16 June 2000 External T.I. 2000-0029195 - INDIAN INVESTMENT INCOME

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Is the interest income earned from tax exempt employment income invested in G.I.C.s, in a bank off reserve, by a status Indian, tax exempt.

Position: No.

Reasons: Regardless of whether the bank was on or off reserve, since the interest income is generated off reserve, it would be considered to be earned in the normal economic mainstream and, accordingly, not considered personal property situated on a reserve.

XXXXXXXXXX 2000-002919
M. Shea-DesRosiers
(613) 957- 8953
June 16, 2000

Dear XXXXXXXXXX:

This is in reply to your facsimile forwarded to the Ottawa Tax Centre on April 4, 2000, concerning the taxation of interest earned on tax exempt income invested in Guaranteed Investment Certificates ("GIC's").

You indicate that you are a status Indian, registered # XXXXXXXXXX, who worked on reserve or Category 1 Lands for XXXXXXXXXX. Any money that you invested in GIC's comes from tax exempt employment income earned in those communities. You believe that any interest earned from the tax exempt employment income invested in GIC's should also be tax exempt. In our telephone conversation (XXXXXXXXXX/Shea-DesRosiers) of June 6, 2000, you mentioned that you are presently unemployed and that your GIC's are with the XXXXXXXXXX. You do not reside on a reserve.

Our comments

In general terms, it is section 87 of the Indian Act, along with paragraph 81(1)(a) of the Income Tax Act, that establish the exemption from taxation for status Indians. Section 87 of the Indian Act exempts from taxation the personal property of an Indian situated on a reserve, and the courts have previously concluded that the reference to personal property in section 87 of the Indian Act includes income. In determining whether the income earned by an Indian is situated on reserve and thus exempt from taxation, the approach taken by the Supreme Court of Canada in the 1992 case of Williams v. The Queen (92 DTC 6320) is followed. This approach requires the examination of all factors connecting income to a reserve to determine if the income is located on the reserve. The Supreme Court of Canada also indicated that the ultimate question is to determine to what extent each connecting factor is relevant in determining whether taxing the particular kind of property in a particular manner would erode the entitlement of an Indian to personal property situated on a reserve. One general direction provided in Williams v. The Queen was that an "overly rigid test which identified one or two factors as having controlling force...would be open to manipulation and abuse". The Supreme Court of Canada rejected the situs of the debtor test as the sole test for determining whether the personal property of an Indian or band was situated on a reserve.

In Recalma v. The Queen, (96 DTC 1520, 98 DTC 6238), the Tax Court of Canada, as confirmed by the Federal Court of Appeal, considered the taxation of income earned by an Indian living on reserve, from investments purchased from an on reserve branch of a bank. It should be noted that the nature of the property in question was the income from the investments and not the investments themselves. The Court had to determine if the investment income was situated on the reserve. This determination required a review of all relevant connecting factors and consideration as to how much weight should be given to each factor. The following were considered in determining the situs of the investment income:

a) the residence of the taxpayer;

b) the origin or location of the capital used to buy the securities;

c) the location of the bank branch where the securities were bought;

d) the location where the investment income is used;

e) the location of the investment instruments;

f) the location where the investment income payment is made; and

g) the nature of the securities and in particular:

i) the residence of the issuer;

ii) the location of the issuer's income generating activity from which the investment is made; and

iii) the location of the issuer's property in the event of a default that could be subject to potential seizure.

In Recalma v. The Queen, the courts placed considerable emphasis on the location of the bank's income generating activity. In that case, the investments were bankers acceptances and mutual funds units and the income generated from these was earned in the economic mainstream and was not connected to a reserve. Basically, the Court concluded that income from these investments started with companies off the reserve and passed through a bank on reserve to the taxpayers. It was held that the investment income of the taxpayer was not personal property situated on a reserve. The Court concluded that in making these investments, the taxpayer chose to invest in the economic mainstream of normal business conducted off the reserve. Consequently, the Canada Customs and Revenue Agency's ("CCRA") position is that income earned in the economic mainstream is so strongly connected to a location off reserve that it generally outweighs other factors that connect it to a reserve.

Based on the decision in Recalma v. The Queen, it is necessary to determine the location of the issuer's income generating activity of the investment instrument. In your situation, since the income is generated off reserve, it would be considered to be earned in the normal economic mainstream and, accordingly, not considered personal property situated on a reserve. The fact that the interest income from your GIC's comes from tax exempt employment income earned on a reserve does not make the interest income tax exempt. Unless the interest income can be identified as exclusively generated on a reserve, it is the CCRA's position that the interest income is not tax exempt. The interest income from your G.I.C.s would, therefore, be taxable.

For the CCRA to consider an Indian's investment income to be tax exempt, the Indian's investment income would have to be from an on-reserve financial institution that generates its income exclusively from investment and loans to Indians on a reserve and it has to be established that the loans and investments are used by Indians for development on the reserve. In addition to the above-mentioned test for the financial institution, in our view, other connecting factors would still have to be present such as the Indian to live and work on a reserve and the capital with which the Indian made the investments has to be from an exempt source.

We trust the above comments will be of assistance to you.

Yours truly,

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch