3 November 2008 Internal T.I. 2008-0296021I7 - Indian Act- Self-Employment 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.

Principal Issues: Are payments from Correctional Services Canada to Status Indians for services provided to Indians in prison exempt from tax under 81(1)(a)?

Position: Question of fact- but likely not.

Reasons: Income-earning activities appear to off-reserve; insufficient connecting factors to tie the income to a reserve. Position supported by CRA publications and court cases.

XXXXXXXXXX
Team Leader PRP
XXXXXXXXXX  Tax Service Office				2008-029602
									Pamela Burnley	(613) 957-3498
November 3, 2008

Dear XXXXXXXXXX :

Re: Taxation of Status Indian - Services Provided by Indian Elder

This is in response to your memo of September 29, 2008 requesting our comments on the tax exemption claimed by XXXXXXXXXX (the "Taxpayer") on certain income received for services provided in his capacity as an Indian Elder (the "CSC Income").

According to the limited facts that you have provided to us, the Taxpayer, who is a Status Indian and an Indian Elder, provides counselling and other services using traditional methods to Indian inmates in federal correctional facilities. His services include some liaison duties and instruction to institutional staff as deemed appropriate. The Taxpayer provides his services pursuant to a contract with Correctional Services Canada. We have assumed, for purposes of our comments, that the CSC Income is self-employment income. If you are not sure whether the Taxpayer is self-employed or an employee, we suggest that you provide all of the facts of the situation to CPP/EI Rulings for their review. We have also assumed that the correctional facilities are not located on a reserve as that term is used in section 2 of the Indian Act. It is not clear if the Taxpayer lives on a reserve, but we note that he appears to rent a house off-reserve.

Paragraph 81(1)(a) of the Income Tax Act together with paragraph 87(1)(b) of the Indian Act exempt from tax certain income of Status Indians. Paragraph 87(1)(b) of the Indian Act states that "the personal property of an Indian or a band situated on a reserve" is exempt from taxation. Income, including income from employment or self-employment, has been held by the courts to be personal property for the purposes of section 87 of the Indian Act.

In The Queen v. Monias, 2001 FCA 239, 2001 D.T.C. 5450, the Federal Court of Appeal stated that the purpose of section 87 of the Indian Act is "to protect reserve lands and Indians' personal property on a reserve from erosion...". The Court also commented:

"That the work from which employment income is earned benefits Indians on reserves, and indeed may be integral to maintaining the reserves as viable social units, is not in itself sufficient to situate the employment income there. It is not the policy of paragraph 87(1)(b) to provide a tax subsidy for services provided to and for the benefit of reserves. Rather, it is to protect from erosion by taxation the property of individual Indians that they acquire, hold and use on a reserve, although in the case of an intangible, such as employment income, it is the situs of its acquisition that is particularly important." [Emphasis added.]

The Supreme Court of Canada, in Williams v. The Queen, 92 DTC 6320, concluded that the determination of whether income is situated on a reserve and thus exempt from tax under the Indian Act requires the evaluation of the various connecting factors which tie the property (i.e. the income) to a location either on or off a reserve.

In the Taxpayer's situation, since the Taxpayer is assumed to be self-employed, rather than an employee, the CSC Income is business income. In Southwind v. The Queen, 98 DTC 6084, the Federal Court of Appeal concluded that the most significant factors that serve to connect business income to a location on or off a reserve are:

1. the location where the revenue-generating activities are carried out; and
2. the location of the business customers.

In the Taxpayer's situation, it appears that the revenue-generating activities are carried out at the correctional facilities where the services are provided and that the facilities are not on a reserve. Consequently, based on the limited information available to us, it is likely that the CSC Income would not be considered to be sufficiently connected to a reserve to be viewed as located on a reserve and would therefore be taxable. We note that if the correctional facilities are in fact physically situated on a reserve, the CSC Income, or some of that income, might be exempt.

If the CSC Income is taxable, any reasonable business expenses incurred for earning that income may be deductible against the CSC Income to the extent that they have not otherwise been reimbursed. We do not have any information on any expenses.

It appears that the Taxpayer has recently incorporated as a legal entity in the province of XXXXXXXXXX . If you need assistance regarding the application of the tax exemption with respect to the Taxpayer's situation in the future, please contact us.

For your convenience, we have attached a severed version of our document, # 2000-0027037, which describes the application of section 87 of the Indian Act to a similar situation.

We trust that these comments will be of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the Taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Yours truly,

Eliza Erskine
A/Manager
Non-Profit Organizations and Aboriginal Issues Section
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch