17 January 2002 External T.I. 2001-0118615 - INVESTMENT INCOME EARNED BY STATUS INDIAN

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Is the interest earned on a GIC taxable

Position: None, question of fact

Reasons: not enough information provided

XXXXXXXXXX 							2001-011861
								Cornelis Rystenbil, CGA
January 17, 2002

Dear XXXXXXXXXX:

Re: Investment income earned by a status Indian

This is in reply to your recent question on whether the interest income earned on a Guaranteed Investment Certificate (GIC) that was purchased through a bank situated on the XXXXXXXXXX Reserve is taxable in the hands of a status Indian who does not live on a reserve.

Our Comments

Written confirmation of the consequences inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4. Where the particular transactions are completed, all relevant facts and documentation should be submitted to the appropriate Tax Services Office. However, we are prepared to provide the following general comments that may be of assistance.

In general terms, it is section 87 of the Indian Act, along with paragraph 81(1)(a) of the Income Tax Act, which establishes 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 previously 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 DTC 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. One general direction provided in Williams v. The Queen was that an "overly rigid test which identified one or two factors as having controlling force...would be open to manipulation and abuse". The Supreme Court of Canada rejected the situs of the debtor test as the sole test for determining whether the personal property of an Indian or band was situated on a reserve.

In Recalma v. The Queen, (96 DTC 1520, 98 DTC 6238), the Tax Court of Canada, as confirmed by the Federal Court of Appeal, considered the taxation of income earned by an Indian living on reserve, from investments purchased from an on reserve branch of a bank. It should be noted that the nature of the property in question was the income from the investments and not the investments themselves. The courts placed considerable emphasis on the location of the bank's income generating activity. The investments in this case were bankers acceptances and mutual funds units and the income generated from these was earned in the economic mainstream and was not connected to a reserve. Basically, the Court concluded that income from these investments started with companies off the reserve and passed through a bank on reserve to the taxpayers. It was held that the investment income of the taxpayer was not personal property situated on a reserve. The Court concluded that in making these investments, the taxpayer chose to invest in the economic mainstream of normal business conducted off the reserve. Consequently, the Canada Customs and Revenue Agency's ("CCRA") position is that income earned in the economic mainstream is so strongly connected to a location off reserve that it generally outweighs other factors that connect it to a reserve.

Based on the decision in Recalma v. The Queen, it is necessary to determine the location of the issuer's income generating activity in respect of the investment instrument. Unless the interest income can be identified as exclusively generated on a reserve, it is the CCRA's position that the interest income is not tax exempt. For the CCRA to consider an Indian's investment income to be tax exempt, the Indian's investment income would have to be from an on-reserve financial institution that generates its income exclusively from investment and loans to Indians on a reserve and it has to be established that the loans and investments are used by Indians for development on the reserve. In addition to the above-mentioned test for the financial institution, in our view, other connecting factors would still have to be present such as the Indian having to live and work on a reserve. We would also consider whether the capital with which the Indian made the investments resulted from an exempt source.

We trust that these comments will be of assistance.

Yours truly,

Mickey Sarazin, CA
Manager, Aboriginal Affairs Section
for Director
Business and Partnership Division
Income Tax Rulings Directorate