questions, and they are decided elsewhere.
Section 87 applies to individuals and to bands. It does not apply to corporations. A company is a separate legal person from the people who own it, so a corporation does not inherit the exemption from its shareholders, and it does not get one because a band owns the shares.
That does not mean nothing is available. Other parts of the Income Tax Act can exempt a band itself, as a public body performing a function of government, and can reach certain corporations owned by such bodies where strict ownership and geographic conditions are met. Different provision, different test, and worth checking properly rather than assuming it either way.
Weighing connecting factors from scratch every time would be unworkable for an ordinary job, so in 1994 the CRA published four shortcuts. Each one looks at only two or three things instead of the whole list, and if your situation fits one, you have your answer.
Two caveats before the table. These are an administrative tool and not law, so a court is not bound by them. And the CRA says openly that an unusual situation can land the other way in either direction, so fitting a guideline is a strong indication rather than a guarantee.
Read them in order. Guideline 1 is about where you work. Guideline 2 is about where you and your employer live. Guideline 3 combines the two. Guideline 4 is for people employed by a band or a band organization.
| Guideline | When it applies | Result |
|---|---|---|
| 1 | At least 90% of the duties are performed on a reserve | Usually all of the income is exempt |
| Proration | Less than 90% on reserve but more than incidental, and no other guideline applies | The exemption splits along with the work. One day a week on reserve means one fifth of the pay is exempt. 30% of the duties on reserve means 30% of the pay |
| 2 | The employer is resident on a reserve and the employee lives on a reserve | Usually all of the income is exempt, wherever the duties are performed |
| 3 | More than 50% of the duties on a reserve, and either the employer is resident on a reserve or the employee lives on one | Usually all of the income is exempt |
| 4 | The employer is a band, tribal council, or a band-controlled organization resident on a reserve and dedicated to the social, cultural, educational or economic development of Indians who mostly live on reserves, and the duties relate to its non-commercial activities | Usually all of the income is exempt, even where the work is done off reserve |
The CRA's own examples are more useful than any paraphrase, so a few of them:
And where it does not apply:
Two phrases mean less than they sound like.
"The employer is resident on a reserve" does not mean having an address there. It means the reserve is where the organization is genuinely run from, which the CRA calls central management and control and usually locates wherever the board of directors actually meets and decides things. A mailbox and a sign do not do it. The CRA has said so in the case of an employment agency with an office on a reserve that carried on almost no activity there.
"The Indian lives on the reserve" means it is your principal home and the centre of your daily routine. Somewhere you own and visit does not count.
This is where the guidelines meet a world they were not written for. They date from 1994, when nobody worked from a kitchen table.
The CRA's position is that the location that matters is where the terms of employment require the duties to be performed. Under a telework arrangement, that is the home office. So:
Both directions surprise people, and the second one is a real planning point rather than a technicality.
The COVID relief has ended. Between 16 March 2020 and 31 December 2022 the CRA ran a temporary administrative position: where someone's regular workplace was on a reserve and moved off reserve solely because of workplace restrictions, the guidelines were applied as though nothing had changed. That guidance is archived and expired on 31 December 2022.
From 2023 onward the ordinary rules apply. Anyone whose hybrid arrangement became permanent after the restrictions lifted is now being assessed on where the work actually happens, and that is a different answer from the one that applied in 2021.
A hybrid week needs a record. Days on reserve against days at home, kept as you go, because the proportion has to be supportable if it is ever questioned.
Worth knowing before it comes as a shock. Where an employee is accommodated to work from an off-reserve home for medical reasons, perhaps on returning from long-term disability, the CRA's position is that those hours are still performed off reserve. A duty to accommodate is not itself a factor connecting the income to a reserve.
So an accommodation that is entirely appropriate as an employment matter can reduce or remove an exemption the person had before. The two systems are not speaking to each other, and neither the employer nor the employee is doing anything wrong. It is simply better found out when the accommodation is being arranged than in the following April.
An employee claiming the exemption completes Form TD1-IN, Determination of Exemption of an Indian's Employment Income, and gives it to the employer. That is what tells payroll to stop deducting income tax on the exempt portion. Without it, tax gets withheld all year and has to be recovered by filing.
Where employment income was exempt, amounts that flow from it are generally exempt in the same proportion. That covers Employment Insurance benefits, retiring allowances, CPP and QPP payments, registered pension plan benefits and wage loss replacement benefits.
The proportion carries through exactly. Someone who was one fifth exempt across a career will have one fifth of the retiring allowance and one fifth of the CPP payments exempt.
Old Age Security is not on that list, because it is based on years of residence in Canada rather than on employment, so it has no employment income to inherit its character from. Treat OAS as taxable unless you have specific advice to the contrary. See CPP, OAS and RRIFs.
