When is a client's income exempt under section 87 of the Indian Act?
As of October 2026, the CRA treats a status Indian's employment income as fully exempt under section 87 of the Indian Act when at least 90% of duties are performed on a reserve, and prorates it below that unless another guideline applies. Business and investment income is exempt only if it is situated on a reserve.
Which CRA guideline makes your client's pay exempt?
Section 87 exempts the personal property of an Indian or a band situated on a reserve laws-lois.justice.gc.ca, and paragraph 81(1)(a) of the Income Tax Act keeps any amount another federal statute declares exempt out of income
laws-lois.justice.gc.ca. The client must be registered, or entitled to be registered, under the Indian Act. Whether the income is situated on a reserve is decided by the connecting factors test
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For employment income the CRA applies that test through four guidelines. Meet any one of them and all of the pay is usually exempt canada.ca.
| Guideline | Test | Result |
|---|---|---|
| 1 | At least 90% of the duties performed on a reserve | All of the pay exempt |
| 2 | Employer resident on a reserve and the employee lives on a reserve | All of the pay exempt, even for work done off reserve |
| 3 | More than 50% of the duties on a reserve, and either the employer is resident on a reserve or the employee lives on one | All of the pay exempt |
| 4 | Employer resident on a reserve is a band, tribal council or Indian organization serving Indians who mostly live on reserves, and the duties are part of its non commercial activities | All of the pay exempt, even for work done off reserve |
| Proration | Under 90% on a reserve and no other guideline met | Only the share tied to on reserve duties exempt |
"Employer resident on a reserve" means the central management and control of the employer is located there, usually where the board meets. "Lives on a reserve" means the home on the reserve is the employee's principal residence and the centre of their daily routine canada.ca.
How does proration split a salary when under 90% of the work is on reserve?
When only proration applies, the exempt share is working days on reserve divided by total working days. Vacation, sick days and statutory holidays come out of both counts canada.ca.
Take a client earning $60,000 from an employer whose management sits off reserve. They work 44 of 220 working days at a reserve clinic and live off reserve, so guidelines 2, 3 and 4 don't apply. The exempt share is 44 ÷ 220 = 20%, so $12,000 is exempt and $48,000 is taxable.
| Item | Amount |
|---|---|
| Total salary | $60,000 |
| Exempt share (44 ÷ 220) | 20% |
| Exempt pay, T4 code 71 | $12,000 |
| Taxable pay, T4 box 14 | $48,000 |
| EI insurable earnings | $60,000 (all of it) |
| CPP without CPT124: 5.95% × ($48,000 − $3,500) | $2,647.75 |
| CPP with CPT124: 5.95% × ($60,000 − $3,500) | $3,361.75 |
The CPP lines use the 2026 employee rate of 5.95% and the $3,500 basic exemption canada.ca. Watch the threshold: a client at 89% on a reserve gets only 89% exempt under guideline 1, but if their employer is resident on a reserve or they live on one, guideline 3 makes all of it exempt
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What does payroll withhold and report for an exempt employee?
The employee completes part 1 of Form TD1-IN, certifying registration and, where it matters, that the reserve home is their principal residence. You reassess when their residence, the employer's residence, where they work or the on reserve percentage changes canada.ca. The form is how you decide which exemption applies
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| Item | Fully exempt pay | Partly exempt pay |
|---|---|---|
| Income tax | Don't withhold | Withhold on the taxable part only |
| EI | Withhold on all of it | Withhold on all of it |
| CPP | Only if you filed Form CPT124 | On the taxable part, or all of it with CPT124 |
| T4 box 14 | Nothing | Taxable part only |
| T4 code 71 | All of it | Exempt part only |
| Boxes 24 and 26 | Box 24 all; box 26 only with CPT124 | Box 24 all; box 26 taxable part, or all with CPT124 |
| RPP and union dues, 2024 slips and later | Codes 94 and 95 | Codes 94 and 95 for the exempt part, boxes 20 and 44 for the taxable part |
If you don't elect CPP coverage, the employee can elect to contribute on exempt earnings with Form CPT20 when they file. In a situation the guidelines don't cover, withhold as for any other employee until you can confirm the exemption canada.ca. Every exempt code is explained on T4 other information codes.
