13 February 2004 External T.I. 2003-0046181E5 - Indian, Corporate & Business 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.

Principal Issues: 1) Will income generated by a corporation owned by a status Indian be tax exempt? 2) Will business income generated by a status Indian be tax exempt?

Position: 1) No 2) Question of fact

Reasons: 1) Corporations do not qualify for exemption under section 87 of the Indian Act. 2) Only business income earned on a reserve will be tax exempt.

2003-004618
XXXXXXXXXX Kimberly Duval
(613) 957-8982
February 13, 2004

Dear XXXXXXXXXX:

Re: Status Indians and Business Income

This is in reply to your electronic mail of October 24, 2003, requesting our views on the several questions you raised regarding the taxation of various income streams earned by a status Indian.

Confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency ("CRA"). In addition, we have recently established a link on the CRA website specifically for issues relating to the taxation of status Indians. This site can be accessed at the following address: http://www.ccra-adrc.gc.ca/aboriginals/menu-e.html.

Paragraph 81(1)(a) of the Income Tax Act (the "Act") and section 87 of the Indian Act provide a tax exemption for a 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 a case called Williams v. the Queen, 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 that tie the property to one location or another. The determination of whether particular income is connected to a reserve is always a question of fact.

We note that the expressions "Indian" and "reserve" have the meanings assigned by subsection 2(1) of the Indian Act.

Your first question involves the taxation of income earned by a corporation, the shares of which are owned by a status Indian that resides on a reserve. Section 87 of the Indian Act does not apply to corporations, even if they are owned or controlled by a status Indian. A corporation is treated as a separate taxpayer and it is not considered a status Indian for purposes of the exemption. Our Internet site on Aboriginal people provides general information in this regard under the heading "Status Indian - Corporations and Trusts".

Your second question involves the taxation of business income earned by a self-employed status Indian. 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). In reaching its decision, the Federal Court of Appeal used the location where the services were performed as the primary connecting factor and the location of the status Indian's customers was also an important connecting factor. Under the heading "Status Indian - Business Income", our Internet site will provide you with additional information and examples to help you in making this determination.

Your third question involves the taxation of dividend income earned by a status Indian. 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.

Essentially, 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 further concluded that in making these investments, the taxpayer chose to invest in the economic mainstream of normal business conducted off the reserve. Consequently, the CRA's position with respect to the taxation of investment income of a status Indian is that income earned in the economic mainstream so strongly connected to a location off reserve, would generally outweigh other factors connecting it to a reserve.

Under the heading "Status Indian - Investment Income", our Internet site provides general information regarding investment income and dividend income. You will find this information helpful in determining whether corporate distributions to status Indian shareholders will be taxable in any particular situation.

You have also asked several questions regarding sales taxes and excise taxes. Again, you will find that our Internet site will offer some general information in this area under the headings "Federal Excise Tax and Duty", "Import Duty and Tax" and "GST/HST". To the extent that the information provided on the Internet site does not sufficiently address your concerns in this area, you may contact the general GST/HST technical enquiry service directly at 1-800-959-5525 or alternatively, you may submit a written request at the following address: Excise and GST/HST Rulings Directorate, Aboriginal Affairs Unit, 320 Queen Street, 14th Floor, Tower A, Ottawa, Ontario, K1Y 0L5.

We trust that these comments will be of assistance.

Yours truly,

Roxane Brazeau-LeBlond, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch