19 January 2000 External T.I. 9932395 - PORTION OF FARMING BUS. ON RESERVE

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: Tax treatment of a status Indian's income from a grain farming business on a portion of land situated on a reserve.

Position: Where a portion of the revenue generating activities are carried on a reserve, in this situation 45%, that portion of the business income would generally be tax exempt.

Reasons: As the main aspects of a grain farming business consist of the growing and harvesting of crops, the location of the land being farmed would be a connecting factor of major importance with respect to income from such a business. In this situation, 45% of the land that the Indian farms in his grain farming business is located on reserve and the major activity of this business, the growing and harvesting, is carried on uniformly throughout the farmland although there is limited business activity that occurs off reserve (i.e., delivery of grain to off reserve elevators).

XXXXXXXXXX 1999-001429
M. Shea-DesRosiers
Attention: XXXXXXXXXX

January 19, 2000

Dear Madam/Sir:

Re: Treaty Indians - Taxability of Farming Income on Farmland Located on Reserve

This is in reply to your letter of November 25, 1999, wherein you request our opinion as to whether the business income generated from a portion of land situated on a reserve would be exempt from tax under the following circumstances:

• a treaty Indian farms approximately 640 acres of farmland;
• approximately 45% of the land base is situated on an Indian reservation;
• the farm's main production consists of cereal crops and oilseeds;
• the treaty Indian lives on the farm but off the reserve as the home quarter is located approximately 1.5 miles from the reserve boundary; and
• the grain is sold to the Canadian Wheat Board and delivered to off reserve elevators.

We also acknowledge our telephone conversation (XXXXXXXXXX/Shea-DesRosiers) of January 7, 2000. For purposes of our response, we assume that your question concerns status Indians and reserves as defined in the Indian Act.

Paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act provide for a tax exemption for an Indian's personal property situated on a reserve. The Courts have previously determined that, for purposes of section 87 of the Indian Act, the reference to personal property includes income. In Williams v. The Queen (92DTC 6320), the Supreme Court of Canada reconsidered the approach to use in determining whether income is situated on a reserve. The proper approach in determining the situs of personal property is to evaluate the various connecting factors which tie the property to one location or another. The Supreme Court of Canada 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 significant factor that serves to connect business income to a location on reserve or off reserve is the location where the activities of the business are carried out. Another significant connecting factor would be the location of the customers of the business. However, as the main aspects of a grain farming business consist of the growing and harvesting of crops, the location of the land being farmed would be a connecting factor of major importance with respect to income from such a business.

You have indicated in your letter that 45% of the farmland that is being used by the Indian in the grain farming business is located on the reserve. We assume that the major activity of this business, the growing and harvesting as indicated above, is carried on uniformly throughout the farmland and that there is limited business activity that occurs off the reserve (i.e. delivery of grain to off reserve elevators). In such a situation where a portion of the revenue generating activities are carried on a reserve, in this situation 45%, that portion of the business income would generally be tax exempt.

It should be noted that where a portion of income from a business is exempt and the remaining portion is not exempt, the expenses which pertain to the exempt portion are not deductible. Normally, expenses should be allocated in the same proportion as revenue (in this case, 45% and 55%) unless another allocation could be shown to be more reasonable in the circumstances.

It should also be emphasized that, although the location of the land being farmed is a connecting factor of major importance in the case of a grain farming business, it should not be interpreted as being of major importance for all types of farming businesses. The significance of the location of land, as a connecting factor, may vary depending on the type of farming business involved.

We trust that our comments will be of assistance to you.

Yours truly,

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

- 2 -