Employee leasing arrangements do not work. The pattern is an employment agency situated on a reserve that hires Indian employees and places them with off-reserve businesses to do off-reserve work. It has been marketed as a way to make wages exempt.
The Federal Court of Appeal and the Tax Court have considered these arrangements and in the majority of cases found the income not exempt. The CRA's published position is that the employer's location on a reserve is not, on its own, a strong enough connecting factor. Guideline 2 does not rescue it. Anyone approached with one of these should get independent advice before signing, and the employer carries source deduction exposure as well.
Three points that get handled incorrectly more often than the income question itself.
| Item | Treatment |
|---|---|
| Income tax | No deduction on the exempt portion |
| EI premiums | Still payable. EI premiums are not a tax, so section 87 does not reach them. The employment is insurable in the ordinary way |
| CPP contributions | Exempt employment is not pensionable by default. An employer may elect to cover all its Indian employees by filing Form CPT124, and that election cannot be revoked. Where the employer has not elected, an individual employee may elect on Form CPT20 |
| T4 reporting | The exempt amount is reported using code 71 in the Other information area of the T4 |
The CPP question deserves a real conversation rather than a default. Not contributing means more in the pay packet now and a smaller CPP retirement pension later, and it also affects CPP disability and survivor coverage. Neither answer is right for everyone, and the employer's election binds every Indian employee, so it is a decision worth taking deliberately. See CPP, OAS and RRIFs and payroll.
No shortcuts here. There are no guidelines for business income, so you are back to weighing connecting factors from scratch. The heaviest one is where the work that earns the money actually gets done.
What gets weighed:
A business serving the reserve community from premises on a reserve sits comfortably. A business operating on a reserve but selling into the general commercial market off reserve is a harder case, and the courts have been reluctant to extend the exemption to income earned in what they describe as the commercial mainstream. That phrase does a lot of work in the case law and it is worth understanding before a structure is built on an assumption.
Two practical consequences. Keep records that show where the activity happened, because this is a factual argument and the person making it carries the burden. And ask before you restructure, not after, since moving an address is not the same as moving a business.
The courts have looked at the location of the debtor, where the income is generated, and the nature of the underlying investment.
The leading authorities are two Supreme Court decisions from 2011, Bastien Estate and Dubé. Both concerned term deposits held at a financial institution located on a reserve, and in both the interest was held to be exempt. What mattered was that the contractual obligation to pay sat with an institution on the reserve, not what that institution did with the money afterwards.
That reasoning does not carry across to everything. Income from publicly traded securities, mutual funds and similar holdings draws its return from the general economy rather than from an on-reserve debtor, and it has generally not been exempted merely because the account is administered on a reserve. Interest on a deposit and a dividend from a listed company are different cases.
This remains one of the more contested areas, and it is worth specific advice rather than a general rule.
Separate relief, separate rules, and it operates through the vendor rather than through a refund.
For vendors, the documentation requirement is the part that causes trouble on audit. The certificate details have to be recorded, and where relief depends on delivery, the delivery has to be evidenced. See HST and GST.
This is the most consequential practical point on the page.
Exempt income is not a reason to skip the return. Benefits and credits are calculated from filed returns. The Canada Child Benefit, the GST/HST credit, the Ontario Trillium Benefit and the Canada Workers Benefit all depend on income being reported, and none of them arrive if nothing is filed. Both spouses have to file.
Exempt employment income goes on Form T90, Income Exempt from Tax under the Indian Act, filed with the return. It is not taxed. It is used to work out what you are entitled to.
Section 81 of the Income Tax Act keeps a handful of amounts out of income for everybody, and one of them comes up often enough here to be worth naming.
Foster care and kinship payments. Social assistance paid on a means, needs or income test for the care of another person, where you are not related to them and they are not your spouse, is not income to you. Since 1 January 2020 that has included payments under a programme provided for by the law of an Indigenous governing body, not only federal and provincial programmes. A companion provision covers payments for the temporary care and upbringing of a child in need of protection, which is what kinship programmes generally are.
This has nothing to do with section 87 and does not depend on status or on a reserve. It is simply an amount people are sometimes told to report and should not.
RRSP room is built from what the tax rules call earned income, and exempt income does not count. So contributing to an RRSP on exempt earnings gets you no deduction, because there was nothing to deduct against, and it can also get you a penalty tax of 1% a month on the amount you were not entitled to put in. You are charged for the privilege of saving.
Two things to know alongside that. A TFSA has no income requirement at all, so it is available regardless and is usually the right home for savings in this situation. And the Income Tax Act does allow exempt income to count toward the RRSP deduction limit for PRPP purposes specifically, which is a narrow exception rather than a general one.
See personal finance for how the registered accounts compare generally.
