13 June 2000 Internal T.I. 2000-0009457 - INDIAN BUSINESS AND 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.

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. whether subsection 90(1) of the Indian Act applies.

2. whether business income of a status Indian is tax exempt

3. whether employment income of status Indian employees is tax exempt.

Position:

1. Cannot conclude that it is applicable
2. No
3. Maybe

Reasons:

1. Documentation provided not sufficient to conclude that the income the client receives for operating XXXXXXXXXX would be considered purchased by Her Majesty or given to Indians under a treaty agreement.

2. Location of revenue generating activities of client business carried on off reserve.

3. Guideline 2 applicable if employer meets definition of "employer is resident on a reserve" and employees are status Indians living on a reserve.

		June 13, 2000

	Winnipeg Tax Services Office	HEADQUARTERS
M. Shea-DesRosiers
	Attention: Mr. Rob Weighell	(613) 957-8953
	Business Audit
		2000-000945	

XXXXXXXXXX
Taxation of business and employment income for status Indians

This is further to your memorandum of February 22, 2000, requesting our opinion as to whether XXXXXXXXXX (the "Client's") business income and the employment income of the Client's status Indian employees are tax exempt.

You had attached to your memorandum a copy of the Client's letter of November 25, 1999, addressed to the Winnipeg T.S.O. Ms. Liz Pasieczka, T1 Client Service, Winnipeg Tax Centre, sent us by fax on April 12 and 13, 2000, a copy of the XXXXXXXXXX (the "Standing Offer") with Appendices "A", "B" and "C" and a copy of the XXXXXXXXXX.

The facts provided by the Client are as follows:

1. The Client operates XXXXXXXXXX, in the town of XXXXXXXXXX which is not located on reserve, for the purpose of providing accommodations for treaty/status Aboriginals arriving in town for medical reasons. XXXXXXXXXX is located off reserve due to the fact that no suitable property is available on the XXXXXXXXXX reserve.

2. The Client is a treaty Aboriginal, XXXXXXXXXX.

3. The Client performs all the management, decisions, accounting, payment of invoices, receipt of funding and payment of wages from her home located on the XXXXXXXXXX reserve.

4. The Client receives funding from XXXXXXXXXX under the Standing Offer.

The Client's opinion

The Client has stated that the property of a status Indian is tax exempt when located on reserve and, in the Client's view, the fact that management occurs on reserve makes her business income tax exempt. The Client is also of the opinion that section 89 (we believe she means subsection 90(1) of the Indian Act) applies. The Client has stated that according to that subsection where funding is provided for the use and benefit of Aboriginals, it is always considered to be situated on reserve. Since the funding the Client receives is for the use and benefit of Aboriginals, it would therefore, in the Client's opinion, be tax exempt.

Our comments

Some pertinent information from the documents provided follows:

On XXXXXXXXXX of the Standing Offer, under the title "XXXXXXXXXX", the persons to whom the services are to be provided are listed as follows:

XXXXXXXXXX.

On XXXXXXXXXX, it is stated that

"XXXXXXXXXX".

On XXXXXXXXXX, the role and membership of the Committee are described as follows:

"XXXXXXXXXX".

The terms of reference of the Committee are found on the same page:

XXXXXXXXXX.

The goals of the XXXXXXXXXX are described at Appendix "B" of the Standing Offer:

"XXXXXXXXXX".

The objectives are listed as follows:

XXXXXXXXXX.

Subsection 90(1) of the Indian Act

Pursuant to subsection 90(1) of the Indian Act, personal property that was purchased by Her Majesty or given to Indians or to a band under a treaty or agreement between the band and Her Majesty, shall be deemed always to be situated on a reserve. Section 87 of the Indian Act exempts from taxation the personal property of an Indian or band situated on a reserve.

Specifically, subsection 90(1) of the Indian Act reads as follows:

90(1) For the purposes of sections 87 and 89, personal property that was

(a) purchased by Her Majesty with Indian moneys or moneys appropriated by Parliament for the use and benefit of Indians or bands, or

(b) given to Indians or to a band under a treaty or agreement between a band and Her Majesty,

shall be deemed always to be situated on a reserve.

