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: 1. Tax treatment for business income of Status Indians;
2. Indian Act Exemption for Employment Income Guidelines
Position: 1. Insufficient information provided therefore general comments given. One significant factor that serves to connect business income to a location on reserve or off reserve is the location of the customers. Another significant connecting factor would be the location where the activities are carried out. If all of the Indian's business income was derived from customers located off reserve, and all of the work was done off reserve, the business income would generally not be exempt. If a portion of the business activities were carried on on reserve, a similar portion of the business income would generally be exempt.
2. As per the Guidelines
Reasons: N/A
March 28, 2000
Moncton Tax Services Office HEADQUARTERS
Client Services M. Shea-DesRosiers
(613) 957-2058
Attention: Ms Roberte Bourgeois
1999-000618
XXXXXXXXXX (the "Individual") XXXXXXXXXX
Tax Treatment of Fishing Income for a Status Indian
This is in reply to your letter of October 27, 1999 concerning the question of whether the Individual's 1998 earned income, as a fisherman, is tax exempt in the following circumstances:
- The Individual is a status Indian who resides on a reserve and works for XXXXXXXXXX (the "company");
- The Individual does not fish on the reserve but the fish is landed on the reserve;
- The buyer does not reside on the reserve, but picks up the lobster on the reserve;
- The company does not reside on the reserve; and
- The fishing income was reported on a T4F.
We cannot determine from the information you have provided whether the Individual is an employee or self-employed. Generally, the Agency considers a person to be a self-employed fisherperson if :
- the person owns or rents a fishing boat;
- the person is a captain of a fishing boat; or
- the person is a sharesman who gets a share of the catch.
There is special Employment Insurance legislation in effect that gives self-employed fishermen employment insurance coverage and it requires "designated" employers to complete T4F information returns. These employers are to issue T4F information returns only to self-employed fishermen although we have been advised that this is not always the case. We also understand that it is possible for a sharesman to be an employee and the fact that income is reported as employment income on a T4 is an indicator that the sharesman may be working as an employee in a fishing business. Whether a person is an employee or not is a question of fact. In this respect, the courts have established four test to determine whether a particular contract is a contract of service (employee) or a contract for services (self-employed). These four test are as follows:
(a) Control Test
The objective of this test is to assess if the individual is limited or restricted under a master-servant relationship. It recognizes that in most cases, the degree of control of an employer over his employee is greater than what which is exercised in an independent contractor relationship. For instance, in a master-servant relationship, the master can order or require not only what is to be done, but how and when it shall be done. In contrast, an independent contractor is usually allowed to choose the manner in which the services are performed.
(b) Integration Test
This test acknowledges that work performed by an employee under an employment contract is done as an integral part of the business, whereas under a contract for services, the work, although done for the business, is not integrated into it, but is only accessory to it.
(c) Economic Reality Test
This test assesses the economic aspects of the relationship between the parties to determine whether the taxpayer is carrying on business for himself/herself or for someone else. The objective of the test is to verify the existence of various factors of an economic nature, and using these facts, attempt to assess the nature of the relationship. Factors to be considered in applying this test include the required investments to be made by the individual, permanency of the relationship, and the skill required by the individual.
(d) Specified Results Test
This test acknowledges that an independent contractor relationship usually involves the undertaking of a specific task after which the relationship ceases and it does not usually require that the undertaking be carried out by a particular individual. In contrast, in an employer-employee relationship, the employee makes himself/herself available to the employer to be used by the employer without reference to a specified result.
Not all of the foregoing tests will be relevant or have the same degree of importance. However, cases to date have in most circumstances indicated that the most important test is the test of control. You may wish to seek the assistance of EI/CPP Rulings as they are responsible for resolving employee/self-employed issues. We called the St. John's Tax Services Office on March 16, 2000, and were advised that no ruling has been made for the Individual.
If it is concluded that the Individual is a self-employed fisherman, it will then be necessary to determine if his business income is connected to a reserve.
In the case of fishing business, in our view, one significant factor that serves to connect business income to a location on reserve or off reserve is the location where the activities are carried out. Another factor would be the location of the business' customers. While there may be some activities carried on in an office located on reserve, in our view, the actual revenue-generating activities would be more significant in determining whether the income from the fishing business income is connected to a reserve. Thus, for example, if a bookkeeper were employed by a self-employed Indian fisherman to maintain the books and records of the business in an on reserve office, but the business' actual revenue-generating activities were off reserve, the business income would be more connected to a location off reserve than it would to a location on reserve. Furthermore, in our view, the residence of the fisherman carries little or no weight as a factor connecting the fishing income to a reserve.
In our view, in the case of a lobster fishing business, where the lobster fishing is done off reserve and the customers are located off reserve, the business income would be taxable. In a similar situation, where the lobster fishing is done off reserve but the customers are located on reserve, we would take a similar view that the off reserve location of the actual revenue-generating activities, the more significant factor, would situate the business income off reserve and, thus, be taxable. However, some revenue generating activities such as preparation, dressing and packing for market take place on reserve. In such a situation, if a portion of the revenue generating fishing activities are carried on on a reserve, a portion of the business income would generally be exempt. However, it is the Agency'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.
It should also 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 unless another allocation could be shown to be more reasonable in the circumstances.
In a previous opinion, we had noted that the limited weight that an on reserve customer would otherwise carry as a connecting factor will not be recognized if it can reasonably be considered that one of the main purposes for the location of the customer on reserve is to serve as a connection between the fishermen's business and a reserve, by acting as an intermediary between the fishermen and the actual fish buyers who are located off reserve.
The Agency has developed guidelines to determine whether employment income is situated on a reserve. We enclose a copy of the Indian Act Exemption for Employment Income Guidelines (the "Guidelines") which were issued by CCRA in June 1994 (at your request a copy was sent by Fax on March 7, 2000). These Guidelines apply to employment income earned in any province. There are four general guidelines any one of which, if met, will generally exempt an Indian's income from taxation. The guidelines are:
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 as described in Guideline 4 at page 7 of the Guidelines.
With respect to Guideline 1, a proration rule further provides that when less than 90% of the duties of employment are performed on a reserve, and none of the other guidelines apply, the portion that is performed on a reserve is exempt from tax.
The Guidelines define the expression "employer is resident on a reserve" as meaning that the reserve is the place where the central management and control over the employer organization is actually located. The Guidelines provide the following explanation of central management and control:
The central management and control of an organization is usually considered to be exercised by the group that performs the function of a board of directors of the organization. However, it may be that the real management and control of an organization is exercised by some other person or group. Generally, management and control is exercised at the principal place of business but it is recognized that this function may be legitimately exercised in a place other than the principal administrative office of the organization. It is a question of fact where the central management and control is exercised.
In addition, employment related income such as, employment insurance, retiring allowances, Canada or Quebec Pension Plan payments, or registered pension plan benefits, will usually be exempt when received if it relates to employment income that was tax exempt.
If it is determined that the Individual is an employee, due to the location of the employment duties and to the commercial nature of the activities, it is unlikely that his employment income will be exempt under Guideline 1 or 4. To determine if Guideline 2 would apply, the definition of residency of the employer in the Guidelines would need to be considered in relation to the Individual's employer. To determine if Guideline 3 or the proration rule would apply, the extent of the employment duties, if any, carried out on reserve, would need to be considered.
Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
Attachment
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