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: Whether a status Indian's business income is exempt.
Position: Question of fact.
Reasons: The most significant factors that serve to connect business income to a location on a reserve or off reserve are the location where the revenue generating activities are carried out and the location of the business customers.
XXXXXXXXXX 2003-005439
J. Gibbons, CGA
May 3, 2004
Dear XXXXXXXXXX:
Re: Business Income Earned by a Status Indian
This is in reply to your letter dated December 19, 2003, wherein you requested our views regarding the taxation of business income earned by a self-employed status Indian in a number of different scenarios. In addition, you have raised the following questions:
1. Is the status of customers, as aboriginal or non-aboriginals, a factor in determining whether the business income is exempt or taxable?
2. How should exempt business income be reported by a status Indian?
3. What documentation is required to support the exempt portion of a status Indian's business income?
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and the subject matter of a request for an advanced income tax ruling submitted in the manner set out in Information Circular 70-6R5. However, we have provided some general comments below, which we hope will be of some assistance to you.
The authority for the tax exemption enjoyed by status Indians on certain income is derived from paragraph 81(1)(a) of the Income Tax Act and paragraph 87(1)(b) of the Indian Act. In particular, the latter statute provides that the tax exemption applies to "the personal property of an Indian or a band situated on a reserve." The Supreme Court of Canada in Williams v. the Queen [92 DTC 6320] concluded that the determination of whether income is situated on a reserve and thus exempt from tax under the Indian Act requires the evaluation of the various connecting factors which tie the property to one location or another.
In the case of business income, the Federal Court of Appeal in Southwind v. the Queen [98 DTC 6084] concluded that the most significant factors that serve to connect business income to a location on reserve or off reserve are:
1. the location where the revenue generating activities are carried out; and
2. the location of the business customers.
In Southwind, the Federal Court of Appeal acknowledged that "[t]he process of determining the tax status of income earned by Natives on Reserves has become quite complex, depending on a sophisticated analysis of a series of factors," and that each case "depends on its unique facts." As a result of this inherent complexity and the factually-driven nature of the connecting-factors analysis, it is not possible to provide comments on general scenarios, such as those outlined in your letter. However, given the Southwind decision, if all of a status Indian's business customers live on reserve and all of the business activities take place on reserve, it is likely that all of the status Indian's business income would be exempt from income tax. If, on the other hand, some of the business activities take place on reserve and some off reserve, and some of the business customers live on reserve and some live off reserve, it is our view that a reasonable apportionment of the business income between exempt income and taxable income may be made.
If your enquiry relates to an actual situation, you should contact your local tax services office since they are able to provide assistance on actual completed transactions. All of the facts and circumstances surrounding the particular situation would have to be provided, in particular, those facts that relate to the factors that connect business income to a reserve. These factors include, in addition to the significant factors described above, the type of business, the nature of the work, the place where the payment is made, and the degree to which the business is in the commercial mainstream.
In regard to questions 2 and 3, there is no requirement for a taxpayer to report the exempt business income on a T1 return or for the filing of documentation to support the exempt status of the net business income. Nonetheless, the onus would be on the taxpayer to substantiate his or her filing position during a review by the Canada Revenue Agency. Accordingly, taxpayers should maintain documentation and other records that support the exempt status of their net business income.
We trust that these comments will be of assistance.
Yours truly,
Roxane Brazeau-LeBlond, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
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