At a glance
- Employment income of an employee registered (or entitled to be registered) under the Indian Act can be fully or partly exempt from income tax when it's connected to a reserve.
- The employee fills out Part 1 of Form TD1-IN to help work out whether their income is exempt.
- On the T4, exempt income goes under code 71 (Other information). Only the taxable part goes in Box 14.
- PayCub lets you set the exempt percentage on each pay stub and splits the T4 for you.
Who qualifies
The section 87 exemption can apply when the employee is registered, or entitled to be registered, under the Indian Act, and the income is situated on a reserve. It doesn't apply to treaty beneficiaries of a First Nation whose final or self-government agreement ended the exemption.
Ask the employee to complete Part 1 of Form TD1-IN, Determination of Exemption of an Indian's Employment Income. The CRA's guidelines cover the common situations:
- 90% or more of the duties performed on a reserve: the income is usually fully exempt.
- Less than 90% on a reserve (and no other guideline applies): the exemption is prorated to the part of the income for duties performed on the reserve.
- Other guidelines can also make income exempt, for example when both the employer and the employee are resident on a reserve. See the CRA's employment income guidelines for more examples.
What to deduct
| Fully exempt | Partly exempt | |
|---|---|---|
| Income tax | Don't withhold | Withhold on the taxable part only |
| EI | Withhold on all income | Withhold on all income |
| CPP | Only if you filed Form CPT124 to cover your First Nations employees | On the taxable part, or on all income if you filed Form CPT124 |
Source: CRA, payments to First Nations workers.
T4 reporting
- Fully exempt: report the income under code 71 in the Other information area. Don't put it in Box 14.
- Partly exempt: the taxable part goes in Box 14, and the exempt part under code 71.
- Fully taxable: Box 14 only, no code 71.
Source: CRA, Indians: tax-exempt employment income.
In PayCub
- On the employee's profile, turn on Indian Act Tax Exempt under the exemptions.
- On each pay stub, enter the % of this pay exempt under Section 87, for example 100% for fully exempt work, or the share of duties performed on a reserve.
- PayCub withholds income tax only on the taxable part, and at year-end reports the exempt amount under code 71 and the taxable amount in Box 14 of the T4.
The percentage can change each pay. If the share of work done on a reserve varies, set it on each stub. Keep the employee's TD1-IN and any records of where duties were performed in case the CRA asks.