4 May 2000 Ministerial Letter 2000-0016908 - INDIAN TAXATION-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.

May 4, 2000

XXXXXXXXXX

Dear XXXXXXXXXX:

The Honourable Martin Cauchon, Minister of National Revenue, has asked me to reply to your correspondence of March 9, 2000, concerning the taxation of income derived from selling personal knowledge related to your birthright. As you may be aware, on November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency (CCRA).

Section 87 of the Indian Act, along with paragraph 81(1)(a) of the Income Tax Act establish the Indian exemption from taxation. Section 87 of the Indian Act exempts from taxation the personal property of an Indian situated on a reserve, and the courts have previously concluded that the reference to personal property in section 87 includes income.

In determining whether income is situated on a reserve, the approach taken by the Supreme Court of Canada in the Williams case must be followed. The proper approach to determining the situs of personal property is to evaluate connecting factors that 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.

Henry Southwind is the leading case dealing with the business income of an Indian. The case concerns income earned from logging, where a status Indian lived on reserve and said that he had an office on reserve. However, all his income earning activities were carried out off reserve and his sole customer was off reserve. The Tax Court decided that his income from his logging activity was taxable and the taxpayer appealed this decision. The Federal Court of Appeal confirmed the Tax Court's decision.

The courts considered two main factors to connect business income to a location on or off a reserve. One significant factor is the location where the revenue generating activities of the business are undertaken, and the other major factor is the location of the customers of the business. In a situation where all of an Indian's business income is derived from activities carried out off reserve, the business income would generally not be exempt from taxation. If a portion of the business activities are carried out on reserve, a similar portion of the business income would generally be exempt. While there may be some administrative activities carried out on reserve, it is our view that the actual revenue generating activities would be more significant in determining whether business income is connected to a reserve. For example, if a bookkeeper is employed in an office located on a reserve to maintain the books and records of a self-employed Indian and performs all of the actual revenue generating-activities off reserve, the business income is more connected to a location off reserve than it would be to a location on 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 c6nsiderations are the location of the revenue-generating activities, and the location of the customers of the business.

In the CCRA's view, as all of your income-earning activities take place off reserve, any business income derived from such activities would not be exempt from taxation. Pursuant to section 90 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. The income you receive from writing on subjects related to your heritage, would not be considered purchased by Her Majesty or given under a treaty and, accordingly, section 90 of the Indian Act would not apply to deem your business income to be situated on reserve.

Finally, you have indicated that the taxation of your business income violates your rights under the Canadian Charter of Rights and Freedoms to receive equal treatment to that accorded to your peers residing on-reserve. Your comments may be in reference to the recent court decision of Batchewana Indian Band in which the court concluded that the inability of band members to vote, who are not resident on reserve, infringes in certain respects upon their rights under the Charter.

The courts have indicated in Harold Brant V. The Minister of National Revenue that the purpose of section 15 of the Charter is to ensure protection from discrimination based on personal characteristics, such as race or ethnic origin, which are outside the control of an individual. Furthermore, being subject to taxation because an individual earns their income off reserve is not a violation of the taxpayer's Charter rights. The CCRA does not feel that the decision in the Batchewana Indian Band case would alter this position.

I trust that you will find my comments helpful.

		Yours sincerely,

		Bill McCloskey
		Assistant Commissioner
		Policy and Legislation Branch