21 January 1994 External T.I. 9312725 F - Indian Employment 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.

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Limited Partnership of Indian Bands

This is in reply to your letter of April 22, 1993 in which you enclose previous correspondence from the Rulings Directorate dated July 20, 1990 concerning the issue of income earned by a limited partnership in which all the limited partners are Indian Bands. We understand that the business of the limited partnership will be carried on both on and off an Indian reserve but the partnership will not have an office located outside an Indian reserve.

You ask, as a consequence of the 1992 Supreme Court of Canada decision in the Glenn Williams case (92 DTC 6320), that we advise whether the Department has amended any of the taxation of status Indian policies outlined in our July 20, 1990 response with respect to a scenario similar to that set out above but which was given in more detail in your letter of February 20, 1990.

We caution that expressions of opinions arising out of discussions or exchanges of correspondence are not rulings and are not binding on the Department. Guidelines under which advance income tax rulings are issued are set out in Information Circular 70-6R2. In light of the foregoing we provide the following comments.

Our Comment

The Supreme Court's decision in the Glenn Williams case called into question the conclusions drawn from the earlier Nowegijick case (83 DTC 5041). In the Glenn Williams case, the taxpayer's employer was located on a reserve, as were his duties of employment. After being laid-off, he received enhanced Unemployment Insurance ("UI") benefits as a result of a job creation project on a reserve. The taxpayer was assessed on the basis that the debtor with respect to the UI payments, the federal Crown, was located off a reserve.

The Court rejected the situs of the debtor test derived from the Nowegijick case as the sole test for determining whether or not a particular property was on a reserve, saying that "any overly rigid test which identified one or two factors as having controlling force ... would be open to manipulation and abuse." Instead, the Court recommended the following approach:

(a)     analyze the matter in terms of categories of property and types of taxation; (b) identify the various connecting factors (i.e. factors connecting the property to a location on or off a reserve) which are potentially relevant; (c) determine the weight to be given the connecting factors in the light of three considerations:

1.     the purpose of the exemption under the Indian Act, 2. the type of property in issue, and 3. the nature of taxation of the property.

Thus, the answer to your question is, yes the Department is and will be changing the way it applies the Indian Act tax exemption in some instances where a review of the various factors connecting income to a reserve indicates that there is little or no connection between a status Indian's income and the reserve. In most instances this will involve employment income only, however, it may also be necessary to review the treatment of income from a business in light of the decision in Williams. This is particularly true in reference to self-employment income from a business or property.

Currently there are two cases of relevance under appeal before the Courts. In the Pete case, 91 DTC 204 (TCC), the Court relied on Nowegijick and applied the "situs of the debtor" test to allow an exemption to the extent that the taxpayer's clients were located on reserves. In the Charleson case, 91 DTC 844 (TCC), the Court looked at a number of factors such as where the business is carried on, where the books and records are kept and where decisions are made and concluded that the business was off the reserve. The appeals of the Pete and the Charleson cases have not been heard yet, therefore we are unable to comment further on the issues involved therein other than to say that when the judgements are rendered they will no doubt impact on, vary, or support the Williams decision.

While the Supreme Court did not address the issue of business income in Williams, it will be necessary to look at the "connecting factors" test with respect to businesses, with the place where the business is carried out as the predominant factor. In determining the question, among other factors, we will likely consider the location of the head office, the location of the books and records and where the activities of the business are carried on. As mentioned in our letter to you of July 20, 1990, it might be possible for a business to have an off- reserve permanent establishment as well as one on a reserve, and any income attributable to the off-reserve permanent establishment may not be exempt. Until the resolution of the Pete and Charleson cases, the Department will maintain the position in IT-62 with respect to income from a business.

In closing, we would point out that where the partnership employs status Indians in the conduct of its business and those employees perform their services in off-reserve locations, it will be necessary for them to establish that, in addition to having an employer situated on a reserve, that they have other factors connecting their income to a reserve, such as residing permanently on a reserve.

We trust our comments will be of assistance to you.

Yours truly,

Roberta Albert for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch

c.c.      Rick Owen