How does the Indian Act tax exemption apply to employment income?

The CRA says:

If you are a First Nations, Inuit, or Métis person residing in Canada, you are subject to the same tax rules as any resident of Canada. In certain cases, your income may be tax-exempt* under section 87 of the federal Indian Act. To continue receiving your benefit and credit payments, you need to file a tax return, even if your income is tax-exempt or you had no income at all.

The CRA has guidelines and detailed background information, based on court decisions, for applying the tax exemption for status Indians under the Indian Act.* Here’s a summary of the tax exemption rules for status Indians regarding on-reserve employment income. For more information about Indian status, see Are you entitled to Indian status. For examples from the CRA on applying these guidelines, see Business income and Interest and investment income.

*The term Indian is used here because of its legal applicability under the federal Indian Act.

Guideline 1

When at least 90% of an Indian’s income is from working at their job or position on a reserve, all of the income from that employment will usually be exempt from income tax.

This Guideline has a Proration Rule: when less than 90% of the work is performed on a reserve, the exemption is prorated to apply only to the proportion of the income earned on a reserve.

Guideline 2

When the employer is resident on a reserve, and the Indian employee lives on a reserve, all of the income from that employment will usually be exempt from tax.

Guideline 3

When over half of the Indian’s work is done on a reserve, and either the employer is resident on a reserve or the Indian lives on a reserve, all of the income from all of that work will usually be exempt from tax.

Guideline 4

If the employer is resident on a reserve and is:

• An Indian band which has a reserve
• A tribal council representing one or more Indian bands which have reserves, or
• An Indian organization controlled by one or more such bands or tribal councils 
• An organization dedicated to the development of Indians who mostly live on reserve,

and if the Indian’s work for that employer is part of the employer’s non-commercial activity for the benefit of Indians mostly living on a reserve, all of the Indian’s income from that employment will usually be tax-exempt.

Detailed information can be found on Form TD1-IN, the CRA Determination of Exemption of an Indian's Employment Income form.

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