28 April 2000 Ministerial Letter 1999-0005038 - INDIAN BUSINESS 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.

April 28, 2000

XXXXXXXXXX

Dear XXXXXXXXXX:

Thank you for your letter of September 9, 1999, concerning the taxation of Treaty Indians. As you know, on November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency (CCRA).

As indicated in a previous letter from XXXXXXXXXX, your concern and your request for a meeting regarding the Northern Resident Deduction has been brought to the attention of the Department of Finance.

With regard to the second issue you raised in your letter about the taxation of Treaty Indians, paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act provide a tax exemption for an Indian's personal property situated on a reserve. In addition, the Courts have previously determined that, for purposes of section 87 of the Indian Act, the reference to personal property includes income. In the 1992 case of Williams, 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 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 certain manner would erode the entitlement of an Indian to personal property situated on a reserve.

Since the Williams decision, two significant factors have emerged in connecting business income to a location on or off reserve. Firstly, they are the location where the principal activities of the business are carried out and the location of the customers of the business. Secondly, while certain activities may be carried out in an on reserve office (for example the maintaining of books and records), the actual revenue-generating activities would be more significant in determining whether business income is connected to a reserve.

In a fishing business, the location where the fishing is done is a connecting factor of major importance. Generally, fishing is done off reserve. You have indicated in your letter that much of the revenue-generating activities such as preparation, dressing and packing of the fish for market take place on reserve. In such a situation, if a portion of the revenue-generating fishing activities are carried out on a reserve, a portion of the business income would generally be exempt. However, it is the CCRA's view that the main activity of a fishing business is the fishing itself. Accordingly, the revenue-generating activities involved in preparing the fish for market may exempt a small portion of the business income.

The confidentiality provisions of the Income Tax Act preclude me from discussing the income tax affairs of particular taxpayers, without their written authorization. However, I can generally address your questions concerning the Indian Act exemption for employed loggers.

With a view to assisting the Indian community, the CCRA developed the Indian Act Exemption for Employment Income Guidelines, incorporating the various connecting factors that describe the employment situations covered by the Indian Act. A copy of the Guidelines is enclosed for your information. Generally, the Guidelines provide that the tax exemption will apply to all the employment income of a status Indian from a particular employment:

1) where substantially all the duties of employment are performed on a reserve;

2) where the Indian lives on a reserve and the employer is resident on a reserve;

3) where more than half the duties are performed on a reserve and either the Indian lives on a reserve or the employer is resident there; and

4) where the employer is resident on a reserve, the duties are part of certain non-commercial activities of the employer and the employer is an Indian band, tribal council or Indian organization described in Guideline 4.

There is a proration rule to Guideline I which, when less than substantially all the duties of employment are performed on reserve, applies to exempt the portion of the income related to duties that are performed on a reserve.

Whether any of the Guidelines apply in a particular situation is a question of fact based on a review of all the pertinent information and details of a situation. When the Guidelines apply and when the facts of a particular situation satisfy the requirements of a guideline, the employment income should be exempt It should be noted that the single connecting factor of an employer resident on a reserve is not sufficient to exempt employment income.

I trust you will find my comments helpful.

		Yours sincerely,

		Martin Cauchon