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Native Indian tax return (new client first time)

Hello,

I have a new client, the husband is native Indian and the spouse is not. The husband income is tax exempted resulting in zero taxable income.

The couple paid child care and the credit is allocated to the lower income spouse the husband whose income is zero. Does it make sense for me to override the child care credit to the wife who is actually paying taxes to reduce her tax payable amount?

I noticed on a prior return by another tax payer, that the husband was claim as a dependant to the spouse to receive additional credit. In my opinion, that’s not correct.

Anyone had a similar situation?

Was the husband’s income earned ON THE RESERVATION? Even if he lived on the reservation but worked off of the reservation then it is taxable.

Here is an excerpt from CRA website:
Indigenous Canadians pay taxes and are subject to the same general tax laws as all other Canadians – except where the tax exemption provided under the Indian Act applies. The Indian Act provides a tax exemption for individuals defined in that Act, if the income is situated on a reserve.

Here is the link to the entire interpretation including case law.

https://www.canada.ca/en/revenue-agency/news/newsroom/statements/statement-canada-revenue-agency.html

@indiramajorm

You seem to have three underlying situations:-

  1. Husband is First Nations, with Indian Status card, and income which was earned is tax exempt for reasons unspecified by you.

T4 slip and reporting T4 earnings
Box 14 = $0
Box 71 = $income amount

  1. Wife has taxable income. Is the wife able to claim the husband’s spousal amount on Schedule 1, line 303?

There is nothing to prevent this.

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-303-spouse-common-law-partner-amount.html

  1. The child care expenses must be claimed by the lower income person. Can this be over ridden in this situation?

No. No specified exemptions. An analogous CRA administrative policy below shows the option to report non-taxable income as taxable to increase benefits eligibility.

DIRECT REFERENCES

T4 Guide
https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4120/employers-guide-filing-t4-slip-summary.html#P880_82106

Tax-exempt employment income
Box 14 – Employment income
Leave this box blank. Instead, in the “Other information” area, enter code 71 and the amount of the exempt salary or wages paid to your Indian employee in the year.

T4 code 71

Box 71 - Indian (exempt income) - Employment

Do not report this amount on your tax return.

https://www.canada.ca/en/revenue-agency/services/aboriginal-peoples/information-indians.html#hdng12
(scroll down to employer source deductions)

"… Reporting exempt income

Employers have to report on a T4 slip employment income that is exempt under section 87 of the Indian Act . On the slip, an employer will enter code “71” in the area called “Other information.” However, the employee does not have to report the exempt employment income on his or her income tax and benefit return. Pensionable earnings must be reported in Box 26 of the T4 slip if an employer has elected to cover exempt employment income of an Indian under the Canada Pension Plan. Reporting exempt income

Employers have to report on a T4 slip employment income that is exempt under section 87 of the Indian Act . On the slip, an employer will enter code “71” in the area called “Other information.” However, the employee does not have to report the exempt employment income on his or her income tax and benefit return. Pensionable earnings must be reported in Box 26 of the T4 slip if an employer has elected to cover exempt employment income of an Indian under the Canada Pension Plan."

https://www.canada.ca/en/revenue-agency/services/aboriginal-peoples/information-indians.html#hdng3

" Overview

Throughout the following text, for purposes of the tax exemption under section 87 of the Indian Act , the CRA uses the term “Indian” because it has a legal meaning in the Indian Act .

As an Indian, you are subject to the same tax rules as other Canadian residents unless your income is eligible for the tax exemption under section 87 of the Indian Act . That exemption applies to the income of an Indian that is earned on a reserve or that is considered to be earned on a reserve, as well as to goods bought on, or delivered to, a reserve."

" Employment income

Throughout the following text, for purposes of the tax exemption under section 87 of the Indian Act , the CRA uses the term “Indian” because it has a legal meaning in the Indian Act .

Employment income is exempt from income tax under paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act only if the income is situated on a reserve. If your employment income is exempt from tax, you do not have to include that income when you file your personal income tax return. If you live in a province that provides child and family benefits which are based on family income, it may be to your advantage to report your exempt income when you file your personal income tax return in order to maximize your provincial benefit entitlements. To ensure that you retain tax-exempt status in respect of the reported amounts, you should contact us toll free at 1-800-959-8281 for instructions on how to report the amounts.

In 1992, the Supreme Court of Canada decided that all factors connecting income to a reserve must be examined in determining whether or not the income is situated on the reserve. To determine whether employment income is situated on a reserve, the courts follow the approach described in the decision called Glenn Williams v. Canada .