Northumberland County includes Alderville First Nation, and Hiawatha First Nation, Curve Lake First Nation and Mississaugas of Scugog Island First Nation are all within reach of Cobourg. Employment that crosses on and off reserve during the same week is ordinary here rather than exceptional, which is exactly the situation the proration rule was written for and the one most often reported incorrectly.
I do not advise on status, band membership or treaty rights. Those are legal questions, and so is the scope of section 87 as a matter of Aboriginal and treaty law. They belong with a lawyer who works in that area.
Where a matter touches both sides, the tax advice and the legal advice need to be taken together rather than one at a time.
No. The income itself has to be situated on a reserve. Status is required, and on its own it settles nothing, so many registered people pay tax on all of their income because none of it is connected to a reserve.
If at least 90% of your duties are on the reserve, all of the income is usually exempt. Below that, the exemption is prorated to the share of duties performed on the reserve, unless Guideline 2, 3 or 4 applies and exempts the whole amount. Keep a record of where you worked, because the proportion has to be supportable.
EI premiums are payable, because they are not a tax. CPP is not payable by default on exempt employment, but the employer can elect coverage on Form CPT124, or you can elect individually on Form CPT20. Contributing builds CPP retirement, disability and survivor entitlement, so the decision has consequences well beyond this year's pay.
Yes. The Canada Child Benefit, GST/HST credit, Ontario Trillium Benefit and Canada Workers Benefit are all calculated from filed returns, and they do not arrive if nothing is filed. The exempt income is reported on Form T90 and is not taxed.
You can, and if your income is exempt it produces no deduction and may attract penalty tax on the over-contribution, because exempt income does not create RRSP room. A TFSA has no income requirement and is generally the better place for savings in that situation. Worth a conversation before contributing rather than after.
Often, and in both directions. The CRA looks at where your terms of employment require you to work, which for a telework arrangement is the home office. Working from a home off reserve for an on-reserve employer means those days are performed off reserve and no longer count toward the 90% or 50% thresholds. Working from a home on reserve for an off-reserve employer means those days are performed on a reserve, which can create an exemption that did not exist before. The temporary COVID position, which ignored the move, ended on 31 December 2022.
Form TD1-IN, Determination of Exemption of an Indian's Employment Income. That is what stops income tax being deducted on the exempt portion. Without it your employer withholds tax all year and you recover it by filing.
No. Section 87 applies to individuals and to bands, and a corporation is neither. A company is a separate legal person from its shareholders, so it does not inherit the exemption from them. Other provisions can exempt a band as a public body performing a function of government, and can reach certain corporations owned by such bodies where strict ownership and geographic conditions are met, so it is worth checking rather than assuming.
Generally no. In employee leasing arrangements, where an on-reserve agency employs you but you do the work off reserve for an off-reserve business, the courts have found the income taxable in the majority of cases, and the CRA's published position is that the employer's location alone is not a strong enough connecting factor. Get independent advice before signing anything of that shape.
Generally not, for the hours worked at an off-reserve home. The CRA's position is that a duty to accommodate is not itself a factor connecting income to a reserve, so the duties count as performed where they are physically performed. An accommodation that is entirely appropriate as an employment matter can reduce or remove an exemption you had before, which is better found out when it is being arranged than the following April.
No. Social assistance paid on a means, needs or income test for the care of someone you are not related to is kept out of income by section 81 of the Income Tax Act, and since 1 January 2020 that covers programmes provided for by the law of an Indigenous governing body as well as federal and provincial ones. This is separate from section 87 and does not depend on status or on a reserve.
Generally no. Amounts that follow employment income, including EI, CPP, registered pension benefits and retiring allowances, are exempt in the same proportion the employment income was. Old Age Security is based on years of residence in Canada rather than on employment, so there is no exempt employment for it to take its character from.
Yes. Section 87 is an exemption from taxation, and Ontario income tax is calculated from the federal figures, so exempt income is not picked up provincially either.
It depends on where the income-earning activity is actually carried on, along with where your customers are, where the business is managed, and where the records are kept. A business serving the reserve community from premises on a reserve is a strong case. A business selling into the general market off reserve is a much harder one, whatever the registered address says.
Relief applies where the vendor or the vendor's agent delivers the goods to the reserve. If you collect the goods yourself off reserve, it does not apply. That makes the delivery arrangement something to settle at the point of sale rather than afterwards.
Two notes on the sources. The employment income guidelines date from June 1994 and have not been rewritten since, which is why they say nothing about remote work and why the CRA's telework position has to be read alongside them. And the COVID-era guidance page is archived; it applied only from 16 March 2020 to 31 December 2022 and should not be relied on for any later year.
The CRA also runs a dedicated enquiries line for these questions at 1-800-959-8281.
Twenty minutes, no charge. Bring the facts and we will work through which guideline applies.
Call (905) 207-9639