Top 10 things we learned about Section 87 from an Indigenous payroll expert

Section 87 payroll compliance can look like a narrow corner of payroll. Alice Maracle, a payroll compliance professional, made a strong case that it’s a clear test of how well any payroll team handles judgment, documentation and change. 

Her Employment Hero webinar covered a lot of ground, so we’ve pulled out the ten lessons that matter most. Each one is grounded in what Alice said, and each one points to something a payroll or finance team can act on this week. This recap is written for payroll administrators, finance leads and the bookkeepers and providers who support them.

1. Modern payroll asks for judgment as well as calculation

Alice opened with an argument that framed the rest of the session. Modern payroll requires more than a correct calculation or a configured piece of software. It requires interpretation, judgment and documentation. Section 87 shows why. Organizations now operate across regions, employees work remotely or in hybrid arrangements and one payroll environment has to accommodate several legal settings at once. The value of a payroll professional increasingly sits in deciding why a treatment is correct, as well as applying it. 

Alice described her own work as combining payroll administration, financial reporting, compliance and the design of internal processes that keep financial operations accurate and accountable.

2. Three questions should frame every decision

Alice asked attendees to keep three questions in mind throughout the presentation. What is the relevant legal requirement? What facts determine how that requirement applies? And what documentation would allow someone else to understand and verify your decision? The questions sound simple. Alice treated them as fundamental to effective payroll governance, and in practice they separate answering one request from running a reliable process. Every lesson below comes back to one of them.

3. Indigenous identity and eligibility are not the same thing

Alice began with the workforce context. The 2021 Census counted 1,807,250 people who identified as Indigenous, or 5.0% of Canada’s population, and that population grew 9.4% between 2016 and 2021, compared with 5.3% for the non-Indigenous population. Those figures include First Nations, Inuit and Métis people, and they don’t tell you how many employees qualify. The exemption turns on registration under the Indian Act, or entitlement to registration. Inuit identity alone doesn’t establish eligibility. Her practical advice was to recognize when an arrangement needs assessment, without assuming anything from an employee’s identity.

Want to hear Alice explain the difference between identity and eligibility in her own words?

4. Where the income is situated matters more than where the cheque lands

Section 87 exempts certain personal property of an Indigenous person situated on a reserve. Courts have treated employment income as personal property for this purpose, so the question is whether that income is situated on a reserve. Alice was direct that you can’t answer it by asking where a paycheque was issued or deposited. The answer comes from connecting factors: where the duties are performed, where the employee lives, where the employer is resident and the nature of the employment. Depositing wages into a reserve-based bank account doesn’t establish an exemption on its own. 

5. Guideline 1 sets the 90% benchmark and the proration rule

The Canada Revenue Agency (CRA) publishes its Indian Act Exemption for Employment Income Guidelines, which apply the connecting factors test to four common situations. Guideline 1 is usually where payroll teams start. When at least 90% of an employee’s duties are performed on a reserve, the entire income from that employment will generally be exempt. Below 90%, but above an incidental share, and where no other guideline applies, the proration rule exempts only the portion tied to on-reserve duties. Alice’s example was 40% of duties on a reserve, so 40% of the income is exempt and the remaining 60% is taxable. 

Payroll needs evidence of that split, such as schedules, time records or project assignments, because a salary figure doesn’t show where the work happened.

6. Guidelines 2 to 4 test the substance of the relationship

Guideline 2 looks at residence. The employee lives on a reserve, and the employer is resident on one. For an organization, residence follows where central management and control is actually exercised. A mailing address, an office or a payroll function on a reserve isn’t enough on its own. Guideline 3 asks for more than 50% of duties on a reserve, plus either an employee who lives on one or an employer resident on one. Alice compared two employees who each perform 60% of duties on a reserve and reached different outcomes, because where they live changed the answer. Guideline 4 covers bands, tribal councils and qualifying First Nations organizations, provided the duties relate to qualifying non-commercial activities. Alice’s summary across all four was that eligibility follows the substance of the relationship, and the label on the employer or the employee doesn’t settle it. For payroll teams, that means recording which guideline applies and why, along with any guideline that was considered and ruled out.

