15 April 2004 Internal T.I. 2003-0052311I7 - Business Income Earned by a 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.

Principal Issues: Will business income earned from the hauling of material both on and off reserve, be exempt from income tax where it is earned by a status Indian living on reserve?

Position: In this particular case, yes

Reasons: Based on the relevant connecting factors, the business income earned by the taxpayer is determined to be strongly connected to the reserve because all of the customers are located on reserve and the majority of the hauling activities are performed either to the reserve or from the reserve such that the business income would be considered tax-exempt for purposes of paragraph 81(1)(a) of the Income Tax Act.

 				April 15, 2004

XXXXXXXXXX  TSO		HEADQUARTERS
				Income Tax Rulings
	Attention:  XXXXXXXXXX 			  Directorate
				Kimberly Duval
(613) 957-8982

				2003-005231

Tax Status on Business Income Earned by a Status Indian

We are writing in response to your e-mail of December 10, 20003 where you requested our comments on the taxation of business income earned by a status Indian living on reserve (the "Taxpayer").

We understand that the Taxpayer in this particular situation earns business income by way of hauling logs and woodchips for local lumber companies, hauling waste material under subcontract for a band owned corporation and performing snow removal services on the reserve during the winter months. We further understand from the correspondence provided to us that all of the Taxpayer's customers are resident on reserve. We note that residency is a question of fact and confirm that the Income Tax Rulings Directorate has made no determination in this regard.

We understand the Taxpayer's revenue-generating activities, as described in your e-mails to us, are as follows:

? Hauling woodchips and logs

The Taxpayer's customer (the "Lumber Company") is located and operated on the reserve. It contracts with the Taxpayer to:

o haul wood chips from its lumberyard on reserve to various off-reserve locations; and
o collect and haul logs from various off-reserve sites back to its lumberyard for processing.

These activities represented approximately 70% of the Taxpayer's gross business revenue in 2002.

? Hauling waste material

A corporation that is owned by the Indian Band (the "Band-owned Corporation"), located and operated on reserve subcontracts the Taxpayer to transport waste material both on and off reserve. This activity represented approximately 24% of gross revenue in 2002.

? Snow removal activity, which represented approximately 6% of gross revenue in 2002. Specifically, the Indian band and various residents of the reserve contract with the Taxpayer to maintain the on-reserve roads, bridges, parking lots and driveways.

Your views

You have expressed concerns that the business income earned by the Taxpayer from hauling logs, woodchips and waste may be subject to income tax, as the income generating activities performed by the Taxpayer were not entirely performed on the reserve. You are fairly confident; however, that any income earned pursuant to the Taxpayer's snow removal activities would be exempt from tax on the basis that the Taxpayer derived this income from activities performed entirely on the reserve.

Our Comments

Paragraph 81(1)(a) of the Income Tax Act (the "Act") provides that an amount declared exempt from income tax by another act of Parliament shall not be included in computing the income of a taxpayer. Section 87 of the Indian Act exempts from taxation the personal property of an Indian situated on a reserve. The courts have concluded that the term "personal property" includes income.

In determining whether income (personal property) is situated on a reserve, the approach taken by the Supreme Court of Canada in the case of Williams (92 DTC 6320) must be followed. The proper approach to determining the situs of personal property is to evaluate the connecting factors that tie the property to one location or another.

Henry Southwind (98 DTC 6084) is the leading case dealing with the taxation of business income of an Indian. At issue in this case was the taxation of income earned from logging by a status Indian who lived on reserve and had an office on reserve. However, all the income-earning activities were carried out off reserve and the sole customer was off reserve. The Federal Court of Appeal upheld the Tax Court's decision that the income from the logging activity was taxable. 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 business. Speaking on behalf of the unanimous bench, Linden J.A. stated:

"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."

He further stated: "According to the Supreme Court in Mitchell, where an Indian enters in to the "commercial mainstream", he must do so on the same terms as other Canadians with whom he competes. Although the precise meaning of this phrase is far from clear, it is clear that it seeks to differentiate those Native business activities that deal with people mainly off the reserve, not on it."

Based on the above comments in the decision, it is our view that the significant factors that serve to connect business income to a location on reserve are the location of the revenue-generating activities and the location of the customers of the business. Another important factor in the determination of the situs of business income is the nature of the work performed, whether or not in the "commercial mainstream".

In this particular situation, the Taxpayer's customers are all located and operated on the reserve such that amounts paid by each debtor for services rendered by the Taxpayer supports economic development on the reserve. This fact, in and of itself, is a significant factor in connecting the business income of the Taxpayer to a location on reserve.

With respect to the revenue-generating activities of the Taxpayer, however, most of the Taxpayer's hauling trips require him to travel off reserve at some point during each haul. As the majority of the Taxpayer's hauling jobs either begin or end off reserve, it raises the question as to whether or not the revenue-generating activities of this Taxpayer are performed on reserve.

Although we agree that part of the Taxpayer's hauling services are performed off the reserve, there is also a portion of the same hauling trip performed on reserve as well. We would also re-emphasize that the hauling services performed by the Taxpayer are entirely for customers located on the reserve. In our view, the fact that the Taxpayer is required to travel off reserve in satisfying the terms of the various hauling contracts for on-reserve clients should not serve to automatically connect the business income to a location off reserve. This fact should be weighed in light of the circumstances and in relation to the other factors connecting the business income to the reserve.

Additional connecting factors to consider in your determination as to whether the business income is connected to the reserve in this particular case include the following: the management and control of the Taxpayer's business occurs on reserve and the Taxpayer himself is resident on the reserve.

It is our opinion, in this particular situation, that the facts surrounding the taxpayer's business would more strongly connect the income earned to the reserve than to a location off reserve. As such, in our view, the Taxpayer's business income for 2002, as described in your e-mail to us, would be tax-exempt by virtue of paragraph 81(1)(a) of the Act. We note that this determination should be done on an annual basis as circumstances may change.

We trust that these comments will be of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. 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 electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Roxane Brazeau-LeBlond, C.A.

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