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. Would investment income earned by status Indians from a Credit Union located on reserve and the majority of members are status Indians be exempt from income tax?
2. In this situation does it make a difference whether the status Indian lives on or off reserve?
3. In this situation would the taxation of interest income earned on savings accounts and terms certificates by the Credit Union be viewed differently than banker's acceptances and mutual fund?
Position:
1. No, unless the Credit Union's income generating activities are connected to a reserve.
2. No.
3. No.
Reasons:
1. The Court in Recalma, placed greater weight on the location of the issuer's income generating activity than any other connecting factor and if this factor is not present, we believe that the presence of other connecting factors would likely be insufficient to establish that the investment income of an Indian would be exempt from tax.
2. See question 1.
3. The taxation of interest income earned on savings accounts and term certificates issued by the Credit Union would be viewed in the same manner as the taxation of banker's acceptances and income from mutual fund units.
2000-000948
XXXXXXXXXX Karen Power, CA
(613) 957-8953
Attention: XXXXXXXXXX
May 23, 2000
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
We are writing in response to your letter of February 19, 2000, requesting our opinion concerning the Department's position regarding the tax treatment of investment income of status Indians. In addition you have requested we review a copy of an initial "Draft" income tax opinion which will be included in the offering statement for the issuance of XXXXXXXXXX investment shares of the XXXXXXXXXX (the "Credit Union").
Membership in the Credit Union is limited to all status Indians residing or working within a 300-kilometre radius of the Credit Union's registered office and all status Indians who are members of a First Nation which is a member of the XXXXXXXXXX. The registered head office of the Credit Union is located on reserve. You have asked that we provide comments on the following questions:
1. In a situation where the head office of the Credit Union is on a reserve and the majority of members are status Indians, Bands or Band operated entities, how important is it that the Credit Union's income generating activity be from loans and investments made exclusively to First Nation members?
2. In the above situation, does it make a difference whether the status Indian is living on the reserve?
3. In the above situation, would the taxation of interest income earned on savings accounts and term certificates issued by the Credit Union be viewed differently than Banker's acceptances and mutual funds purchased by a status Indian from the Credit Union?
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996 (copy attached). Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Department.
Question 1:
It is a question of fact whether there are sufficient connecting factors to determine whether the investment income earned by a status Indian is exempt from income tax. However, in our view, the Court in the case of Arnold Recalma v. The Queen, 96 DTC 1520, 98 DTC 6238, placed greater weight on the location of the issuer's income generating activity than any other connecting factor and if this factor is not present, we believe that the presence of other connecting factors would likely be insufficient to establish that the investment income of an Indian would be exempt from tax.
In our view, the facts that the Credit Union's head office is located on reserve and the majority of members are status Indians are not sufficient to establish that the distributions made on the XXXXXXXXXX investment shares and interest on member's deposits would be exempt from taxation.
Question 2:
As discussed in question 1, in our view, if the issuer's income generating activities are not exclusively on reserve, the presence of other connecting factors, such as the residence of the status Indian, would likely be insufficient to establish that the investment income of an Indian would be exempt from tax.
Question 3:
In the above situation, the taxation of interest income earned on savings accounts and term certificates issued by the Credit Union would be viewed in the same manner as the taxation of income from banker's acceptances and income from mutual fund units.
Review of the "Draft" income tax opinion which will be included in the offering statement
It is not our practice to undertake such a review, however, we would like to make the following comments.
Please note that our file # 9911687, on which you have based much of your opinion, contained a typo in the second sentence of the fourth paragraph of the comments section. This sentence should be corrected to include the word not in the following location "...in the economic mainstream and was not connected to a reserve." This sentence appears on page XXXXXXXXXX of your offering statement and should be appropriately corrected.
We do not share your view that it should be of no concern to the First Nation member where the issuer of the security generates its income. In determining whether investment income is exempt from taxation, it remains our position that there may be many factors to consider but that the primary factor is the income generating activity of the issuer of the investments.
Finally, we disagree with XXXXXXXXXX paragraph which indicates that the Agency has generally not sought to tax investments from deposit accounts which are held at a reserve branch. Before Williams and Recalma, the Department's positions on investment income was that interest earned on a bank account located on reserve was exempt from taxation. However, based on the Recalma decision, unless the income from deposit accounts can be identified as exclusively generated on the reserve, in our view, the income is not exempt.
We trust our comments will be of assistance to you.
Yours truly,
Roberta Albert, CA
For Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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