To date, the paragraph 90(1)(a) income tax issues that have been dealt with by the Courts have generally involved employment income. In Kahn-Tineta Horn v. M.N.R. (89 DTC 147), the Appellant argued that the salary that she earned as an employee was exempt from tax by virtue of paragraph 90(1)(a) of the Indian Act: the skills, training and background of the Appellant being personal property that had been purchased by Her Majesty with monies appropriated by Parliament for the use and benefit of Indians or bands, and which is deemed to be always situated on a reserve.

In answer to this argument, the Tax court of Canada said:

"...I would say that Her Majesty cannot purchase the Appellant's skills and training as the Appellant cannot divest herself of such skills or training. Such a proposition appears to me as a contract for slavery, something which is surely not meant by counsel for the Appellant., In Rapistan Canada Ltd. V. M.N.R., 48 D.L.R. (3d) 613 at 616, Chief Justice Jackett stated that:

'... as far as I know, under no system of law in Canada, does knowledge, skill or experience constitute "property" that can be the subject matter of a gift, grant or assignment... As I understand the law, knowledge or ideas, as such, do not constitute property.'

Therefore, I find that the Appellant's skills, training and background were not and could not have been purchased by Her Majesty.

Can it be said that her employment income or wages were purchased by Her Majesty with Indian moneys or moneys appropriated by parliament for the use and benefit of Indians or bands? This argument was raised in the course of the hearing again for the purposes of paragraph 90(1)(a) of the Indian Act.

This proposition was discussed and rejected by Associate Chief Justice Thurlow in The Queen v. the National Indian Brotherhood, 78 DTC 6488 at 64909, as follows:

'In my opinion, it is not possible to regard the salaries here in question as "personal property that was purchased by Her Majesty" within the meaning of paragraph 90(1)(a) and I am unable to accept counsel's submission that the paragraph should be interpreted as if it read "personal property that was... moneys appropriated by Parliament" as I think that grammatically the word "purchased by Her Majesty with" govern the whole of the remainder of the paragraph. The provision therefore cannot apply.'

To this, I would add that wages are not purchased but paid and that the result of such a proposition would affect all the departmental employees in a strange manner especially if one reads subsection 90(2) of the Indian Act, which states:

'Every transaction purporting to pass title to any property that is by this section deemed to be situated on a reserve, or any interest in such property, is void unless the transaction is entered into with the consent of the Minister or is entered into between members of a band or between the band and a member thereof.' "

This case is not conclusive with respect to paragraph 90(1)(a) of the Indian Act and business income. However, it does provide conclusive comments that employment income cannot be exempt from taxation by virtue of paragraph 90(1)(a) of the Indian Act.

The Court cases pertaining to the application of paragraph 90(1)(b) of the Indian Act considered the meaning of "treaty" and "agreement" and came to the conclusion that an agreement is a word closely related to a treaty. As described in Mitchell v. Peguis Indian Band ( (1990) 2 SCR 85), in paragraph 90(1)(b) of the Indian Act, the words "treaty" and "agreement" take colour from each other. Thus in our view, an agreement would have to be similar in nature to a treaty. It would have to implement a treaty, that is, it must be an agreement which implements a treaty obligation. In The Queen v. Kakfwi (99 DTC 5639), the Court said (p.6 - 1999 CCH Canadian Limited),

"Thus, LaForest, J.'s analysis (in Mitchell) makes clear that an application of the basic rules of legislative interpretation which require that the terms "treaty" and "agreement" in paragraph 90(1)(b) be linked together so as to limit the extent of the word "agreement" to that of "ancillary agreement"-- that is to say an agreement in the nature of a treaty or attached to a treaty -- is (4) wholly supported by the history of the protective tax regime adopted by Parliament in furtherance of the duties of the Crown toward Indians.

"May I add that, in my view, LaForest, J. could have used a further argument in support of his understanding of the meaning of the term "agreement" in the context in which it appears by pointing out to the French corresponding term used by Parliament: "accord". While the word "accord" is in the family of those French words that may be grouped under the English concept expressed by the word "agreement", such as "contract", "arrangement", "convention", "entente", it has a clear connotation to the idea of a reconciliation, of a pact arrived at by the giving and taking of both parties, of a mutual understanding worked out through concessions and compromise, (5) and is therefore a word closely related to treaty".