The Indian Act Exemption for Employment Income Guidelines will help you determine whether your employment income is considered to be situated on a reserve. The guidelines are an administrative tool and only deal with the most common employment situations. In some situations, unusual factors result in employment income being treated differently than the way the guidelines describe. In such cases, any factors connecting the income to a reserve must be analysed in accordance with the various court decisions to determine if the tax-exemption applies. If you need help, call us toll free at 1-800-959-8281 .

Expenses such as union dues and registered pension plan contributions are deducted from the specific source of employment income that they relate to. The net amount of this employment income will be exempt from taxes if the employment income is considered to be situated on a reserve. Any expenses that relate to employment income that is tax-exempt cannot be claimed as deductions against other taxable sources of employment income.

Note

A number of court decisions have dealt with tax-planning arrangements using section 87 of the Indian Act . Please follow this link for a discussion of “employee leasing” arrangements.

Employment-related income

Throughout the following text, for purposes of the tax exemption under section 87 of the Indian Act , the CRA uses the term “Indian” because it has a legal meaning in the Indian Act .

Employment Insurance benefits, Canada Pension Plan benefits, Quebec Pension Plan benefits, registered pension plan benefits, retiring allowances, and wage-loss replacement plan benefits you receive are treated in the same way as the employment income that gave rise to the particular income. In other words, if your employment income is exempt from income tax under section 87 of the Indian Act, your employment-related income will also be exempt. If part of your employment income is exempt, any employment-related income arising from that exempt income will also be exempt from income tax."


" Old Age Security (OAS) benefits

If you receive OAS payments, including the Guaranteed Income Supplement (GIS), the amounts you receive are not eligible for the tax exemption under section 87 of the Indian Act . Since OAS and GIS payments are not related to any previous employment and are not considered to have any connection to a reserve, the payments are considered to be off-reserve. The fact that you live on a reserve is not significant enough to connect the income to a reserve. Therefore, normal rules apply to these payments."

CCB, CCTB, UCCB

“…
To qualify for the CCB and the CDB, both you and your spouse or common-law partner, if applicable, must file an income tax and benefit return every year, even if there is no income to report.”

GENERAL REFERENCES

CRA Indian Employees
https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/payroll-deductions-contributions/special-situations/indian-employees.html

Indian Act Exemption for Employment Income Guidelines
https://www.canada.ca/en/revenue-agency/services/aboriginal-peoples/indian-act-exemption-employment-income-guidelines.html

CRA tax exemption under section 87 of the Indian Act.
https://www.canada.ca/en/revenue-agency/services/aboriginal-peoples/indians.html

CRA Aboriginal Peoples.
https://www.canada.ca/en/revenue-agency/services/aboriginal-peoples.html

Indigenous and Northern Affairs Canada
http://www.aadnc-aandc.gc.ca/eng/1100100010002/1100100010021

Connectivity for Aboriginal and Northern Communities in Canada
http://www.aadnc-aandc.gc.ca/eng/1352214337612/1353504776242

1 Like

@ptorkoff

Great reference.
https://www.canada.ca/en/revenue-agency/news/newsroom/statements/statement-canada-revenue-agency.html

Additional Comments re Status Indian Taxes
I have been preparing tax returns for Status Indians since 2005. Please note that there have been major changes on what is considered “Tax Treaty on Reserve Land” during the past fifteen years.

The original boundaries per the tax treaties have been redefined one or more times in many instances. In some cases “Bands” were moved. Previously CRA had seemed to accept “Traditional Land” as part of the on Reserve Land. The strict definition of the boundaries began to be enforced recently and resulted in a major revamp in 2011 of the legal and tax definitions. Several First Nations Bands are in court contesting these interpretations.

For example, here in Alberta, one reserve land near Fort McMurray had their boundaries redefined by 200 meters narrower by Indian Affairs. At contest were the original boundaries vs the reassessed boundaries. As a result a major new band structure is now outside of the reserve and the employment income earned out of this new facility built to supply services to oil companies would be subject to taxation. There is an side agreement with CRA that the old interpretation be in place until the politicians decide, legislation is updated, and courts rule. All of this is still ongoing and will likely be ongoing for some time to come.

Across Canada the situation various by Treaty, by Band, by Reserve, and by Aboriginal status. In some cases Band land was expropriated and other land was given. In some cases this had two unrelated Bands on one Reserve. Some Bands have yet to receive their land. Other Bands are not recognized as legitimate Bands.

Bottom Line
Each Reserve, each Band, each tax situation needs to be reviewed and assessed on a case by case basis in the event that there may be a difference of opinion.

1 Like

Hello,

dominique_dabolczi - The husband works on the reserve. His T4 slip shows $103K in box 71.

Thank you for the information. Greatly appreciate the feedback.