16 March 2004 External T.I. 2004-0066761E5 - Taxation of Indian self-employed fishing 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: Is the income of self-employed status Indian fishers in a particular situation taxable?

Position: Yes

Reasons: Based on the Williams connecting factors analysis and the guidance provided by the Southwind case, the most significant factors are the location where the income earning activity takes place, and the location of the customers. Since fishing here takes place off the reserve and is sold at an off-reserve plant to off-reserve buyer, insufficient connecting factors exist to tie the income to a reserve.

2004-006676
XXXXXXXXXX Renée Shields
(613) 948-5273
March 16, 2004

Dear XXXXXXXXXX:

Re: Taxation of Status Indian Self-employed Fishers

This is further to our meeting of March 9, 2004 during which you requested general information regarding the taxation of fishing income earned by self-employed status Indian fishers.

Paragraph 81(1)(a) of the Income Tax Act (the "Act") and section 87 of the Indian Act provide a tax exemption for a status Indian's personal property situated on reserve. The courts have previously determined that, for purposes of section 87 of the Indian Act, the reference to personal property includes business, investment and employment 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.

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 ("FCA") case of Southwind v. the Queen. The Southwind case involved a reserve-resident sole proprietor of a logging company who logged off-reserve for an off-reserve client. In reaching its decision that the business income was taxable, the FCA used the location where the principal income earning activities of the business took place as the primary connecting factor and the location of the status Indian's customer was also an important connecting factor.

With respect to fishing, although certain activities may be carried out in an on-reserve office (for example the maintaining of books and records), the actual revenue-generating activities would be more significant in determining whether business income is connected to a reserve. It is our position that the principal activity of a fishing business is the activity of making the catch. Where the fishing takes place off-reserve and the fish are sold to an off-reserve customer, it is unlikely that the connecting factors test can be met.

We note that for purposes of the connecting factors analysis, "reserve" must be interpreted in accordance with the definition in the Indian Act which provides that "reserve" means a tract of land, the legal title to which is vested in Her Majesty, that has been set apart by Her Majesty for the use and benefit of a band, and for purposes of section 87 of the Indian Act, includes designated lands. "Designated lands" is defined in subsection 2(1) of the Indian Act as "a tract of land or any interest therein, the legal title to which remains vested in Her Majesty and in which the band for whose use and benefit it was set apart as a reserve has, otherwise than absolutely, released or surrendered its rights or interests."

The term "reserve" can also include any settlements deemed to be reserves for purposes of the Indian Settlements Remission Order, and any other areas given similar treatment under federal legislation (for example, Category I-A lands under the Cree-Naskapi (of Quebec) Act).

We understand that you are aware of the Supreme Court of Canada case of R. v. Gladstone. In that case, the Heiltsuk band of the Bella Bella Reserve in British Columbia established an aboriginal right to the commercial fishing of herring spawn on kelp. The determination was made based on historical demonstrations particular to the Heiltsuk band.

Because of the countless different fact situations that may exist, an aboriginal right established by one First Nation cannot simply be extended to all First Nations. If a particular First Nation believes that it has an aboriginal right to fish commercially in territorial lands, and if this right were confirmed by the courts, then an additional connecting factor would exist that may have a bearing on the tax treatment of fishing income earned by the First Nation's reserve residents.

We trust that these comments will be of assistance. We confirm that we will be sending you an email with the additional information you requested during our meeting.

Yours truly,

Roxane Brazeau-LeBlond, C.A.

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