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 income distributed to a status Indian by a trust exempt from tax?
Position: No.
Reasons: Connecting factors situate the income off reserve.
May 8, 2002
XXXXXXXXXX HEADQUARTERS
Aboriginal Program Advisor Karen Power, CA
XXXXXXXXXX (613) 957-8953
XXXXXXXXXX Tax Services Office
2002-013778
Status Indian - Income from a Trust
We are writing in reply to your correspondence of May 1, 2002, wherein you requested our views on the taxation of income received by a status Indian in the following situation.
Our understanding of the facts is as follows:
1. A trust (the "Trust") operates a business called XXXXXXXXXX (the "Business"). The Business' office is located on the reserve. However, all of the income earning activities take place off reserve.
2. In XXXXXXXXXX% of the Business' income was generated from timber rights allocated to Indian Bands. The timber rights involve land located off reserve. The Business' only customer is located off reserve.
3. Any income earned by the Trust is paid or made payable to its sole beneficiary, Mr. P, a status Indian.
4. Mr. P's principle residence is located off reserve. Mr. P's wife and children all reside at this principal residence located off reserve. During certain times of the year, Mr. P resides in a fully equipped trailer located on reserve. The trailer is also used as an office.
Paragraph 81(1)(a) of the Income Tax Act (the "Act") and section 87 of the Indian Act may provide an exemption from taxation in respect of a status Indian's personal property situated on reserve. Since a trust is not an Indian, it is not exempt from taxation pursuant to section 87 of the Indian Act. Consequently, the Trust would not be exempt from taxation under paragraph 81(1)(a) of the Act.
Under the Act, income earned by the Trust is subject to income tax. However, paragraph 104(6)(b) of the Act provides that a trust (other than an employee trust or a trust governed by an employee benefit plan) may deduct in computing its income for a taxation year an amount not exceeding the amount which would be its income for the year as became payable in the year to a beneficiary. Subsection 104(24) deems an amount to be payable for these purposes if it was paid or the beneficiary was entitled to enforce payment in the year. Under paragraph 104(13)(a) of the Act, the beneficiary is required to include in income the amount that would be the trust's income, but for the subsection 104(6) deduction, that became payable to the beneficiary.
In the above situation, the Trust would have to pay income taxes on any income remaining after its deduction under paragraph 104(6)(b) of the Act and Mr. P. would have to include the amount deducted by the Trust in his income under paragraph 104(13)(a) of the Act.
Whether or not Mr. P.'s income under paragraph 104(13)(a) of the Act would be exempt from taxation by virtue of section 87 of the Indian Act is a question of fact. 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 Glenn Williams v. Her Majesty 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 case of Henry Southwind (98 DTC 6084) 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.
In our view, an analysis of the connecting factors in the present case, focusing on the location of the activities and the location of the sole customer, leads to the conclusion that the income allocated to Mr. P by the Trust is not situated on reserve and, consequently, would be subject to taxation.
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
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