3 April 2002 Internal T.I. 2002-0126427 - TRANSPORTATION SERVICE BUSINESS - 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 business income earned by a status Indian exempt from taxation?

Position: No.

Reasons: Connecting factors situate the income off-reserve.

		April 3, 2002

	XXXXXXXXXX  Tax Services Office	HEADQUARTERS
	Verification  & Enforcement Division	Karen Power, CA
	T1 Taxpayer Requests	(613) 957-8953
	XXXXXXXXXX
		2002-012642

Business Income Earned by a Status Indian

This is in reply to your letter of March 1, 2002, wherein you request our views on the tax treatment of business income earned by a status Indian. Specifically, you have asked whether the business income would be exempt from taxation under sections 87 and paragraph 90(1)(a) of the Indian Act.

You describe a situation in which:

1. The status Indian ("Taxpayer") operates a sole-proprietorship business that transports status Indians to medical appointments. The Taxpayer resides and operates his business off reserve.

2. The Taxpayer and his employees report to work at the XXXXXXXXXX office located off reserve. Vehicles used in the business are owned by the Taxpayer and are stored at each individual driver's home when they are not in use; all drivers live off reserve.

3. The Taxpayer receives client referrals from the employees at the XXXXXXXXXX office. An XXXXXXXXXX employee verifies that a Treaty Indian requires transportation to a medical appointment, and then Health Canada's Medical Health Services Branch approves the payment for the transportation. The XXXXXXXXXX office employee refers the matter to the Taxpayer who arranges for the transportation of the Treaty Indian. The Taxpayer or one of his employees would then transport the individual to and from their medical appointment. Many of the individuals requiring transportation services reside on reserve.

4. The Taxpayer invoices Health Canada Medical Services Branch directly for payment.

5. The Taxpayer's books and records are maintained and located off reserve.

Our Comments

Paragraph 81(1)(a) of the Income Tax Act (the "Act") and section 87 of the Indian Act provide a tax exemption for an Indian's personal property situated on a reserve. The courts have previously determined that, for purposes of section 87 of the Indian Act, the reference to personal property includes income. In Williams (92 DTC 6320), the Supreme Court of Canada reconsidered the approach to use in determining whether income is situated on a reserve. The proper approach in determining the situs of personal property is to evaluate the various connecting factors which tie the property to one location or another.

It should be noted that the Indian Act Exemption for Employment Income Guidelines only apply to employment and employment-related income. Our positions with respect to other sources of income are based on the criteria established by the Courts. For example, our position with respect to the factors connecting business income to a reserve, and the weight given to each factor, is based on the Federal Court of Appeal case of Southwind v. The Queen (98 DTC 6084) which 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. In reaching its decision, the Federal Court of Appeal 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 a transportation service business, we would consider both the location of the revenue-generating activities and the source from which that business income is received as being significant factors that serve to connect the business income to a location that is either on or off reserve. In the situation you describe, the Taxpayer's income is derived from Health Canada and it appears the majority of the revenue from the business generating activities are off reserve. Even though these are not significant factors, we note that the transportation services are arranged and coordinated at a location off reserve, the books and records are maintained at a location off reserve and both the Taxpayer and his employees reside off reserve. When we consider the main connecting factors and the limited weight that may be given to the other connecting factors, we would conclude that these connecting factors would tie the business income to an off reserve location and consequently such income would not be exempt from taxation. The fact that some of the medical trips involving the transportation of reserve residents originate from and return to a reserve, would not in our view be sufficient to connect the Taxpayer's business income to a reserve.

The Taxpayer's representatives have made reference to the Clarke v. Canada decision. It is our understanding that this reference refers to the case of Marianne Folster 97 DTC 5315 heard at the Federal Court of Appeal. In the case of Marianne Folster, the taxpayer was a status Indian employed by Health and Welfare Canada, as an Administrator at the Norway House Hospital situated in Northern Manitoba. The taxpayer lived on the reserve. The Hospital is located off reserve but 80% to 90% of the patients are status Indians, who resided on the Norway House Indian Reserve. At one time, the Hospital was situated on the Reserve, however, due to a fire in 1949, the Hospital was rebuilt adjacent to, but off the reserve.

The Federal Court of Appeal determined that the income was exempt. After consideration of the connecting factors, the Court found that the performance of her duties, being primarily for the Indians on reserve, the actual historical circumstances involving the relocation off reserve and Ms. Folster's residence should be given more weight than the actual location of the hospital and employment duties and were enough to exempt the income. The CCRA did not seek to appeal the judgment to the Supreme Court because we are of the opinion that the case was decided in a manner specific to its unusual facts and circumstances. As a result, the decision is not precedent setting.

The Taxpayer's representatives also point to the Monias case as further support for their assertion that the taxpayer's business income should be exempt from taxation. David Monias was a status Indian employed by the Awasis Agency of Northern Manitoba which received its funding from Indian Affairs. Mr. Monias did not live on reserve but filed his tax returns on the basis that his employment income was exempt from tax under section 87 of the Indian Act. The Tax Court of Canada allowed the taxpayer's appeal. In the Court's view, the taxpayer's employment was intimately connected with various Indian communities all located on reserve. The decision was appealed to the Federal Court of Appeal.

