4 July 1995 External T.I. 9330595 F - Taxation of Interest on Treaty Land Entitlement Monies

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:

Taxation of interest earned on Treaty Land Entitlement monies.

POSITION TAKEN:

The nature of the Treaty Land Entitlement monies (i.e., whether they are tax-exempt) would first have to be determined in establishing whether the interest earned thereon is taxable. Generally, the monies will be exempt from taxation by virtue of section 87 of the Indian Act if, as described in paragraph 90(1)(b) of the Indian Act, they were "given to Indians or to a band under a treaty or agreement between a band and Her Majesty." In our view, an agreement would have to be similar in nature to a treaty for the exemption to apply.  The agreement would have to implement a treaty; that is, it must be an agreement which implements a treaty obligation.  Furthermore, the property that was given must be related to the settlement of land issues.

The initial investment income derived from property which comes within subsection 90(1) of the Indian Act would be income earned from property deemed to be situated on a reserve and so would be exempt from taxation.  However, it is questionable if income earned on accumulated investment income in these circumstances would receive the protection of subsection 90(1) of the Indian Act.  Nevertheless, if it is determined that the Treaty Land Entitlement monies are tax-exempt monies received by an Indian or band resident on a reserve and invested (by the Indian or band) at a branch located on a reserve, then, in our view, there would exist strong factors connecting the accumulated interest income earned on the monies to the reserve.  All other relevant factors, in a particular situation, would also have to be evaluated in determining whether the interest is exempt from taxation.

REASONS FOR POSITION TAKEN:

With respect to paragraph 90(1)(b) of the Indian Act, the Supreme Court of Canada held, in Mitchell v. Peguis Indian Band ((1990) 2 SCR 85), that the words "treaty" and "agreement" take colour from each other and that the use of the word "given" is a distinct and pointed reference to the process of cession of Indian lands.

In Williams v. Her Majesty the Queen, 92 DTC 6320, [1992] 1 CTC 225, the Supreme Court rejected the situs of the debtor test as the sole test for determining whether the personal property of an Indian was situated on a reserve.  The approach adopted in Williams requires an examination of all factors connecting income to a reserve to determine if the income is located on the reserve.

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Attention:  XXXXXXXXXX

Dear Sir:

Re:  Taxation of Interest Earned on Treaty Land Entitlement Monies

This is further to our letter of March 29, 1994, wherein we indicated that upon completion of the Department's review of its positions concerning non-employment income earned by status Indians, we would advise you on the issues raised in your letter of October 22, 1993, regarding the above-noted subject.  In your letter, you requested that we confirm your understanding that interest earned on Treaty Land Entitlement monies is subject to taxation, unless the monies are invested in financial institutions that are located on reserve lands.  It is also your understanding that where such monies are invested in a financial institution located on a reserve, the interest earned on the monies is not taxable, unless the deposit instrument is domiciled off-reserve at the location of the head office of the issuer of the instrument.

We apologize for the unavoidable delay that has been encountered in replying to your request.  In light of the decision of the Supreme Court of Canada in Williams v. Her Majesty the Queen, 92 DTC 6320, [1992] 1 CTC 225, the Department has had to review its interpretation of the scope of the exemption from income taxation provided under the Indian Act.

Our Comments

In Williams, the Supreme Court noted that "the purposes of the conflict of laws have little or nothing in common with the purposes underlying the Indian Act."  "The test for situs under the Indian Act must be constructed according to its purposes, not the purposes of the conflict of laws", and so it is not appropriate to simply adopt general conflict of law principles when determining whether income is connected to a reserve.

One general direction provided in Williams was that "an overly rigid test which identified one or two facts as having controlling force...would be open to manipulation and abuse". The Supreme Court rejected the situs of the debtor test as the sole test for determining whether the personal property of an Indian was situated on a reserve.  The approach adopted in Williams requires an examination of all factors connecting income to a reserve to determine if the income is located on the reserve.

Based on Williams, it is our view that the location of a savings account on a reserve would not, in itself, be sufficient to exempt the interest income earned thereon.  Similarly, the fact that the investment in a term deposit or the purchase of a guaranteed investment certificate takes place on-reserve would not, in itself, be sufficient to exempt the interest income earned thereon.  The connecting factors specific to an investor will have to be examined.

Of course, when all potential factors indicate a reserve location, the investment income will be subject to exemption. For instance, when a status Indian lives on-reserve, earns exempt income and makes deposits of funds into a savings account in a branch of a bank located on a reserve, that Indian's interest income earned on such account will be exempt from income taxation.  At the other extreme, when a status Indian lives off- reserve and earns only taxable income, the deposit of funds into a savings account located on-reserve, by means of an automated teller machine located off-reserve, will not be sufficient to exempt the interest income earned on such account.

With respect to the Treaty Land Entitlement monies, the nature of the monies (i.e., whether they are tax-exempt) would first have to be determined in establishing whether the interest earned thereon is taxable.  Generally, the monies will be exempt from taxation by virtue of section 87 of the Indian Act if, as described in paragraph 90(1)(b) of the Indian Act, they were "given to Indians or to a band under a treaty or agreement between a band and Her Majesty."  With regard to paragraph 90(1)(b) of the Indian Act, the Supreme Court of Canada held, in Mitchell v. Peguis Indian Band ((1990) 2 SCR 85), that the words "treaty" and "agreement" take colour from each other and that the use of the word "given" is a distinct and pointed reference to the process of cession of Indian lands.  Thus, in our view, an agreement would have to be similar in nature to a treaty for the exemption to apply.  The agreement would have to implement a treaty; that is, it must be an agreement which implements a treaty obligation.  Furthermore, the property that was given must be related to the settlement of land issues.

The initial investment income derived from property which comes within subsection 90(1) of the Indian Act would be income earned from property deemed to be situated on a reserve and so would be exempt from taxation.  However, it is questionable if income earned on accumulated investment income in these circumstances would receive the protection of subsection 90(1) of the Indian Act.  Nevertheless, if it is determined that the Treaty Land Entitlement monies are tax-exempt monies received by an Indian or band resident on a reserve and invested (by the Indian or band) at a branch located on a reserve, then, in our view, there would exist strong factors connecting the accumulated interest income earned on the monies to the reserve.  All other relevant factors, in a particular situation, would also have to be evaluated in determining whether the interest is exempt from taxation.

We trust that these comments will be of assistance.

Yours truly

R. Albert for DirectorBusiness and General DivisionIncome Tax Rulings and Interpretations DirectoratePolicy and Legislation Branch