1 March 1994 Internal T.I. 9314007 - NON-CAPITAL LOSS

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

            March 1, 1994

      WINNIPEG DISTRICT OFFICE      Head Office
A. White, Assistant Director  Rulings Directorate
      Client Assistance Division    B. Kerr
(613) 957-8953
      Attention: Gord Mizak

            931400

Non-capital Losses of Status Indians

This is in reply to your memorandum of May 7, 1993 and further to our telephone conversation (Thornley/Mizak) of May 27, 1993, concerning XXXXXXXXXX a status Indian earning exempt employment income on a reserve.

Apparently XXXXXXXXXX was allowed to claim section 8 deductions, such as R.P.P., C.P.P., and U.I.C. for the years 1986 and 1987. In the years 1988 to 1991 inclusive she was allowed a deduction for R.P.P. contributions only. As her remuneration was considered exempt under the Indian Act, it was excluded from the computation of income under paragraph 81(1)(a) of the Income Tax Act (the "Act"). As the various deductions were not "netted" in computing income, they resulted in non-capital losses which XXXXXXXXXX was advised to apply to other years.

You ask that we advise if this is correct as the deductions were allowed in spite of a lack of reportable income. You also note that when XXXXXXXXXX begins receiving any benefits these amount will likely be exempt. Thus, she can apply her non-capital losses to other types of income.

You note that you have 9 other cases similar to XXXXXXXXXX and over the telephone you indicated that since writing the memorandum you now have many more enquiries along the same lines.

Our comments

The issue in your situation would be where does the exemption provided under paragraph 81(1)(a) of the Act take place, would it be at the "source" determination or at the "income" determination?

The following provisions of the Act are relevant for this determination:

section 3 "The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year determined by the following rules:

(a) determine the aggregate of amounts each of which is the taxpayer's income for the year...from a source...including...each office or employment..."

subsection 5(1) "Subject to this Part, a taxpayer's income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by him in the year."

subsection 8(1) "In computing a taxpayer's income for a taxation year from an office or employment, there may be deducted such of the following amounts as are wholly applicable to that source..."

subsection 81(1) "There shall not be included in computing the income of a taxpayer for a taxation year,

(a) an amount that is exempt from income tax by any other enactment of the Parliament of Canada..."

Paragraph 87(1)(b) of the Indian Act exempts from taxation "the personal property of an Indian...situated on a reserve."

Taking a simple example, suppose Mrs. X receives wages of $40,000 and has $3,000 deducted in respect of registered pension plan contributions. If the wages are exempt at the source determination in section 5 of the Act, then she would have no income from employment but a section 8 deduction for the registered pension plan contribution of $3,000 creating a loss from employment of $3,000, which flows through to paragraph 3(d) thereby resulting in a non-capital loss under paragraph 111(8)(b) of the Act. However, if the exemption takes place at the income determination in section 3 of the Act, there would be no loss from employment nor any non-capital loss. She would have her wages of $40,000 brought into the calculation of her income from employment at subsection 5(1) less her section 8 deduction of $3,000 resulting in $37,000 income from employment. The exemption would take place at section 3, resulting in no amount being included in income at paragraph 3(a) and since there is no loss from employment at paragraph 3(d) there would be no non-capital loss.

In our view, the general scheme of the Act is that "income" is determined in section 3 of the Act. It is this income that forms the basis for subsection 2(2) which is the definition of taxable income which then flows through to subsection 2(1) of the Act for authority to tax.

The taxability of any income depends on its source. Accordingly, one would have to break income down and determine it on a source by source basis. Therefore, it follows that it must first be determined on a source by source basis (ie. sections 5-8 for employment, sections 9-37 for business or property, sections 38-55 for capital gains and sections 56-59.1 for other sources). Once this is done then each source must be looked at separately to determine whether they flow through into section 3 of the Act. Any amounts that are exempt by virtue of paragraph 81(1)(a) of the Act would be excluded at the section 3 determination, not at the individual source determinations (ie. section 5, 9 or 38). It is also our view that the wording in subsection 81(1) of the Act most closely resembles the wording in section 3 of the Act, thus providing further support that the exemption takes place at the section 3 determination and not at the source determination.

Further support for the position that the income from each source must first be determined and that the exemption takes place at the section 3 income determination can be found in the Courts. The Court in the case of Nowegijick v. The Queen, (83 DTC 5041), concluded that income from an office or employment is included within the ambit of the exemption provided for under paragraph 87(1)(b) of the Indian Act. The Court also went on to say at page 5046 "nothing in these reasons should be taken as implying that no Indian shall ever pay tax of any kind....We are concerned here with personal property of an Indian situated on a reserve and only with personal property situated on a reserve." In the case of Glenn Williams v. The Queen, (92 DTC 6320), the Court refers to the conclusion in the Nowegijick case that salary income is personal property for the purposes of the Indian Act exemption and goes on at page 6324 to "see no difference between salary income and income from unemployment insurance benefits in this regard, therefore I hold that the receipt of income from unemployment insurance benefits is also personal property for the purposes of the Indian Act." In the Williams case at page 6324 reference was made to section 56 of the Act as bringing the Unemployment Insurance benefits into income. What the Court is doing is looking at the source of income, then deciding whether that source is situated on a reserve. It is the source of income which is, for the purposes of the Indian Act, the personal property of the Indian situated either on or off a reserve. Consequently, it is the income from a source situated on a reserve which cannot be included in income for income tax purposes pursuant to paragraph 87(1)(b) of the Indian Act.

These views are consistent with those expressed in a recent legal opinion that we received on a similar situation.

All of the factors in respect of any subsequent income from any particular source would have to be reviewed at that time in light of the Indian Act and the Act to determine whether the amounts are exempt or not.

R. Albert
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

c.c. Rick Owen

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