Which other income is exempt, and which never is?
Outside employment the same test applies, but the CRA weighs different factors canada.ca.
| Income | Treatment |
|---|---|
| EI, CPP or QPP, RPP benefits, retiring allowances tied to the job | Exempt in the same proportion as the employment income |
| Business income (sole proprietor or partnership) | Exempt where the income earning activities are on a reserve; prorated if split, expenses in the same ratio |
| Interest on deposits and fixed rate GICs | Exempt only if the institution is on a reserve, interest is paid there, and the rate is fixed when invested |
| Mutual funds | Generally taxable |
| Rental income from property on a reserve | Generally exempt |
| Capital gains on property on a reserve | Not taxable, but a return is still required |
| Training allowances | Taxable unless the training is on a reserve |
| OAS, GIS, US Social Security and US pensions | Taxable, even for a client living on a reserve |
| Income of a corporation or trust | Never eligible, even if a status Indian owns or controls it |
Proration carries through: if one fifth of the client's pay was exempt, one fifth of the retiring allowance and of the CPP paid from that job is exempt too canada.ca. Expenses that relate to exempt income can't be deducted against taxable income
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Does exempt income count for the Canada Workers Benefit?
Exempt income doesn't go on the T1. Form T90, Income Exempt From Tax Under the Indian Act, calculates the client's net exempt income canada.ca. The CRA also notes that applying for the Canada child benefit and the GST/HST credit can make a client eligible for related provincial or territorial benefits
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The main federal use is the Canada Workers Benefit. Schedule 6 pulls tax exempt working income from line 10000 of Form T90 and net exempt income from line 10026, and line 38105 asks whether your client chooses to include it. Including it is optional, but once they do, the spouse's exempt income must go in too canada.ca. Run it both ways: exempt pay can lift a low earner over the CWB phase in, or push a family past the phase out. The 2026 thresholds are on Canada Workers Benefit 2026.
A client with no taxable income should still file. The Canada child benefit, the child disability benefit and the GST/HST credit all require a return, even with no income canada.ca.
When do the guidelines not decide the answer?
In uncommon situations the CRA goes back to the full connecting factors analysis, and residence of the employer carries little weight when it has no real tie to the reserve. A dentist living on a reserve who is the sole shareholder of a professional corporation treating patients off reserve has taxable salary. So does a worker placed off reserve by a leasing agency whose head office is on a reserve canada.ca.
Three more limits catch people. Treaty 8 gives no general tax exemption (Benoit, 2003 FCA 236). Members of a First Nation with a self government or tax agreement may fall under different rules. And a person newly registered under Bill S-3 or Bill C-3 is exempt only from the effective date that applies to their registration, such as August 15, 2019 for the second set of S-3 amendments canada.ca.
Sources
Does a status Indian pay GST/HST on goods bought off reserve?
Not if the vendor or the vendor's agent delivers them to a reserve; carrying them there in their own vehicle makes the purchase taxable. The vendor records the 10 digit registry number or band name on the invoice and keeps proof of delivery canada.ca.
Can a client with only exempt income deduct RRSP contributions?
No. With only exempt income the contributions aren't deductible, and the client may owe the Part X.1 penalty on contributions that can't be deducted. A client who also has taxable income follows the normal RRSP rules canada.ca.
Is EI received after exempt employment taxable?
Does a corporation owned by a status Indian get the exemption?
No. Corporations and trusts aren't eligible even when a status Indian owns or controls them, and only unincorporated business income can be exempt canada.ca. Dividends paid to the shareholder can be exempt when the corporation's head office, management and main income earning activities are all on a reserve.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.