The Federal Court of Appeal (2001 DTC 5450) concluded that the taxpayer was not entitled to the section 87 exemption and the judgment of the Tax Court was set aside. The outcome of this case turned on the application of the connecting factors test established in the Williams decision. In this case some factors tended to connect the employment income to reserves while others pointed to an off-reserve location. The Court concluded that the factors connecting the income off-reserve outweighed the factors connecting the income to a reserve. It was noted that while the taxpayer's work benefits Indians on reserves, and may be integral to maintaining the reserves as viable social units, it was not in itself sufficient to situate the employment income on reserve. Speaking on behalf of the unanimous bench, Strayer J.A. stated that:

"It is not the policy of paragraph 87(1)(b) to provide a tax subsidy for services provided to and for the benefit of reserves. Rather, it is to protect from erosion by taxation the property of individual Indians that they acquire, hold and use on a reserve, although in the case of an intangible, such as employment income, it is the situs of its acquisition that is particularly important."

Thus, while it was a relatively close call, the Court concluded that it would not be consistent with the purposes of section 87 to conclude that the taxpayer's employment income was exempt from tax. In March of 2002, the taxpayer's application to appeal the decision to the Supreme Court of Canada was denied.

Finally, the Taxpayer's representatives argue that paragraph 90(1)(a) of the Indian Act would deem the business income to be situated on reserve and consequently exempt from taxation. Pursuant to subsection 90(1) 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. Section 87 of the Indian Act exempts from taxation the personal property of an Indian or band situated on a reserve. Specifically, subsection 90(1) of the Indian Act reads as follows:

"For the purposes of sections 87 and 89, personal property that was:

(a) purchased by Her Majesty with Indian moneys or moneys appropriated by Parliament for the use and benefit of Indians or bands, or

(b) given to Indians or to a band under a treaty or agreement between a band and Her Majesty,

shall be deemed always to be situated on a reserve."

To date, the paragraph 90(1)(a) income tax issues that have been dealt with by the Courts have generally involved employment income. In Kahn-Tineta Horn v. M.N.R. (89 DTC 147), the Appellant argued that the salary that she earned as an employee was exempt from tax by virtue of paragraph 90(1)(a) of the Indian Act: the skills, training and background of the Appellant being personal property that had been purchased by Her Majesty with monies appropriated by Parliament for the use and benefit of Indians or bands, and which is deemed to be always situated on a reserve. In answer to this argument, the Tax court of Canada said:

"...I would say that Her Majesty cannot purchase the Appellant's skills and training as the Appellant cannot divest herself of such skills or training. Such a proposition appears to me as a contract for slavery, something which is surely not meant by counsel for the Appellant. In Rapistan Canada Ltd. V. M.N.R., 48 D.L.R. (3d) 613 at 616, Chief Justice Jackett stated that:

'... as far as I know, under no system of law in Canada, does knowledge, skill or experience constitute "property" that can be the subject matter of a gift, grant or assignment... As I understand the law, knowledge or ideas, as such, do not constitute property.'

Therefore, I find that the Appellant's skills, training and background were not and could not have been purchased by Her Majesty.

Can it be said that her employment income or wages were purchased by Her Majesty with Indian moneys or moneys appropriated by Parliament for the use and benefit of Indians or bands? This argument was raised in the course of the hearing again for the purposes of paragraph 90(1)(a) of the Indian Act.

This proposition was discussed and rejected by Associate Chief Justice Thurlow in The Queen v. the National Indian Brotherhood, 78 DTC 6488 at 64909, as follows:

'In my opinion, it is not possible to regard the salaries here in question as "personal property that was purchased by Her Majesty" within the meaning of paragraph 90(1)(a) and I am unable to accept counsel's submission that the paragraph should be interpreted as if it read "personal property that was... moneys appropriated by Parliament" as I think that grammatically the word "purchased by Her Majesty with" govern the whole of the remainder of the paragraph. The provision therefore cannot apply.'

To this, I would add that wages are not purchased but paid and that the result of such a proposition would affect all the departmental employees in a strange manner especially if one reads subsection 90(2) of the Indian Act, which states:

'Every transaction purporting to pass title to any property that is by this section deemed to be situated on a reserve, or any interest in such property, is void unless the transaction is entered into with the consent of the Minister or is entered into between members of a band or between the band and a member thereof.' "

This case is not conclusive with respect to paragraph 90(1)(a) of the Indian Act and business income. However, it does provide conclusive comments that employment income cannot be exempt from taxation by virtue of paragraph 90(1)(a) of the Indian Act. The Court cases pertaining to the application of paragraph 90(1)(b) of the Indian Act considered the meaning of "treaty" and "agreement" and came to the conclusion that an agreement is a word closely related to a treaty. As described in Mitchell v. Peguis Indian Band ( (1990) 2 SCR 85), in paragraph 90(1)(b) of the Indian Act, the words "treaty" and "agreement" take colour from each other. Thus in our view, an agreement would have to be similar in nature to a treaty. It would have to implement a treaty, that is, it must be an agreement which implements a treaty obligation.

In our view, there is no proof to support a conclusion that the business income earned by the Taxpayer and received from Health Canada would be considered purchased by Her Majesty with Indian moneys or money appropriated by Parliament for the use and benefit of Indians or bands, or given to Indians or a band under a treaty or agreement between a band and Her Majesty. Accordingly, subsection 90(1) of the Indian Act would not apply to deem the Taxpayer's business income to be situated on reserve.

Based on the above analysis, the Taxpayer's income from his transportation service business is not exempt and is taxable under the Act.

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 CCRA'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 severed copy using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at (613) 957-0682. The severed copy will be sent to you for delivery to the client.

We trust our comments will be of assistance.

Mickey Sarazin, CA
Aboriginal Affairs Section
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

- 6 -