26 June 2002 External T.I. 2002-0146745 - cattle farming 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 CCRA.

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

Principal Issues: Tax treatment of a status Indian's income from a cattle farming business.

Position: Likely exempt from taxation.

Reasons: Location of rangeland would be the most significant connecting factor.

				2002-014674
XXXXXXXXXX 			Karen Power, CA
(613) 957-8953
June 26, 2002

Dear XXXXXXXXXX:

Re: Tax Exemption for Status Indians

We are writing in reply to your letter of June 13, 2002, wherein you requested our views on the tax treatment of business income earned by a status Indian.

You described a situation in which the taxpayer is a status Indian who resides on reserve. The taxpayer operates a cattle farm that is also located on reserve. During certain periods of the year, the cattle graze on lands located off the reserve. Cattle make up substantially all of the operations of the farm. The only other income is derived from the rental of farm machinery to an Indian band.

Our Comments

The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, situations that involve a specific taxpayer and a completed transaction should be submitted with all of the relevant facts and documentation to the appropriate tax services office for their views.

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. The Supreme Court 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.

Canada Customs and Revenue Agency's 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). 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.

In a cattle farming business, we would consider the location of the rangeland as the most significant connecting factor that serves to connect the business income to a location that is either on or off reserve. In the situation you describe, the taxpayer lives on reserve, his farm is located on a reserve and the cattle graze principally on land located on reserve. In our view, a very strong argument could be made to support a conclusion that the taxpayer's cattle farming business income is connected to a reserve. However, since your case involves a specific taxpayer, this determination should be made by the relevant Tax Services Office.

We trust our comments will be of assistance.

Yours truly,

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