9 October 2012 External T.I. 2012-0444561E5 - Indian- self-employed 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: Whether the income of a self-employed Indian XXXXXXXXXX located on a reserve is exempt from tax.

Position: General comments provided

Reasons: Provided the income-earning activities take place on a reserve, the business income from the XXXXXXXXXX will qualify. XXXXXXXXXX business income may qualify for a partial exemption based on income-earning activities that take place on a reserve.

XXXXXXXXXX
2012-044456
A. Townsend

October 9, 2012

Dear XXXXXXXXXX:

Re: Indian Self-Employment Income

This is in response to your letter dated March 28, 2012, inquiring whether business income earned from XXXXXXXXXX business is exempt from tax pursuant to section 87 of the Indian Act. You have provided us with the following information:

• You are an Indian, as that term is defined in subsection 2(1) of the Indian Act.
• You do not reside on a reserve.
• You are self-employed as a XXXXXXXXXX and you operate a XXXXXXXXXX located on XXXXXXXXXX of land on a reserve. The office and books and records are located on the reserve.
• The XXXXXXXXXX business is operated both on and off several reserves in the serviced area.
• The XXXXXXXXXX are obtained from locations both on and off reserves and are sold from the XXXXXXXXXX. All sales are made from the location on the reserve to XXXXXXXXXX that are not located on reserves.

The situation outlined in your letter relates 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 our website at http://www.cra-arc.gc.ca. We are, however, prepared to provide the following general comments.

Paragraph 81(1)(a) of the Income Tax Act, together with paragraph 87(1)(b) of the Indian Act, exempts from taxation the personal property of an Indian situated on a reserve. The courts have determined that for the purpose of section 87 of the Indian Act, income, including self-employment income, is personal property. In our view, the leading court case with respect to the taxation of business income earned by an Indian is Southwind v. the Queen, 98 DTC 6084 (FCA) (“Southwind”). In Southwind, the Federal Court of Appeal endorsed consideration of a series of factors that should be considered in determining where business income is situated. These factors include: the location of the business activities, the location of customers, the location where decisions affecting the business are made, the type of business, the nature of work, the location of the books and records and the residence of the business owner. In most cases, the factor with the greatest significance is the location of the income-earning activities of the business. In addition to these factors, the courts have also considered the location of a business’s suppliers.

As mentioned, the key factor in determining whether an Indian’s business income is tax-exempt is the location of the income-earning activities of the business. Generally, we consider income earned from work completed on a reserve to be situated on a reserve. Therefore, an Indian operating a business as a sole proprietorship who completes all of his or her income-earning activities from a location on a reserve will usually qualify for the tax exemption with respect to all of the income derived from this business.

In the situation described in your letter, it appears that the income-earning activities of the businesses are located both on and off a reserve. For example, sales of XXXXXXXXXX located on a reserve and sold from a reserve would likely be income situated on a reserve. However, in the case of a XXXXXXXXXX operation, where a XXXXXXXXXX is XXXXXXXXXX from a location off-reserve to another location off-reserve, the income would generally not be situated on a reserve and would not qualify for the exemption from tax.

Where an Indian individual earns business income through the completion of specific tasks, to which specific income can be allocated, we 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 services performed 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 the reserve, these activities may be incidental to the business which is therefore considered to be operated off-reserve. In determining the amount of income earned from work done on a reserve, any expenses must be allocated reasonably between the income that is tax-exempt and the income that is taxable. In order to support a claim for a partial exemption of business income under section 87 of the Indian Act, taxpayers should maintain documentation regarding the activities performed on or off a reserve to support the allocation of income.

We trust these comments will be of assistance.

Yours truly,

R. Albert, CA
Manager
Non-Profit and Aboriginal Issues Section
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch