Why Section 87 payroll begins with a conversation, not a calculation

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For an employee registered under the Indian Act, Section 87 can mean some or all of their employment income is exempt from income tax. For a colleague in a near-identical role, it can mean nothing changes at all. The difference lives in the details of each job, and payroll teams are the ones who have to read them.

Those details have grown harder to decipher. Remote and hybrid work have moved desks off-site and split weeks between locations, while the underlying law has stayed largely the same. For small and medium businesses, a wrong call in an employee’s first week can follow them through every pay run of the year.

Alice Maracle has built payroll frameworks and audit-ready reporting systems across nonprofit organizations, private sector businesses and community-driven initiatives. She is now finance coordinator at Discovered Intelligence. Speaking on Inside the Workroom by Employment Hero, she traces Section 87 from its legal roots to the onboarding desk, through the mistakes that follow and the systems that prevent them. Her starting point is understanding before action: “What we need to understand is why the legislation exists, and then we could become better equipped to apply it responsibly and appropriately,” Maracle explains.

Section 87 asks more than one question

Maracle says Section 87 is neither a simple payroll benefit nor a general tax exemption. It carries specific legal and historical context, and that context shapes how it applies. The most common misstep she sees is the search for a single deciding factor: where an employee lives, where the business sits or whether the work happens from home. “The analysis is usually much more nuanced,” she says.

Courts built that nuance into what is known as the connecting factors test. The Canada Revenue Agency (CRA) worked with First Nations organizations to develop guidelines that apply the test to common employment situations, published as the Indian Act Exemption for Employment Income Guidelines. Under the first guideline, a full exemption generally requires at least 90 per cent of employment duties to be performed on a reserve.

Remote work has not rewritten that test, but it has complicated it. Maracle explains that the CRA separates “duties performed on a reserve out of genuine operational necessity” from work done for convenience, and expects “clear evidence that the primary duties are actually anchored to a reserve.” For hybrid staff, she notes, “the connecting factors have to be evaluated dynamically across different work sites.”

The first week sets the course

Maracle’s guidance begins before a single deduction changes: “the employer first will need to understand the employee’s eligibility without making any assumptions.”

She recommends adding the TD1-IN form, Determination of Exemption of an Indian’s Employment Income, to every onboarding pack alongside the standard federal and provincial TD1 forms. Employees do not always raise the exemption themselves. “Sometimes it changes, sometimes it doesn’t, and you don’t always know,” she says. Where an employer treats income as exempt, the CRA requires a completed TD1-IN to be kept on file for that employee in case it asks to see it.

The request itself carries weight. Maracle cautions against reading eligibility from a name or appearance, and says employers should explain why the information is needed. “An employee should never feel like they’re being asked to justify their Indigenous identity.” The conversation, in her words, should centre on “determining the correct payroll treatment and understanding what documentation is required.”

Records follow the same principle. She says they belong in confidential payroll files, kept apart from general HR files, so that “every single employee is treated with the same level of professional discretion.” Respectful payroll practices, she adds, “often recognize that we’re dealing with people.”

When payroll gets it wrong, employees feel it first

Mistakes are not rare. “This is something that happens quite frequently,” Maracle says. Both sides carry consequences, but “employees are often going to feel the impact first.”

The stakes are tangible. An employee who had tax withheld on exempt income can get it back by filing their tax return, which can mean months of waiting for money that was theirs to begin with. The exemption also has limits: Employment Insurance (EI) premiums are not considered a tax, so Section 87 does not exempt them. 

Recovery starts with scope: which pay periods were affected, and which current or former employees. Corrections can involve the CRA and, Maracle explains, “filing amended T4 or even T4A slips.”

Then comes the human side. Maracle recommends contacting affected staff proactively to explain what occurred and “how their pay and their tax filings may have been affected.” That openness can “build or rebuild trust that may have been lost during this process.” The repair is incomplete, she says, without “embedding proper controls into the payroll calendar.”

Strong systems outlast any one person

For Maracle, the case for getting this right begins with people. “The most important resource that any organization has is its employees,” she says. The return is trust, particularly among Indigenous employees who “historically have felt marginalized in different organizations.”

Her model is governance rather than expertise held in one person’s head. She wants Section 87 procedures built into standard routines, compliance checklists and payroll calendars. “This will protect institutional knowledge, but it also ensures continuity regardless of staff turnover.”

The aim, she says, is “creating resilient organizational systems that support accuracy, accountability, and trust.”

She expects the subject to grow, describing Section 87 as “more likely going to become a larger part of the payroll industry and payroll processes in Canada as a whole.” Preparation, in her view, is the whole game. “Ultimately it’s about being prepared for a problem before it arises.”

The conversation itself, she adds, is part of the work. “Shining a light on it will make it less complicated and a lot more easy to integrate with organizations all across the country.”