21 February 2005 Ministerial Correspondence 2004-0104611M4 - Indian tax - Guideline 4 and also 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: Information requested regarding the interpretation of Guideline 4 and also the taxation of fishing income earned by status Indians.

Position: Guideline 4 requires that the employer be resident on a reserve, which determination is a question of fact. Further, the employer must be a band with a reserve, or a tribal council representing such bands. The employer organization must be dedicated to the social, cultural, educational or economic development of status Indians who, for the most part, live on reserves. The employee's duties must be in connection with the employer's non-commercial activities carried on for the benefit of Indians who for the most part live on reserves. Fishing income is taxed in accordance with the principles outlined in the Southwind case. Accordingly, the location where the principal income earning activities of the business take place is the primary connecting factor, with the location of customers also being important. If fishing takes place off-reserve and the catch is sold to off-reserve customers, the income will not be connected to a reserve and will be taxable.

Reasons: General information provided

Signed on February 21, 2005

XXXXXXXXXX

Dear XXXXXXXXXX:

The Honourable John McCallum, Minister of National Revenue, has asked me to reply to representations made to the Honourable Andy Scott, Minister of Indian Affairs and Northern Development and Federal Interlocutor for Métis and Non-Status Indians, regarding the taxation of Status Indian employees of XXXXXXXXXX and the taxation of fishing income earned by Status Indians. Minister Scott forwarded copies of your documentation to Minister McCallum on November 2, 2004.

XXXXXXXXXX has asserted the position that exemption from taxation is a treaty right. The Canada Revenue Agency (CRA) defers to officials of Indian and Northern Affairs Canada (INAC) to address questions about the existence of treaty rights. Although unable to comment on this aspect of the issue, I can provide clarification about the taxation of employment and business income earned by Status Indians.

To assist the Indian community in understanding when employment income will be taxable, the CRA developed the Indian Act Exemption for Employment Income Guidelines, which incorporate the various connecting factors that describe the employment situations covered by the Indian Act. Although not binding law, the Guidelines are a useful administrative tool for taxpayers and for CRA employees to be able to work with the very broadly worded tax exemption provided by the Indian Act and the Income Tax Act.

I understand that in particular, Guideline 4 is of concern to the employees of XXXXXXXXXX. Guideline 4 requires that the employer be resident on a reserve. Although always a question of fact, in order to be considered resident on a reserve, central management and control over the employer organization must actually be located on a reserve. The group that performs the function of a board of directors of the organization is usually considered to exercise central management and control. However, in a particular situation, a person or group other than the board of directors may in fact exercise the real management and control of an organization.

Generally, management and control is exercised at the principal administrative office but it is recognized that this function may be legitimately exercised elsewhere. Management and control may be found to exist on a reserve where the directors of the organization validly conduct their significant decision-making board meetings by teleconference call, with a majority of directors being physically present on a reserve. Similarly, if a series of meetings, occurring both on and off reserve, deal with significant issues and decisions relating to the management and control of an Indian organization, it would be reasonable to require that a majority of such meetings take place on reserve in order to establish residency on a reserve.

Guideline 4 also requires that the employer be an Indian band that has a reserve, or a tribal council representing one or more Indian bands that have reserves, or an Indian organization controlled by one or more such bands or tribal councils. Further, the organization must be exclusively dedicated to the social, cultural, educational, or economic development of Status Indians who for the most part live on reserves. Finally, the individual's duties of the employment must be in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on reserves.

All of the previous requirements must be satisfied for Guideline 4 to apply. I am advised that you have been dealing directly with officials of the XXXXXXXXXX Tax Services Office to resolve the specifics of this matter, and I encourage you to continue do so.

The CRA'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. This 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 Court used the location where the principal income earning activities of the business took place as the primary connecting factor. 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 the CRA's position that the principal activity of a fishing business is the activity of making the catch. If 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.

For the purposes of the connecting factors analysis, "reserve" must be interpreted in accordance with the definition in the Indian Act. The Act defines a reserve as 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 the purposes of section 87, and it includes designated lands. Designated lands are defined in subsection 2(1) of the 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 the 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.

I trust that the information I have provided will be of assistance.

							Yours sincerely,

							Ed Gauthier
							Deputy Assistant Commissioner
							Tax and Regulatory Affairs
							Policy and Planning Branch

c.c.: Minister's Office
Political Assistant

Renée Shields
(613) 948-5273
2004-010461