14 June 2023 External T.I. 2021-0910211E5 - Indian Act exemption and business 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 Partnership’s 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: No.

Reasons: There are not enough significant connecting factors to situate the Partnership’s income to a reserve.

							June 14, 2023

XXXXXXXXXX						Income Tax Rulings Directorate
							Ann Townsend
							2021-091021

Dear XXXXXXXXXX:

Re: Partnership income and the tax exemption under Section 87 of the Indian Act

This is in response to your correspondence asking if the partnership income earned by individual partners is exempt from income tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act.

You have provided us with the following information:

• The XXXXXXXXXX (“Partnership”) has two individual partners who are registered under the Indian Act (“Partners”) and who are members of the XXXXXXXXXX (“Member Nation”).
• The Partners do not live on a reserve.
• The Partnership has an office on XXXXXXXXXX, a reserve of the Member Nation.
• The Partnership has an XXXXXXXXXX Agreement (“Agreement”) with XXXXXXXXXX (“Forest Co.”) to harvest timber on the traditional territory of the XXXXXXXXXX (“Nation”).
• The Agreement requires the Partnership to deliver the harvested timber to a sawmill that is owned and operated by Forest Co., and located on a reserve that is neither a Member Nation nor Nation reserve.
• Forest Co. pays a royalty to the Nation for the timber harvested by the Partnership on the traditional territory of the Nation.
• The Partners rent a house on the Nation’s reserve that is used for business meetings and as a meeting point before and after weekly work shifts.

It is your view that the court decisions in the fishing income cases of the Queen v Robertson et al (footnote 1) (“Robertson”) and Ballantyne v. the Queen (footnote 2) (“Ballantyne”) support that the Partnership’s business income is situated on a reserve. In those cases, the courts gave considerable weight to the important role played by the fishing co-operatives (“Co-ops”).

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 87(1)(b) of the Indian Act together with paragraph 81(1)(a) of the Income Tax 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 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 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 takes 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 on 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.

You have opined that the decisions in Robertson and Ballantyne support that the Partnership’s business income is situated on a reserve. In those cases, the commercial fishers were members of the Co-ops (on-reserve institutions) (footnote 3) and nearly all of the fishers lived on a reserve. The Co-ops controlled the fishing quotas, negotiated the price to be paid for the fish on behalf of the fishers, and provided financial support through loans to the fishers for boats and supplies. In addition, the Co-ops were very active in every aspect of the commercial fishing of its members. It is our view that the relationship between the Co-ops and the fishers are very different from the relationship between Forest Co. and the Partnership. The connecting factors that situated the fishing income on a reserve in those cases, are not applicable to the Partnership’s income and, therefore, do not support that the Partnership’s income is situated on a reserve.

As noted above, one of the most significant connecting factors used by the courts to connect business income to a reserve is where the income earning activities take place.

Based on our understanding of the facts, the Partnership’s primary income earning activities appears to be harvesting timber, which occurs off-reserve, and transporting the timber 200 kms to a sawmill that is owned by Forest Co. and located on a reserve. Therefore, the income-earning activities of harvesting and transporting the timber takes place substantially off-reserve.

The location where the management and business decisions are made is another factor that is given significant weight in applying the connecting factors test. For example, if the management and business decisions, including the negotiation of the contracts, are made at a location on a reserve, this may indicate a connection to a reserve. In this case, the Partnership has an office on the reserve of the Member Nation, however, there is no indication that any business decisions, including contract negotiations, are made from this office.

In addition, although the Partnership rents a house on the Nation’s reserve, which it uses as a meeting point before and after work shifts, it appears that the majority of the management and decision making activities of the Partnership occur off-reserve (e.g., home of the Partners, at the cutting sites).

Another factor that is given significant weight in determining whether business income is situated on a reserve, is the location of the customers. The Partnership’s sole customer, Forest Co., is a public company and although it owns a sawmill on a reserve, that fact alone does not make it resident on a reserve. In addition, the lumber is shipped from Forest Co.’s sawmill to various locations in North America. Therefore, since the Partnership’s sole customer is not resident on a reserve, this factor does not connect the business income to a reserve.

Based on the information provided, it is our view that the Partnership’s income is likely not situated on a reserve and, as result, the income is not exempt from tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Act.

We trust these comments will be of assistance to you.

Yours truly,

Ms. Nerill Thomas-Wilkinson, CPA, CA

Manager
Non-Profit Organizations and Indigenous Issues
Speciality Tax Division
Income Tax Rulings Directorate

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 The Queen v Robertson et al 2012 FCA 94; 2010 TCC 552 Leave to Appeal to the SCC dismissed

2 Ballantyne v The Queen 2012 FCA 95; 2009 TCC 325; 2012-10-25 SCC Docket 34840 – Leave to Appeal Dismissed with Costs

3 Paragraph 86 Robertson