13 October 2000 Internal T.I. 2000-0027037 - INDIAN TAX-SELF-EMPLOYED 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 payments made to status Indians for services provided off the reserve will be taxable
2 ) does the fact that the services provided off the reserve are provided only to status Indians alter our position in 1 above; and,

3 ) if the argument is presented that the status Indians to whom the services are being provided would otherwise be on a reserve, would that change our position in 1 above.

Position:

1 ) Income is taxable under the ITA, 2 ) No 3 ) No

Reasons:

1 ) The current situation mirrors the Southwind case in that the location of the sole client and the location where the services were performed are situated off reserve.

2 ) it does not connect the place where the services are provided to a reserve.

3 ) the services are provided to the contractee for the benefit of the status Indians. The status Indians cannot be considered to be the "customer". The contractee pays the elders for services rendered.

								October 13, 2000

	XXXXXXXXXX  Tax Services Office		HEADQUARTERS
	XXXXXXXXXX 						Cornelis Rystenbil, CGA
(613) 957-2060
	Attention:  XXXXXXXXXX
								2000-002703

Indian Taxation - Self Employed Services Provided off Reserve

This is in response to your request of May 18, 2000. You have requested our comments on the application of the Indian Act exemption, particularly to the situation where Indian elders assist in providing counseling services using traditional methods to Indian inmates in a federal correctional facility located on crown land (i.e., not located on a reserve). The Indian elders are self-employed individuals working under contract with Corrections Canada. The services are only provided to Indian inmates.

More specifically, you asked:

1) for confirmation that the payments made to these status Indians for services provided off the reserve will not be excluded from taxation under the provisions of paragraph 81(1)(a) of the Income Tax Act (the "Act") and the services are a taxable supply. Therefore, both income tax returns and GST returns are required for these non-filers;

2) does the fact that the services provided off the reserve are provided only to status Indians within the prison alter our response to 1 above; and,

3) if the argument is presented that the status Indians to whom the services are being provided are incarcerated in a prison and would otherwise be on a reserve, would that change our response to 1 above.

Our comments:

The Indian Act exempts from taxation the personal property of an Indian situated on a reserve. The courts have previously concluded that the term "personal property" includes income. In determining whether income is situated on a reserve, the approach taken by the Supreme Court in the case of Williams (92 DTC 6320) must be followed. The proper approach to determining situs of personal property is to evaluate the various 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 establishing whether taxing the particular kind of property in a particular manner erodes the entitlement of an Indian to personal property situated on a reserve.

Henry Southwind (98 DTC 6084) 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 this logging activity was taxable and the taxpayer appealed this decision. The Federal Court of Appeal rendered its decision on January 14, 1998, confirming the Tax Court's decision. In reaching its decision, the Court used two main connecting factors, namely the location where the services are performed and the location of the sole customer of the Indian. Speaking on behalf of the unanimous bench, Linden J.A. stated that:

"(15) Although Morell Logging is not the appellant's employer, the significance of its off-reserve location lies in that Morell Logging was the appellant's only customer and debtor in the taxation year. The nature of the appellant's business income must be determined, in part, by reference to the source from which that business income is received. In this respect, the appellant's situation is distinguishable from Nowegijick, where the debtor employer was located on a Reserve. Moreover, all of the services performed by the appellant were done off the Reserve, a very significant feature of this case. I agree with Mr. Nadjiwan that the method of payment by cheque drawn on an off-reserve bank, though relevant, is not as important as it was thought to be by the Tax Court Judge."

In Mr. Southwind's case, both the location of the sole client and the location where the services were performed were situated off reserve.

In our view, one significant factor that serves to connect business income to a location on- or off-reserve is the location where the revenue-generating activities of the business are undertaken. Another factor is the location of the business customers. In a situation where all of an Indian's business income is derived from activities carried on off reserve for customers located off reserve, the business income would generally not be exempt from taxation.

According to subsection 2(1) of the Indian Act, reserve means a tract of land, the legal title to which is vested in Her Majesty, that has been set apart by Her Majesty for the use and benefit of a band, and for purposes of section 87 of the Indian Act includes designated lands. Designated lands is defined in subsection 2(1) of the Indian Act as a tract of land or any interest therein, the legal title to which remains vested in Her Majesty and in which the band for whose use and benefit it was set apart as a reserve has, otherwise than absolutely, released or surrendered its rights or interests. The crown land in question is not a reserve as defined in the Indian Act.

In response to your first question, in our view, the current situation mirrors the Southwind case in that the location of the sole client (Corrections Canada) and the location where the services were performed (the correctional facility) are situated off reserve. Accordingly, income earned by the two elders is not exempt and is taxable under the Act.

With reference to your second question, the fact that the services provided to Corrections Canada are provided only to Indians does not change our position in that, in our view, it does not connect the place where the services are provided to a reserve.

With regard to your third question, our answer would not change. Please note that the services are provided to Corrections Canada for the benefit of the Indian inmates. In our view, the inmates cannot be considered to be the "customer". It is Corrections Canada who pays the elders for services rendered.

In his submission, the taxpayer's representative made reference to two employment cases: Shilling and Folster. Neither of these cases are of particular relevance to the current business situation that you are dealing with. Nevertheless, it should be noted that CCRA has appealed the Shilling decision. Consequently, until such time as the matter is resolved by the courts, CCRA will apply the Indian Act Exemption for Employment Guidelines in its current format. With respect to the Folster decision, CCRA's view is that the case was handled in a manner specific to its unusual facts and circumstances. Accordingly, that decision only applies to individuals in identical circumstances and is not precedent setting.

We have forwarded a copy of your incoming request and our response to GST Rulings and have asked them to respond directly to you regarding your GST questions.

For your information, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (613) 994-2898. A copy will be sent to you for delivery to the client.

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

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