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 particular business income qualifies for the Indian Act exemption pursuant to section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act.
Position: Likely Not.
Reasons: Only connecting factor is that customers are located on-reserve, no business activities take place on-reserve.
XXXXXXXXXX
2012-047278
Lori Merrigan
(613) 957-9229
April 23, 2013
Dear XXXXXXXXXX:
Re: Indian Tax Exemption Business Income
This is in response to your email of December 12, 2012, our response of December 13, 2012, and your follow-up email of December 14, 2012, with respect to the tax treatment of business income you earned off-reserve. It is our understanding that you are an Indian, as that term is defined in subsection 2(1) of the Indian Act.
The situation outlined in your email 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 our website at http://www.cra-arc.gc.ca. However, we are prepared to provide the following general comments.
An Indian's personal property is exempt from tax pursuant to paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act if that property is situated on a reserve. Although income is personal property, its intangible nature makes it difficult to determine its location. The courts have concluded that the most significant factors that serve to connect business income to a location on or off a reserve are the location where the revenue-generating activities are carried out and the location of the business' customers. Other factors that may be 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 location of a fixed place of business and the location of the books and records, and the residence of the business' owner.
The CRA considers income earned from work completed on a reserve to have sufficient connecting factors to a reserve to conclude that the income is situated on a reserve. Therefore, self-employed individuals who complete all of their income-earning activities from a location on a reserve will usually qualify for the tax exemption with respect to all of their self-employment income. However, in this situation, it appears that most of your business income results from activities completed off-reserve.
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 the reserve, these activities may be incidental to the business, which is therefore considered to be operated off-reserve. In situations where activities performed on a reserve are incidental, none of the income is exempt.
It is our understanding that you perform XXXXXXXXXX services electronically for XXXXXXXXXX businesses that are owned and operated by the First Nation on-reserve. However, your business is located off-reserve; that is, all of your business-earning activities take place at your residence off-reserve, your books and records are maintained in your residence off-reserve, and you receive payment for your business activities at your residence off-reserve.
In your e-mail of December 14, 2012, you stated that you felt your services were likened more to an employment situation than as an independent business owner. However, it would appear that even if we were to consider the income to be more like employment income, we would likely consider the income to be taxable. When considering whether an Indian's employment income is exempt from tax, we generally refer to the Indian Act Exemption for Employment Income Guidelines ("Guidelines"), which can be found on the CRA website at http://www.cra-arc.gc.ca/brgnls/gdlns-eng.html. In your situation, if the income were employment income as opposed to business income, it would appear that none of the Guidelines would apply to exempt this income from tax.
You also make reference to two rulings documents 2003-0052311I7 and 2003-0054391E5, each of which discuss factors connecting an Indian's business income to a reserve. Document 2003-0054391E5 makes similar reference to comments provided above and states that:
"
if all of a status Indian's business customers live on reserve and all of the business activities take place on reserve, it is likely that all of the status Indian's business income would be exempt from income tax. If, on the other hand, some of the business activities take place on reserve and some off reserve, and some of the business customers live on reserve and some live off reserve, it is our view that a reasonable apportionment of the business income between exempt income and taxable income may be made."
As noted above, in the information you provided to us, it appears that your business activities take place off-reserve. This document makes reference to not only the location of the customers on a reserve, but also to the location of the business activities on a reserve.
In the situation described in document 2003-0052311I7, the business owner hauls material to and from a reserve for on-reserve clients. Although the work was not entirely performed on a reserve, based on the nature of the work, it was determined that the income would likely be exempt from tax, since the majority of his work began or ended on a reserve. Additional connecting factors that were taken into consideration in this particular case were the fact that the management and control of the taxpayer's business occurred on the reserve and the taxpayer was also resident on the reserve; neither of which are present in your situation.
You also cited a tax court case, Akiwenzie v. The Queen, where you quoted several of Judge Campbell's comments that you felt were relevant to your situation. However, this particular case considered whether a taxpayer's employment income was connected to a reserve. In your situation, we have to consider whether your business income would be connected to a reserve, such that the tax exemption would apply.
Moreover, the decision of the judge in this tax court case was appealed and heard by the Federal Court of Appeal ("FCA"), Akiwenzie v. The Queen (2004 DTC 6007), wherein the decision of the tax court judge was set aside. The FCA found that the fact that an employee's duties were beneficial to reserves does not, in and of itself, result in his income being situated on these reserves. The FCA judge did state that, in his view, the tax court judge did correctly find:
"that the respondent's income was not sufficiently connected with the reserve on which he lived by virtue of his occupancy of the reserve and the amounts which he would have spent on it to support himself and his family (see Bell v. Canada, 2000 DTC 6365 at paragraph 41). However, the "true connection" which he did find is a virtual connection with "each and every reserve in Canada" based on the exceptionally beneficial nature of the services rendered by the respondent through his employment and his genuineness qua Indian (see paragraph 5, supra)."
The FCA judge, however, did continue to state:
"With respect, these factors have nothing to do with the preservation of the respondent's personal property qua Indian on these reserves. Specifically, it cannot be said that the taxation of the respondent's income would result in the erosion of his entitlement qua Indian on any or all of these reserves as there is no connection whatsoever between this income as such and these reserves as economic bases or physical locations (Monias, supra, paragraphs 46 and 67).
The FCA also cites the case of Monias v. The Queen (2001 DTC 5450) in which the Federal Court of Appeal previously stated:
"That the work from which employment income is earned benefits Indians on reserves, and indeed may be integral to maintaining the reserves as viable social units, is not in itself sufficient to situate the employment income there. It is not the policy of paragraph 87(1)(b) to provide a tax subsidy for services provided to and for the benefit of reserves. Rather, it is to protect from erosion by taxation the property of individual Indians that they acquire, hold and use on a reserve, although in the case of an intangible, such as employment income, it is the situs of its acquisition that is particularly important."
In our view, since all of the income-earning activities of your business activities take place off-reserve, the income earned from these activities would likely be taxable.
We trust that these comments will be of assistance.
Yours truly,
Roger Filion, CPA, CA
Manager
Non-Profit Organizations and Aboriginal Issues Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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