6 August 1997 Internal T.I. 9422387 - INDIAN EXEMPTION SELF-EMPLOYED 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.

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.

Principal Issues:

Taxation of business income earned by a self-employed status Indian consultant.

Position:

Facts unclear so response is inconclusive.

Reasons:

With respect to business income of a consultant, two significant factors to consider are:

1. The place where the revenue-generating consulting services are provided, and

2. the location of the residence of the customers. The location of an office on reserve does not connect the business income to the reserve. Its a question of fact as to where the revenue-gererating activities are carried out.

		August 6, 1997

	Saint John Tax Services	HEADQUARTERS
	Client Assistance	Roberta Albert
(613) 957-8953
	Attention: Louise Bolduc
		942238

Business Income Earned by a Status Indian

This is further to your round trip memorandum of August 25, 1994, wherein you asked for our comments regarding the taxation of income earned by a status Indian who operates a consulting business. You indicated that the Indian lives off reserve and that his sole client is XXXXXXXXXX, also situated off reserve. The Indian maintains an office on a reserve where he keeps his books and records. He had no telephone in the on-reserve office and he made no payment for the on-reserve office space. We apologize for the unavoidable delay that has been encountered in replying to your request.

Our comments

Section 87 of the Indian Act, along with paragraph 81(1)(a) of the Income Tax Act (the "Act"), establish the Indian exemption from taxation. Section 87 of the Indian Act exempts from taxation the personal property of an Indian situated on a reserve, and the courts have previously concluded that the reference to personal property in section 87 includes income. Although the decision of the Supreme Court of Canada in Glenn Williams v. Her Majesty the Queen (92 DTC 6320) dealt primarily with the taxation of unemployment insurance benefits received by Indians, it also found that the situs of the debtor test was not necessarily the appropriate test to apply in determining whether an Indian's income is connected to a reserve and thus exempt from taxation. Specifically, the Court ruled that to determine if an Indian's income is situated on a reserve, it is necessary to look at all relevant factors connecting the income to a reserve.

As the courts have also ruled, the purpose of the Indian Act is to protect the property of an Indian on reserve; it is not intended to provide an economic advantage to an Indian operating in the commercial mainstream. In our view, in general, where a business is operated entirely on a reserve and the clients of the business are Indians living on reserve, the business income would be considered to be connected to a reserve and thus exempt from tax in the hands of the proprietor. Where the business is operated entirely off reserve and the clients of the business reside off reserve, the business income would be taxable.

In the case of fishermen and grain growers, we have taken the view that the location of the fishing and grain growing, as the case may be, determines whether the income from the business is exempt. In other cases of business income, such as that of a consultant, we would consider both the location of the revenue-generating activities and the location of the customers as being the most significant factors that serve to connect the business income to a location that is either on or off reserve. Where some of the revenue-generating activities take place on reserve and some off reserve, and some of the customers live on while others live off reserve, it is our view that a portion of the business income will be taxable and the remaining portion will be exempt. Where a portion of income from a business is exempt and the remaining portion is not exempt, the expenses which pertain to the exempt portion are not deductible. Normally, expenses should be allocated in the same proportion as revenue unless another allocation could be shown to be more reasonable in the circumstances. In a specific situation, it could be that some expenses pertain entirely to the exempt portion or to the taxable portion, and in that case, a specific allocation of the entire expense to its respective portion would be most appropriate.

In the situation described above, we cannot make any conclusive comments as it is unclear where the revenue-generating activities are undertaken. It is a question of fact as to where the consultant carries out these activities and, although the location of the taxpayer's office is not sufficient to connect the business income to the reserve, it may indicate that the consultant carries out some of his work there.

R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch