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: Taxation of consulting business income of a status Indian.
Position: Consulting business income allocated between the exempt and non-exempt portions based primarily on the location, whether on reserve or off-reserve, where the services are rendered and the location of the customers.
Reasons: The location where services are rendered is the major connecting factor because services are the revenue generating activities. The customers' location, as a factor, is reflected in the income allocation between exempt and non-exempt portions because of its influence over the location where the services are rendered.
April 6, 2001
XXXXXXXXXX Tax Services Office Headquarters
Business Audit S. Parnanzone
(613) 957-2133
Attention: XXXXXXXXXX
2001-007179
XXXXXXXXXX
Exempt Income of Status Indian
We are replying to your memorandum of February 21, 2001, concerning the taxation of consulting income earned by the above-noted taxpayer.
Our understanding of the facts is as follows:
1. XXXXXXXXXX (the "Taxpayer"), a status Indian living off reserve in XXXXXXXXXX, carries on a consulting business through an off-reserve-located partnership with a non-Indian (XXXXXXXXXX). The partnership provides consulting services to Indian bands as well as corporations, some of which are controlled by Indian bands, XXXXXXXXXX. The partnership often operates as an intermediary between Indian bands and either large companies or government groups.
2. The partnership's customers are located throughout the Province of XXXXXXXXXX.
3. The partnership operates in the commercial mainstream and will supply services to any customer seeking its advice. Other commercial operations in the area offer similar services. The partnership rents its business office in XXXXXXXXXX, does its banking locally and keeps the books and records stored in its office.
4. In the initial assessments of the Taxpayer's XXXXXXXXXX tax returns, the consulting business income from the partnership was treated as being exempt from tax under paragraph 81(1)(a) of the Income Tax Act (the "Act") and section 87 of the Indian Act. In XXXXXXXXXX, the CCRA reassessed the Taxpayer to exempt from tax his XXXXXXXXXX consulting income.
5. The Taxpayer has requested the CCRA to reassess his XXXXXXXXXX tax return so that his share of partnership income from the consulting business is also exempt from tax by virtue of paragraph 81(1)(a) of the Act and section 87 of the Indian Act.
6. In XXXXXXXXXX the partnership's consulting activities were conducted both at its business office in XXXXXXXXXX and away from it, although all business decisions were made in XXXXXXXXXX. The Taxpayer's duties consisted mostly dealing with customers while his partner's duties concerned more the in-office work. The Taxpayer performs the majority of his services in the partnership's office and then travels to the customers to collect information and to report the results of his work. A review of the partnership's itemized invoices suggests XXXXXXXXXX% of the Taxpayer's time was spent away from the office and the balance of his time working in XXXXXXXXXX.
7. In XXXXXXXXXX the customers paid by cheque the amounts invoiced by the partnership, which received the payments at its office and deposited them at its bank in XXXXXXXXXX.
8. You described the partnership's major customers for XXXXXXXXXX as follows:
XXXXXXXXXX.
9. Relying on the Jacob Pete case (91 DTC 204), which dealt with income received by a status Indian from consulting services, you have concluded that the Taxpayer's XXXXXXXXXX share of the partnership income that would be exempt from tax under paragraph 81(1)(a) of the Act or that would be subject to tax would be generated from the following sources:
Non-Exempt Customers
(a) XXXXXXXXXX - advice to a native band about off reserve matters. This service could have been supplied by any mainstream consulting service.
(b) XXXXXXXXXX - a government agency is not a native or band.
(c) XXXXXXXXXX - advice to a native band about off reserve matters. This service could have been supplied by any mainstream consulting service.
(d) XXXXXXXXXX - an incorporated company can't be a native Indian.
(e) XXXXXXXXXX - a government agency is not a native or band.
Exempt Customers
(f) XXXXXXXXXX - improvements to the local government services have direct application to native property on the reserve.
(g) XXXXXXXXXX - improvements to the provision of power would improve conditions on reserve lands.
(h) XXXXXXXXXX - improvements to the local government services have direct application to native property on the reserve.
10. You have requested our opinion concerning your allocation between exempt and non-exempt portions of the consulting business income earned by the Taxpayer in XXXXXXXXXX.
As you suggested in the referral, this Taxpayer's situation resembles that in the Pete case. The decision of the Tax Court of Canada in Pete was based on the situs of the debtor. However, that case was heard before the decision in Williams (92 DTC 6320) was issued by the Supreme Court of Canada, which found that the situs of the debtor test was not the appropriate test to apply in determining whether an Indian's income is connected to a reserve and thus exempt from taxation. As the courts have noted, the purpose of the Indian Act is to protect the property of an Indian on reserve; it is not intended to provide an economic advantage to an Indian operating in the commercial mainstream. In general, where a business is operated entirely on a reserve and the clients of the business are Indians living on reserve, the business income would be considered to be connected to a reserve and thus exempt from tax in the hands of the Indian proprietor. Where a business is operated entirely off reserve and the clients of the business reside off reserve, the business income would be taxable.
In the case of fishermen and grain growers, we have taken the view that the location of the fishing and grain growing, as the case may be, determines whether the income from the business is exempt. In cases of other types of businesses, such as that of a consultant, we would consider both the location of the revenue-generating activities and the location of the customers as being the most significant factors that serve to connect the business income to a location that is either on or off reserve. Where some of the revenue-generating activities take place on reserve and some off reserve, and some of the customers live on reserve while others live off reserve, it is our view that a portion of the business income will be taxable and the remaining portion will be exempt. We would also point out that where a portion of income from a business is exempt and the remaining portion is not exempt, the expenses pertaining to the exempt portion are not deductible in computing income. 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 specific situation, it could be that some expenses pertain entirely to the exempt portion or to the taxable portion, and in that case, a specific allocation of the entire expense to its respective portion would be most appropriate.
In case at hand case, although the Taxpayer may work towards obtaining some benefits for Indians on reserves, the Taxpayer, through the partnership, is in the business of providing consulting services to any customer that seeks them. In the above situation, in our view, the business income should be pro-rata exempt taking into consideration primarily the location at which the services, which are the revenue generating activities, are performed. Accordingly, we suggest using the location where the services are rendered, whether on or off reserve, in respect of all the partnership's customers in order to allocate the consulting income between exempt and non-exempt portions. The customers' location as a connecting factor would, in our view, be reflected in the suggested income allocation because if the customers are located on reserve, such as where the customer is an Indian band, the percentage of services rendered on reserve (and, by consequence, the portion of exempt income) would presumably be greater than if the customers are located off reserve, such as where the customer is a non-Indian. It is unclear from your referral whether during the XXXXXXXXXX% of the time the Taxpayer rendered his services outside the partnership's office he rendered such services on reserve or off reserve.
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.
M. Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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