16 November 2009 Internal T.I. 2009-0343511I7 - Indian Proprietor - Business and Employment 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: (1) Is employment income earned from guiding tax exempt? (2) Is business income earned from guiding tax exempt?

Position: (1) Likely. (2)Not likely.

Reasons: (1) Guideline 2, appears the employees are resident on the reserve and the employer is likely resident on the reserve. (2) The revenue-generating activities appear to be earned off-reserve

								November 16, 2009

	XXXXXXXXXX  TSO Audit				HEADQUARTERS
								Income Tax Rulings Directorate
	Attention: XXXXXXXXXX 				Lori Merrigan
(613) 957-8979

								2009-034351

Indian Proprietor - Taxation of Business Income and Employment Income

This is in response to your correspondence of XXXXXXXXXX , regarding a request you received for taxpayer assistance concerning the taxation of certain employment income and business income earned from guiding.

Facts

We understand that in the situation under review:

• the proprietor lives on a reserve and has XXXXXXXXXX employees who also live on the reserve;
• all of the individuals are Indians as that term is defined in section 2 of the Indian Act;
• this is an unincorporated business providing hunting and fishing services (also described

as "guiding" services) to non-Indian individuals through nearby resorts;

• the majority of the services provided to customers do not take place on a reserve;
• the proprietor, and his XXXXXXXXXX employees, pick up the customers from the resorts and return them in the evening;
• supplies (i.e., spare parts, gas, oil, etc.) are kept on the reserve and the boats are kept on the reserve during the evening; and
• the books and records are kept and payroll is paid from an office located on the reserve.

Analysis

Paragraph 81(1)(a) of the Income Tax Act (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 Canada Revenue Agency ("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 employee 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 all of the employment income of an Indian employee who lives on a reserve, provided that the employer is also resident on a reserve.

3. Guideline 3 exempts all of the employment income of an Indian employee 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.

It is unlikely that either of Guidelines 1 or 3 would apply in the situation under review since all or substantially all of the duties of employment appear to be performed off-reserve.

In this case, we understand that the employees are Indians who live on the reserve and the proprietor is an Indian who lives on the reserve; therefore, Guideline 2 may apply. Even if the proprietor is an Indian who lives on a reserve, it is still a question of fact whether the "employer" is resident on a reserve. For purposes of the Guidelines, for an employer to be "resident on a reserve", means that a reserve is the place where the central management of the employer's business is actually located. In the case of a sole proprietor, the residence of the proprietor is relevant; however, regard must be had to whether the majority of the business decisions are made on the reserve, since it is the residence of the proprietor in his or her capacity as an employer that is in issue.

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 that each case depends on its particular facts. In Southwind, the Court 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 to the business 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.

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 (i.e., are not incidental). In particular, where all or most of the income-earning activities of a business take place off-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.

Conclusion

Although the proprietor in this particular case may be considered to be resident on the reserve as an employer, and as such the employment income of the XXXXXXXXXX employees may be exempt, we are of the view that there are insufficient factors to connect the business income to the reserve. If some of the revenue-generating activities of the business are being performed on the reserve, the taxpayer would need to clearly show a link between revenue generated and specific tasks performed on the reserve (e.g., specific tours that take place on reserve lands), in order to be eligible for any exemption. Administrative duties or general accounting are not considered specific tasks and are not included in revenue-generating activities. As such, it is likely that all of the business income (i.e., the self-employment income) in the present situation will be taxable.

We trust that these comments will be of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

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