24 October 2014 Internal T.I. 2013-0473751I7 - Gold Indian investment

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: Income tax treatment of gold investment by status Indian

Position: It depends on application of connecting factors to each case

Reasons: Gold-trading considered an adventure or concern in the nature of trade (business). Therefore, connecting factors relating to Indian business income must be applied to each individual case in order to establish sufficient connection of the income to a reserve.

October 24, 2014

Taxpayer Services Directorate Headquarters
XXXXXXXXXX Call Centre Income Tax Rulings
Directorate
A. Messore
(613) 948-2227

Attention: XXXXXXXXXX 2013-047375

RE: Indian Act tax exemption for purchase and sale of gold on reserve

This is in response to your email request seeking our views on a transaction contemplated by a taxpayer who is an Indian as that term is defined in subsection 2(1) of the Indian Act.

You have received a telephone inquiry from a taxpayer who resides off-reserve, and wishes to purchase gold bullion through an on-reserve financial institution with the intention of subsequently reselling the gold at a profit. The taxpayer stores the gold bullion in a safety-deposit box at the on-reserve financial institution for safe keeping. The taxpayer would like to know if the profits realized from the resale of the gold bullion will be exempt from income tax.

The nature of the contractual relationship, if any, between the taxpayer and the financial institution is not clear from the above description. Nor do we know how long the gold will be held before resale, or what quantities of gold will be traded and the frequency of such transactions. Since this inquiry relates to a particular fact situation, the details of which are not available, we will provide you with general comments about the provisions of the Income Tax Act and related legislation (where referenced), without confirming the specific income tax treatment of the particular fact situation you describe.

Generally, the Canada Revenue Agency is of the view that a person who invests in gold coins, bullion or certificates is dealing in commodities, and the comments in Interpretation Bulletin IT-346R "Commodity Futures and Certain Commodities" would apply to those transactions. While it is a question of fact whether a gain or loss on the disposition of any property is on income account or capital account, the Canada Revenue Agency considers that transactions involving commodities such as gold constitute a business or an adventure or concern in the nature of trade.

The Canada Revenue Agency's Interpretation Bulletin IT-346R establishes an administrative position which allows a person who meets the definition of "speculator" at ¶ 6 of the Bulletin to elect to report the income resulting from such transactions, for income tax purposes, as being on account of capital instead of income. Thus, although the activity of purchasing and selling gold bullion is considered to be a business or an adventure or concern in the nature of trade, the taxpayer may choose to report the business profit or loss that is generated as a capital gain or loss for tax purposes. Once a choice is made to report the income or loss from such transactions on either an income or capital basis, it must subsequently be followed by the taxpayer consistently.

Paragraph 81(1)(a) of the Income Tax Act together with paragraph 87(1)(b) of the Indian Act exempt from income tax 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 business income, is personal property. An Indian is defined in the Indian Act as a person who is registered or entitled to be registered as an Indian. Where the location of property is not easy to determine, as with intangible property such as income, the courts have used a connecting factors analysis whereby they identify potentially relevant factors connecting the intangible property to a location.

In the case of business income, as we have here, the courts have identified as potentially relevant connecting factors such things as the type of business and nature of the work, the location where the business services are provided or the business activities take place, the place where the business is operated, the place where the income is generated, the location of the clients, the location of those receiving the business services (if different from the clients), the location where business planning and decisions are made, the place were payment is made, the location of the books and records, the location of the business' bank accounts and, to a lesser extent, the residence of the owner of the business. These connecting factors will have different relevance and weight depending upon the facts of each case. No one connecting factor is determinative and the weight, if any, to attach to each factor will vary according to the particular circumstances of each case.

There is no indication that a separate office location exists, and therefore we assume the investment business is operated from the taxpayer's home situated off the reserve. Presumably, that is where the investment planning and decisions are made, where the business activities take place, and where the taxpayer keeps records of any transactions.

The role of the financial institution is unclear, although it is possible that it is acting as a broker for these transactions on the world commodities exchanges. The fact that the gold bullion is physically located in a safety deposit box at an on-reserve XXXXXXXXXX location does not sufficiently connect the income derived from gold transactions to a reserve. The safety-deposit contract entered into with the XXXXXXXXXX is not the means by which the taxpayer will generate income from the gold. Rather, any business income would be the result of profits realized on gold transactions made through global commodities exchanges situated off-reserve.

From the limited facts, it seems the taxpayer is not carrying out any essential or significant components of the investment business operations on-reserve, other than storing the gold commodities there. The financial institution may be acting as a broker to those commodities exchange transactions, which themselves occur off-reserve. In our view, the connecting factors overall tend towards situating the business income off-reserve, and the income from the gold-trading transactions would therefore likely be taxable.

For your information, unless exempted, 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, following a 90-day waiting period (unless advised otherwise to extend this waiting period), 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 the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity.  Requests for this latter version should be e-mailed to: LPRA-PLAR ITR-DDI Access Team-Équipe d'Accès.   In such cases, a copy will be sent to you for delivery to the taxpayer.
We trust these comments will be of assistance.

Yours truly,

Roger Filion, CA
Manager
Non-Profit Organizations and Aboriginal Issues
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch