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 business income earned a status Indian selling financial products from a reserve office for companies located off-reserve would be tax-exempt.
Position: Whether the business income would be tax-exempt would depend on the weight to be given to the various connecting factors that tie the income to the reserve, which is a question of fact.
Reasons: Based on the guidance provided in the Southwind decision.
XXXXXXXXXX 2005-014376
J. Gibbons, CGA
October 14, 2005
Dear XXXXXXXXXX:
Re: Business Income Earned by a Status Indian
This is in reply to your email dated July 26, 2005, in which you enquired about the possibility of receiving a ruling from us that income from a business that would be carried on by you on a reserve would be exempt from income taxes. For purposes of our reply, we have presumed that you are a status Indian and that your reference to an income tax exemption was to the exemption that applies on certain income received by status Indians.
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 income 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, the latter of which exempts from taxation "the personal property of an Indian or a band situated on a reserve". The Supreme Court of Canada, in the 1992 case Williams v. the Queen, concluded that the determination of whether income is situated on a reserve and thus exempt from income tax 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 the 1998 case Southwind v. the Queen, clarified that the most significant factors that serve to connect business income to a location on a 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 the straightforward case where all of a status Indian's business customers are on reserve and all of the business activities take place on reserve, it is likely that all of the business income of the status Indian would be exempt from income tax. If, on the other hand, some of the business activities take place off reserve and/or some of the customers live off reserve, it is likely that only a portion of the business income may be tax-exempt.
Based on the limited hypothetical facts provided in your letter, it is our understanding that all of your customers, i.e., the various dealers for whom you would sell financial products and from whom you would receive commissions, would be located off reserve and that almost all of your time would be spent at an office on a reserve generating business income. You also indicated that the financial products would be sold to individuals living both on and off reserve. Although more information concerning the operation of your proposed business would have to be known before any conclusion could be made as to which portion, if any, of the income from that business would be considered to be connected to a reserve, on the basis of the limited facts provided, it is our view that if the exemption for status Indians were to apply it may be a prorated exemption only. This means that only part of your income would be exempt from income tax, and therefore another part would remain subject to income tax.
As acknowledged by the Federal Court of Appeal in the Southwind case, the determination of the tax status of income earned by Indians on reserves is quite complex and each case depends on its particular facts. Although the Southwind decision placed emphasis on the two main connecting factors, they also pointed to, as other factors (i) the place where decisions affecting the business are made, (ii) the type of business and the nature of the work, (iii) the place where the payment is made, (iv) the degree to which the business is in the commercial mainstream, (v) the location of a fixed place of business and the location of the books and records, and (vi) the residence of the business' owner.
If your scenario relates to an actual proposed transaction, we would be pleased to consider an advance ruling request submitted in the manner set out in Information Circular IC 70-6R5. You can find a copy of this publication on our website which is located at www.cra.gc.ca.
We trust that these comments will be of assistance.
Yours truly,
Robin Maley
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch
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