Exempt Income

Some income is exempt from taxation. There are MANY categories of exempt income: if you are a foreign soldier stationed in Canada, if you volunteer in the emergency response field (volunteer firefighter, etc), or if you earned interest from a tax-free savings account (TFSA). Credits such as the Child Tax Benefit and GST Tax Credit are also exempt.

The most common example of exempt income might be the income of an "Indian" if that income is earned on a reserve.  More details on this are below.


S. 87 of the Indian Act exempts the personal property of an Indian situated on a reserve from taxation. The courts have decided that, for purposes of S. 87 of the Indian Act, an Indian's employment income is personal property.
Therefore, if an Indian earns employment income, what must be determined is whether that income is situated on a reserve.
An Indian's employment income will usually be exempt from income tax in any of the following situations:

• when at least 90 % of the duties of an employment are performed on a reserve,
• when the employer is resident on a reserve and the Indian lives on a reserve,
• when more than 50% of the duties of an employment are performed on a reserve and the employer is resident on a reserve, or the Indian lives on a reserve,
• when the employer is resident on a reserve and the employer 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, if the organization is dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves, and the duties of the employment are in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on reserves.

When less than 90% of the duties of an employment are performed on a reserve and the employment income is not exempted by another guideline or disposition of the Act, the exemption must be prorated. The exemption will only apply to the portion of the income related to the duties performed on the reserve.
The receipt of EI benefits, retiring allowances, CPP (or QPP) payments, RPP benefits or wage loss replacement plan benefits will usually be exempt from income tax when received as a result of employment income that was exempt from tax. If a portion of the employment income was exempt, then a similar portion of these amounts will be exempt.