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) Will the CRA be providing similar administrative relief to self-employed income that was applied to employment income as a result of the COVID-19 restrictions? (2) Is self-employed income earned by a physician from providing medical services virtually eligible for the tax exemption under Section 87 of the Indian Act.
Position: (1) No (2) It depends, based on a connecting factors test.
Reasons: (1) There is no standard test that can be used to determine if business income is situated on a reserve, therefore similar guidance would not be feasible. (2)A connecting factors analysis would be required to determine whether the income is situated on a reserve.
XXXXXXXXXX 2021-088474
Michel Gauthier
May 27, 2022
Dear XXXXXXXXXX:
Re: Medical Services Provided virtually during Covid-19 and the tax exemption under Section 87 of the Indian Act
This is in reply to your correspondence of March 4, 2021 asking whether the self-employed income earned by a physician, who is registered under the Indian Act, is exempt from income tax under paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act.
Your question has arisen as a result of the COVID-19 restrictions that required the physician to provided “on-call” services to on-reserve patients by telephone from a home office located in Toronto, which were usually provided on-reserve. You are asking whether the Canada Revenue Agency (CRA) will be providing administrative relief to self-employed First Nations individuals to overcome possible adverse tax consequences resulting from the COVID-19 restrictions, similar to the administrative relief that was provided for employment income. (footnote 1) In addition, you are asking whether the income earned by the physician from the on-call services will qualify for the tax exemption after the COVID-19 restrictions were lifted.
Our Comments:
This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.
Paragraph 81(1)(a) of the Income Tax Act together with paragraph 87(1)(b) of the Indian Act exempts from income tax the personal property situated on a reserve of an individual who is registered or entitled to be registered under the Indian Act. The courts have determined that for the purpose of section 87 of the Indian Act, income is personal property and is therefore exempt from income tax if it is situated on a reserve. The courts have stated that the determination of whether income is situated on a reserve requires identifying the various factors connecting the income to a reserve and weighing the significance of each such factor. This is referred to as the “connecting factors” test.
The connecting factors test is a two-step analysis. First, potentially relevant factors that connect the property to a location are identified and then each factor is given weight in light of three considerations: the purpose of the income tax exemption, the type of property, and the taxation of that property.
When applying the connecting factors test to business income the courts have indicated that the most significant connecting factors (footnote 2) are:
• where the income earning activities of the business take place
• the type of business and the nature of the business activities
• where the management and decision making activities of the business take place
• where the customers are located
Other connecting factors (footnote 3) that the courts have found to be less significant are:
• whether or not the business owner lives on a reserve
• whether the business maintains an office on a reserve or take business orders from a location on a reserve
• whether the books and records are kept on a reserve
• whether the administrative, clerical, or accounting activities take place on a reserve
The above connecting factors are not exhaustive, since there are other potential connecting factors that could apply depending on the fact situation. In addition, a connecting factor will have different relevance and weight depending upon the specific facts of each case. As a result, there is no standard test that can be used to determine if business income is situated on a reserve. This can only be determined by a review of all the relevant facts at the end of each year and is beyond the scope of a technical interpretation. However, we can offer the following general comments to assist you in making that determination.
The CRA has an administrative position on the application of the Indian Act Exemption for Employment Income Guidelines (Guidelines) as a result of the COVID-19 crisis. Where an individual’s regular place of employment (full time or part time) was located on a reserve before the imposition of COVID-19 workplace restrictions and changed solely because of those restrictions, the CRA will continue to apply the Guidelines as if the individual was still working at their regular workplace on a reserve. This will be the CRA’s position where, among other things, the individual intends to work, and does work, at the on-reserve location as soon as the restrictions are lifted.
However, unlike the Guidelines, there is no standard test that can be used to determine if business income is situated on a reserve and there are many connecting factors to consider. Therefore, the CRA will not be providing similar administrative relief for self-employed business income as it is not feasible and it would not be an effective tool to overcome any adverse tax consequence resulting from the COVID-19 restrictions.
You have also asked whether the income earned by the physician providing on-call services from an office in Toronto will qualify for the exemption from tax after the restrictions are lifted. It is your view that the on-call income is considered situated on a reserve because it is earned from treating on-reserve patients.
The courts have concluded that the purpose of the tax exemption is to ensure tax does not erode the use of Indian property on reserves. The purpose is not intended to provide a tax subsidy for services provided to and for the benefit of reserves. Therefore, the fact that the physician’s on-call services benefit individuals on a reserve is not a factor that is given significant weight in a connecting factors test.
As noted above, the location of the revenue-generating activities of a business is considered by the courts to be the most significant connecting factor in determining the location of business income. Since the revenue-generating activity from the on-call services is located in Toronto, it is our view that the income earned from providing the on-call services would not be exempt from tax under paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act.
We trust that these comments will be of assistance.
Yours truly,
Ann Townsend, CPA, CMA
Non-Profit Organizations and Indigenous Issues
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 https://www.canada.ca/en/revenue-agency/campaigns/covid-19-update/guidance-application-indian-act-exemption.html#h_1
2 https://www.canada.ca/en/revenue-agency/services/indigenous-peoples/information-indians.html#hdng5
3 Ibid.
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