24 July 2009 External T.I. 2009-0332711E5 - Taxation of Income of an Indian from Guiding

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 income from guiding on "traditional hunting grounds" would be exempt from tax as per paragraph 81(1)(a) of the Income Tax Act.

Position: Maybe.

Reasons: It is a question of fact whether the income earned is business income or employment income and whether or not the income is situated on a reserve. It would depend whether the "traditional hunting grounds" were located on a reserve. This can only be determined through consultation with the relevant Tax Services Office.

								2009-033271
XXXXXXXXXX 							Lori Merrigan
(613) 957-8979
July 24, 2009

Dear XXXXXXXXXX :

Re: Taxation of Income of an Indian from Guiding

This is in response to your letter received May 28, 2009, inquiring about the taxation of your income earned from guiding. We understand that you are an Indian as that term is defined in section 2 of the Indian Act.

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in information Circular 70-6R5, "Advance Income Tax Rulings". This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed or ongoing transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. Although we cannot comment on your specific situation, we are able to provide the following general comments, which may be of assistance.

Our Comments

It is not clear from the information that you have provided whether the income in question is employment income or business income. Therefore, we have provided general comments on both (although the income appears to be business income).

Paragraph 81(1)(a) of the Act, together with paragraph 87(1)(b) of the Indian Act, exempt from tax certain income of Indians. Paragraph 87(1)(b) of the Indian Act states that "the personal property of an Indian or a band situated on a reserve" is exempt from taxation.

Income from employment has been held by the courts to be personal property for the purposes of section 87 of the Indian Act.

The Supreme Court of Canada, in Williams v. The Queen, 92 D.T.C. 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 factors connecting the income to a reserve and the weighing of the significance of each such factor.

Employment Income

Based on the guidance provided in Williams, and in consultation with other government departments as well as interested Indian groups and individuals, a number of connecting factors were identified that can be used to determine whether employment income is situated on a reserve. This initiative resulted in the development of the Indian Act Exemption for Employment Income Guidelines (the "Guidelines"), which apply to common employment situations involving Indian individuals. You can view these Guidelines on the CRA Web site at www.cra.gc.ca/aboriginals/gidelines-e.html. The most commonly applied Guidelines are as follows:

1. Guideline 1 exempts all of the employment income of an Indian if at least 90% of the employment duties are performed on a reserve. When less than 90%, but more than an incidental proportion, of the duties are performed on a reserve, and none of the other guidelines apply, only the portion that is performed on a reserve is exempt from tax.

2. Guideline 2 exempts employment income of Indian employees who live on a reserve, provided that the employer is also resident on a reserve.

3. Guideline 3 exempts the employment income of an Indian if more than 50% of the employment duties are performed on a reserve and either the employer is resident on a reserve or the Indian lives on a reserve.

For purposes of section 87 of the Indian Act and the Guidelines, reserve means "reserve" as that term is defined in section 2 of the Indian Act. The "traditional hunting lands" referred to in your letter may or may not include reserve land.

Business Income

The Federal Court of Appeal in Southwind v. The Queen, 98 DTC 6084, acknowledged that the determination of the tax status of income earned by Indians on reserves is complex and each case depends on its particular facts. In Southwind, the Federal Court of

Appeal concluded that the most significant factors that serve to connect business income to a location on or off a reserve are:

1. the location where the revenue-generating activities are carried out; and

2. the location of the business' customers.

Other factors that were considered relevant, but not necessarily of equal significance, are:

• the place where decisions affecting the business are made;
• the type of business and the nature of the work;
• the place where the payment is made;
• the degree to which the business is in the commercial mainstream;
• the location of a fixed place of business and the location of the books and records; and
• the residence of the business' owner.

In the straightforward case where all of an Indian's business customers are on reserve and all of the business activities take place on a reserve, it is likely that all of the business income of the Indian would be exempt from income tax. If, on the other hand, some of the business activities take place off a reserve or some of the customers live off a reserve, it is likely that only a portion of the business income may be exempt from income tax.

Where an Indian individual earns business income through the completion of specific tasks, to which specific income can be allocated, the CRA will allow the individual to claim the tax exemption on the portion of the income that is situated on a reserve. This type of allocation only applies as long as the duties completed on a reserve are a meaningful part of earning the business income. If only a very small portion of the income-earning activities take place on a reserve, these activities may be incidental to the business, which is therefore considered to be operated off a reserve. In situations where activities performed on a reserve are incidental, none of the income is exempt. In particular, where all or most of the income-earning activities of a business take place off a reserve, the fact that administrative activities take place on a reserve will not generally be sufficient to situate any of the business income on a reserve.

If an Indian has partially-exempt self-employment income, business expenses must be allocated reasonably between the income that is exempt and the income that is taxable, to the extent that these expenses have not been otherwise reimbursed. In order to support a claim for a partial exemption of business income under section 87 of the Indian Act, taxpayers should maintain documentation, for each taxation year, regarding the activities completed under their business contracts and the circumstances surrounding each of those activities.

We trust that these comments will be of assistance.

Yours truly,

Eliza Erskine
A/Manager
Non-Profit Organizations and Aboriginal Issues
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch