Salary or Wages from Employment Duties Performed Partly or Entirely on a Reserve or Premises

Source deductions of income tax

If an Indian performs his or her employment duties partly or entirely on a reserve or premises, you are not required to withhold income tax from the employment income (or portion thereof) that gives entitlement to the deduction for employment income situated on a reserve or premises.

If any of the conditions set out below are met, all of the employment income earned by an Indian gives entitlement to the deduction. If none of the conditions are met, only the portion of the income attributable to the employment duties performed on the reserve or premises gives entitlement to the deduction.

Conditions that must be met for all the employment income to give entitlement to the deduction

  • The Indian employee performs at least 90% of his or her employment duties on a reserve or premises.
  • The Indian employee performs more than 50% (but less than 90%) of his or her employment duties on a reserve or premises and at least one of the following conditions is met:
    • The Indian employee lives on a reserve.
    • The employer manages and administers the business on a reserve or premises.
  • The Indian employee performs more than 50% of his or her employment duties outside a reserve or premises and both of the following conditions are met: 
    • The Indian employee lives on a reserve.
    • The employer manages and administers the business on a reserve or premises.
Example of how to calculate source deductions of income tax of an Indian employee whose duties are performed both on and outside a reserve

An employer that manages and administers a business on a reserve pays an Indian employee a gross salary of $500 per week. 40% of the employee's duties are performed on the reserve and 60% are performed outside the reserve. The employee does not live on a reserve.

In this case, the conditions for all the employment income to give entitlement to the deduction have not been met. If more than 50% of the employment duties are performed outside a reserve or premises, the Indian must live on a reserve for the full amount of employment income to be deducted in the calculation of his or her taxable income. Consequently, only the portion of the income attributable to the duties performed on the reserve, that is, $200, (40% of $500), is considered to be employment income situated on a reserve or premises and therefore gives entitlement to the deduction.

Consequently, the employer must withhold income tax from the portion of the income attributable to the duties performed outside the reserve, that is, $300 (60% of $500).

If the same employee had lived on a reserve, the employer would not have been required to withhold income tax, because the conditions would have been met and the full amount of the income ($500) would have given entitlement to the deduction.

Québec Pension Plan contributions

You are not required to withhold or pay Québec Pension Plan (QPP) contributions with respect to the employment income of an Indian who is entitled to the deduction for employment income situated on a reserve or premises, unless you have made an irrevocable election on form RR-2-V, Election to Participate in the Québec Pension Plan: Indian Employees Whose Employment Is Excepted by Reason of a Tax Exemption, to have all of your Indian employees who reside in Canada and whose work in Québec is excluded from the QPP because of a tax exemption participate in the QPP.

Québec parental insurance plan premiums

All of the salary or wages paid to an Indian are subject to employee and employer Québec parental insurance plan (QPIP) premiums, even if the salary or wages are employment income that gives entitlement to the deduction for employment income situated on a reserve or premises.

This is the case for all employers, regardless of whether the employer is an Indian, an Indian band, a band council or an Indian organization.

Other employer contributions

Indian employer

Special rules apply to an employer that is an Indian, an Indian band, a band council or an Indian organization. See Indian Employer.

Other employers

All of the salary or wages paid to an Indian are subject to the following, even if the salary or wages are employment income that gives entitlement to the deduction for employment income situated on a reserve or premises:

Similarly, you must include all of the salary or wages paid to an Indian in your total payroll used to calculate your health services fund contribution rate, your participation in workforce skills development and, if applicable, your contribution to the Workforce Skills Development and Recognition Fund (WSDRF).

Special rule regarding source deductions of income tax and QPP contributions

An employer that is an Indian band, a band council or an Indian organization controlled by one or more similar bands or band councils and exclusively devoted to the social, cultural, educational or economic development of Indians who, for the most part, live on reserves, you do not have to withhold income tax or withhold and pay QPP contributions if the following conditions are met:

  • The employer manages and administers the business on a reserve or premises.
  • The Indian's employment duties are part of the employer's non-commercial activities which are intended for the well-being of the Indians who live on the reserve.

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