Principal Issues: Whether Indian investment income is exempt in the various scenarios presented?
Position: Depends on each factual case situation.
Reasons: Bastien & Dubé exempts Indian investment income where: 1) there is a contractual debt obligation (deposit account) between an Indian investor and on-reserve financial institution; 2) the contract is concluded on the reserve; 3) the place of payment of the debt is on the reserve.
XXXXXXXXXX
A. Messore
(613) 948-2227
2012-044366
April 2, 2014
Dear XXXXXXXXXX :
Re: Investment Income of an Indian
Thank you for your correspondence concerning the tax exemption available to Indians, as that term is defined in subsection 2(1) of the Indian Act. You have requested clarification of Canada Revenue Agency's (CRA) position regarding the exemption from tax of investment income of an Indian.
We note your reliance on the CRA's published guidance on Indian investment income to resolve some of the more complex situations raised by your submission. The guidance is meant as a tool to inform and simplify the application of the law in relatively straightforward circumstances. However, it is not intended as a comprehensive or restrictive guide to the treatment of investment income in all cases. To assist us in the treatment of more complex cases, such as the ones presented here, it is necessary to refer to the analysis of the Supreme Court of Canada in its most recent decisions on Indian investment income. (footnote 1)
You have requested our opinion on whether, in each case described below, the investment income of an Indian (the "client") would be exempt.
A. If a client uses the telephone or internet banking to open a savings or chequing account, or to obtain a term deposit or guaranteed investment certificate (GIC), at a branch of a financial institution that is located on a reserve.
B. If a client requests that payment of interest income be made at or to another location off-reserve or to another person, and the bank accedes to that request.
C. If a client obtains at a bank located on a reserve a term deposit or a GIC issued by a loan or trust company subsidiary of the bank that is not located on a reserve.
D. 1) If a client obtains a term deposit or GIC from a branch of an investment dealer located on a reserve and that term deposit or GIC is issued by a financial institution that is not located on a reserve. Would the result be any different if the issuing financial institution is affiliated with the on-reserve investment dealer?
2) If a client holds cash in their brokerage account that was opened at a branch of an investment dealer located on a reserve and interest is credited into that account by the investment dealer, through its head office processing department.
3) If a client purchases an interest in savings account investments through their brokerage account opened at a branch of an investment dealer located on a reserve. The savings account investments may represent deposits on account of an affiliated financial institution and the interest is credited on this deposit by the deposit-taking institution.
E. If a client opens a chequing or savings account or obtains a term deposit or GIC at an on-reserve branch of a financial institution jointly with a person who is not an Indian.
F. If the rate of interest is not fixed or able to be calculated at the time the client obtains the investment.
In addition, you have suggested that the CRA review its matching program procedures to ensure that exempt Indian interest income be correctly identified to avoid arbitrary reassessments. And you have commented on the desirability of having additional published guidance on the manner in which the CRA will process T5 slips in respect of income situated on a reserve.
Our Comments
This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings. Although we cannot comment on any specific situation, we hope the following general comments will be of some assistance.
Paragraph 81(1)(a) of the Income Tax Act together with paragraph 87(1)(b) of the Indian Act exempt from tax the personal property of an Indian situated on a reserve. The courts have determined that for the purpose of section 87 of the Indian Act, the reference to personal property includes income. But because income is intangible property, and therefore difficult to situate physically, the courts apply the connecting factors test whereby they identify and evaluate relevant connecting factors in order to determine whether income is located on a reserve.
In the cases of Bastien and Dubé, the Supreme Court of Canada examined investment income arising from a contractual debt obligation (such as a term deposit) and identified three significant connecting factors, considered fundamental, in determining whether this type of investment income is property situated on a reserve, and therefore exempt. The three connecting factors are as follows: the location where the investment instrument is bought and the investment contract is signed by the parties, the location of the bank branch that has issued the investment instrument (residence of the debtor financial institution), and the location where the investment income payment must be made (place of performance of the debt).
Each of the scenarios you have described must be examined in light of the Bastien and Dubé decisions in order to determine, first, whether the investment vehicle is a contractual debt obligation, such as those described in Bastien and Dubé, concluded between an on-reserve financial institution and an Indian and, second, whether each of the connecting factors elaborated by the Supreme Court is satisfied.
Briefly, our comments on each of your scenarios are as follows:
A. To the extent that the contract of investment is not bought and signed on a reserve, one of the connecting factors may not be satisfied and the interest income would likely not be considered exempt.
B. To the extent that the place of payment is not located on a reserve, one of the required connecting factors may not be satisfied and the interest income would likely not be considered exempt.
C. To the extent that the contractual debt obligation is between an Indian investor and an off-reserve financial institution the issuer of the GIC the residence of the debtor is not on a reserve. The connecting factors would not be met and the interest income would likely not be exempt. This is not altered by the fact that an on-reserve bank, which is not the debtor to the contract, serves as an intermediary between the parties to help the Indian investor obtain the GIC from the off-reserve debtor financial institution.
D. As in C above, to the extent that the debtor financial institution which is a party to the contractual debt obligation and which issues the financial instrument is not located on a reserve, the investment income would likely not be exempt.
E. As a general rule, an individual must report his share of interest income from a joint investment based on the amount that the individual contributed to it. To the extent all of the conditions for exemption with respect to the investment are satisfied, the client's share of the interest income from the joint investment would be exempt.
F. To the extent the investment income does not arise directly from a contractual debt obligation between a client and an on-reserve financial institution, but rather from events and activities located and occurring off the reserve, the investment income would likely not be exempt.
Finally, we have referred your comments and suggestions with respect to the CRA's matching program, procedures and published guidance to the appropriate program areas responsible for such issues.
We trust these comments will be of assistance.
Yours truly,
Roger Filion, CA
Manager
Non-Profit Organizations and Aboriginal Issues
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Estate of Rolland Bastien v The Queen, 2011 SCC 3 ("Bastien"); Dubé v The Queen, 2011 SCC 39 ("Dubé")