In our view, the documentation provided is not sufficient for us to conclude that the business income the Client receives for operating XXXXXXXXXX would be considered purchased by Her Majesty with Indian moneys or money appropriated by Parliament for the use and benefit of Indians or bands, or given to Indians or a band under a treaty or agreement between a band and Her Majesty. Accordingly, subsection 90(1) of the Indian Act would not apply to deem the Client's business income to be situated on reserve.

Section 87 of the Indian Act

In general terms, it is section 87 of the Indian Act, along with paragraph 81(1)(a) of the Income Tax Act (the "Act"), that establish the exemption from taxation for status Indians. Section 87 of the Indian Act exempts from taxation the personal property of an Indian situated on a reserve, and the Courts have concluded that the reference to personal property in section 87 of the Indian Act includes income. In determining whether the income earned by an Indian is situated on reserve, and thus exempt from taxation, the approach taken by the Supreme Court of Canada in the 1992 case of Williams v. The Queen (92 D.T.C. 6320) is followed. This approach requires the examination of all factors connecting income to a reserve to determine if the income is located on the reserve. The Supreme Court of Canada also 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.

In Mitchell v. Peguis Indian Band ( (1990) 2 S.C.R. 85), the Supreme Court of Canada described the purpose of the Indian Act as being the preservation of the entitlements of Indians to their reserve lands and the prevention of their erosion through taxation, but not the conferring of a general economic benefit upon Indians. In this respect, La Forest, J. stated that:

"...one must guard against ascribing an overly broad purpose to ss. 87 and 89. These provision are not intended to confer privileges on Indians in respect of any property they may acquire and possess, wherever, situated. Rather, their purpose is simply to insulate the property interests of Indians in their reserve lands from the intrusions and interference of the larger society so as to ensure that Indians are not dispossessed of their entitlements.

Indians have a plenary entitlement to their treaty property; it is owed to them qua Indians. Personal property acquired by Indians in normal business dealings is clearly different; it is simply property anyone else might have acquired, and I cans see no treason why in those circumstances Indians should not be treated the same as other people. Property of that nature will only be protected once it can be established that it is situated on a reserve".

La Forest, J. concluded that :

"...Indians, when engaging in the cut and thrust of business dealings in the commercial mainstream are under no illusions that they can expect to compete from a position of privilege with respect to their fellow Canadians".

In determining whether business income is exempt, the Canada Customs and Revenue Agency (CCRA) places considerable emphasis on the location of where the business activity is carried on, with a lesser emphasis on the location of the customers. This position was upheld in the Federal Court of Appeal case of Southwind v. The Queen (98 DTC 6084) which is the leading case dealing with the business income of an Indian. While certain activities may be carried on in an on reserve office (i.e. maintaining of books and records), the actual revenue generating activities would be more significant in determining whether business income is connected to a reserve.

The location where the self-employed Indian lives is not a determining factor in connecting the business income to the reserve. While it may carry some weight, the most important considerations are the location of the revenue-generating activities. In a situation where a portion of the revenue-generating activities of the business are performed on the reserve, then a similar portion may be exempt from tax.

In the present situation, the Client lives on a reserve and performs all the management and accounting duties at home on the reserve. The Client's customers are treaty /status Aboriginals. However, the location of the revenue generating activities of the Client's business is carried on off reserve. Therefore, in our view, business income (present and future, assuming it remains the same) is not tax exempt because of the location of the revenue generating activities.

As for the employment income of the Client's status Indian employees, CCRA has developed guidelines to determine whether employment income is situated on a reserve. The Indian Act Exemption for Employment Income Guidelines (the "Guidelines") which were issued by CCRA in June 1994 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.

In the present situation, Guideline 2 could apply. To determine whether 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. 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.

Based on the above, since the Client performs all the management and accounting duties from the Client's home located on the reserve, as well as the payment of invoices, the receipt of funding and payment of wages, the Client would meet the definition of "employer resident on a reserve". Even though as mentioned in Liz Pasieczka's E-Mail of May 26, 2000, "It would appear that the Client conducts affairs from her residence for convenience ["husband is not well", Client "not feeling well"]", if the management and control of the Client's business is exercised at the residence of the Client on reserve, such that the Client meets the definition of "employer resident on a reserve", then Guideline 2 would apply to all her status Indians employees who live on a reserve and, consequently their employment income would be tax exempt. It should be noted that the employer's residence may change if the location of the central management and control changes.

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

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