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:
Whether dividends received by a status Indian are taxable or exempt.
Position:
These particular dividends are taxable.
Reasons:
In order to be exempt, the corporation paying the dividends must carry out its business activities on reserve as well as have its head office and its share register on reserve.
August 7, 1997
XXXXXXXXXX Tax Services HEADQUARTERS
XXXXXXXXXX Roberta Albert
Assistant Director
Client Assistance
950071
Dividends Received by a Status Indian Shareholder
We are responding to your request of January 5, 1995, for our comments concerning dividends received by a status Indian shareholder from a construction company which conducts 100% of its house-building business on Indian reserves. The 75% shareholder is another corporation whose head office is in XXXXXXXXXX and the 25% shareholder is the status Indian who lives in XXXXXXXXXX. The books, records and share register, etc., of the construction company are maintained in the office of the 75% corporate shareholder and there is no office or sub-office on an Indian reserve.
We apologize for the unavoidable delay that has been encountered in replying to your request. As you are likely aware, in light of the decision of the Supreme Court of Canada in Williams v. Her Majesty the Queen (92 DTC 6320), the Department has had to review its interpretation of the scope of the exemption from taxation provided under the Indian Act.
When an Indian owns shares of a corporation, the shares constitute property of the Indian and income from that property may be exempt by virtue of section 87 if the income is connected to a reserve. In Interpretation Bulletin IT-62, entitled Indians, which was cancelled on July 15, 1995, it was stated that dividends on shares of a corporation whose head office, principal business activity and share register were on a reserve would normally be considered to be earned on the reserve.
In the Williams case, the Supreme Court of Canada considered the issue as to where income is earned. Although the case concerned unemployment insurance benefits, the general application of the case is that one needs to consider the factors that serve to connect income to a location that is either on or off reserve. Following the decision in the recent combined cases of Arnold, Laura and R. Mark Recalma v. Her Majesty the Queen, 96 DTC 1520 (1996) 3 CTC 2272 (TCC), which involved investment income, the connecting factors pointing to the location of shares are not to be given as much weight as other, more significant factors. Similarly, the mere location of a corporation's administrative office on reserve would not be sufficient to enable one to conclude that income arising from the corporation's business is connected to a reserve. Instead, what is more important is the location of the revenue-generating activities of the corporation that enables the corporation to earn income and pay dividends. The location of the corporation's clients is another significant factor.
In our view, when considering whether dividend income is exempt under the Indian Act, the three factors previously noted in the Interpretation Bulletin continue to be significant. Accordingly, when the principal business activities of a corporation are carried out on reserve and the head office and share register of the corporation are on reserve, the dividend income earned on the shares held by a status Indian shareholder will be exempt. Thus, where the company's head office and share register are off reserve, in our view, dividends from that company would be taxable in the hands of the recipient and, accordingly, dividends received by the status Indian in the above-noted scenario are taxable.
R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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