Would seeing the guidelines applied to real scenarios help your team?

7. Three scenarios show that the combination of facts decides the outcome

In the first, a registered employee lives on a reserve and works from home for a company headquartered in Toronto. If the location is verified and at least 90% of duties are on the reserve, Guideline 1 generally supports exemption. The Toronto address doesn’t disqualify the income, but payroll would still want evidence of the remote arrangement and the actual work location. In the second, a registered employee works for an Indigenous-owned commercial company and lives and works off reserve. Indigenous ownership alone doesn’t make the salary exempt, so the income is taxable. In the third, a registered employee earns $80,000 a year with 40% of duties on a reserve. Roughly $32,000 would be exempt and $48,000 taxable. Alice’s takeaway was that the real question is how far income qualifies.

8. A TD1-IN opens the assessment. It doesn’t close it.

Form TD1-IN is the CRA’s determination form for an Indian’s employment income. It helps employers establish whether income is fully exempt, partly exempt or taxable. Alice was clear that it isn’t an automatic authorization to stop withholding tax. It’s a trigger for assessment, and payroll still has to confirm the information is complete, reasonable and consistent with the arrangement. The same goes for a request to stop withholding because someone has shown proof of registration. That request should prompt an assessment before anything changes in the system. Circumstances also change. A new work location, a new principal residence or a new employer may mean the original assessment needs revisiting. 

Employment Hero’s Indigenous payroll compliance checklist sets out the documentation to gather before the first pay run and what to do when circumstances change.

9. Registration and the status card are different things

Indigenous Services Canada says registration under the Indian Act doesn’t expire, although a status card does reach a renewal date. An expired card is a document to renew, and it doesn’t mean eligibility has disappeared. A simple habit helps here: note the renewal date in the file next to the registration evidence, so the renewal is visible without reopening the eligibility question. Alice’s guidance was to keep reliable, accepted evidence of registration and renew documents when needed, without assuming the underlying legal eligibility has ended. She also raised privacy. Registration information is personal, so employers should collect and keep only the documentation that’s reasonably necessary for the compliance purpose.

10. Every eligibility decision has to survive year-end reporting

Correct eligibility decisions have to become correct reporting. The taxable portion of employment income goes in the regular employment income box, and the exempt portion is reported under code 71 in the Other information area. Related amounts, such as registered pension plan contributions and union dues tied to exempt income, carry codes 94 and 95. Section 87 doesn’t exempt Employment Insurance, so EI premiums generally continue. CPP treatment depends on whether the appropriate coverage election is in place. Quebec employees bring extra reporting, including the RL-1 slip. Alice recommended reconciling payroll calculations to the applicable T4 and provincial requirements as part of the year-end process, and her closing test is one to keep: if the CRA asked how a particular employee’s exempt income was calculated, could you rebuild that amount from the file? Employment Hero’s T4 guide on Code 71 and exempt income covers slip placement and the errors that most often force amended T4s.

What should a payroll team do with the list?

Alice’s closing point was that payroll is moving from calculation toward interpretation. Teams don’t need to memorize every scenario. They need a reliable method: understand the legislation, identify the facts, document the reasoning and reassess when those facts change. Technology can support that work, but it can’t carry it. Payroll systems maintain classifications and produce reconciliation reports, yet they process whatever they’re given, so one faulty assessment repeats across every pay cycle. Employment Hero’s Indigenous payroll software sets out the documentation to gather before the first pay run and what to do when circumstances change

If you act on only one lesson this week, make it number ten. Pick one partly exempt employee and try to rebuild their exempt amount from the file. If you can’t, you’ve found the place to start.

Alice’s three questions, the legal requirement, the facts and the documentation, make a practical agenda for any payroll review.

Score your next review against that framework by watching the session on demand.