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:
The tax treatment of child support payments and investment income of status Indians.
Position TAKEN:
Prior to 1992, the situs of the debtor would, pursuant to the decision in Nowegijick, determine the taxability of alimony and maintenance payments to Indian recipients. Thus, where the payer lived on reserve, the alimony payments received by a recipient would be tax exempt. In light of Williams, however, alimony and maintenance income will be exempt only if the recipient lives on a reserve. As the Department does not normally reassess on the basis of a court decision (since that would require a retroactive application of the court decision), this new view is effective after 1991.
The fact that a trust may be situated on a reserve is not sufficient to establish that the investment income received from the trust is exempt. This determination would require a review of all relevant connecting factors specific to each investor, including the nature and location of the investment instrument(s) from which the investment income was earned. While we have not identified all of the factors connecting investment income to a reserve, given the Recalma decision, if the investment income stream for a financial instrument involves an entity located off reserve, that investment income will not qualify as personal property situated on a reserve.
Reasons FOR POSITION TAKEN:
Position taken in other files and based on relevant jurisprudence as indicated above.
July 3, 1997
Surrey Tax Centre HEADQUARTERS
T1 Processing M. Azzi
Attention: J. Brady 957-8953
7-950258
Status Indians Exempt Income
This is further to our memo of June 20, 1995, wherein we indicated that the issues raised in your memo of January 24, 1995, regarding the tax treatment of child support payments and investment income of status Indians, would be addressed under separate cover. We apologize for the unavoidable delay that has been encountered in replying to your request. As previously indicated, in light of the Williams case (92 DTC 6320), the Department has had to review its interpretation of the scope of the exemption from income taxation provided under the Indian Act.
In the situation involving child support payments, you indicate that a woman, who was a status Indian but has apparently lost her status as she is now living off reserve, is receiving child support payments from a status Indian living on a reserve who earned his income on reserve. As regards to your query on investment income, you indicate that a status Indian is receiving investment income from a trust "situated on a reserve".
Please note that, for purposes of this reply, we assume that the child support payments at issue are otherwise taxable and that they are not excluded from the recipient's income by virtue of the recent amendments to the Income Tax Act (the "Act") contained in Bill C-92, which received Royal Assent on April 25, 1997 (the effect of these new rules, which generally apply to payments required to be made under agreements or orders made after April 1997, is that there is no income inclusion or deduction in respect of payments made for the support of children).
Paragraph 81(1)(a) of the Act and section 87 of the Indian Act provide a tax exemption for an Indian's personal property situated on a reserve. The Courts have determined that, for purposes of this exemption, income is personal property. Therefore, what must be determined is whether the income of an Indian is situated on a reserve.
In determining where the income of an Indian is "situated", prior to Williams, direction was provided by the Nowegijick case (83 DTC 5041), when it found that the situs of the debtor determined whether income was situated on a reserve and, therefore, exempt from taxation. In Williams, however, the Supreme Court of Canada rejected the situs of the debtor test as the sole test for determining whether personal property of an Indian was situated on a reserve, indicating that "an overly rigid test which identified one or two factors as having controlling force...would be open to manipulation and abuse." The approach adopted in Williams requires the examination of all factors connecting income to a reserve to determine if the income is situated on the reserve.
Alimony and Maintenance
From the information provided, it is unclear whether the woman receiving child support qualifies as an "Indian" and, therefore, whether she qualifies for the above-described exemption. In this respect, reference should be made to subsection 2(1) of the Indian Act which defines an "Indian", for purposes of the Indian Act, as "a person who pursuant to this Act is registered as an Indian or is entitled to be registered as an Indian", and to sections 6 and 7 of the Indian Act which describe persons who are, and persons who are not, entitled to be registered as Indians. The onus is on the individual to prove registration or entitlement to registration as an Indian. The following comments apply to a person who qualifies as an Indian for purposes of the Indian Act.
As indicated above, prior to 1992, the situs of the debtor would, pursuant to the decision in Nowegijick, determine the taxability of alimony and maintenance payments to Indian recipients. Thus, where the payer lived on reserve, it was the Department's view that the alimony payments received by a recipient would be tax exempt.
In light of Williams, however, it is our present view that alimony and maintenance income will be exempt only if the recipient lives on a reserve. That is, in our view, the most significant factor that would serve to connect alimony and maintenance income to a location on reserve or off reserve is the location of the recipient's residence. In our view, there is no direct connection between the payer's income and the periodic payments of alimony and maintenance and, therefore, the tax status of the payer's income is not a factor relevant in determining whether alimony and maintenance income received should be exempt. It is also our view that the residence of the payer is irrelevant (this is consistent with the decision in Williams which, as indicated above, determined that the residence of the debtor should not be viewed as being of primary importance, since to do so would be to inappropriately rely on general conflict of laws principles). As the Department does not normally reassess on the basis of a court decision (since that would require a retroactive application of the court decision), this new view is effective after 1991.
Investment Income
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. Where a bank account is considered to be situated at a location on reserve, this is one factor to weigh in determining whether interest earned on deposits in that account is exempt from taxation. There could be other factors that would connect the income to a location off reserve.
In the recent case of Arnold Recalma v. Her Majesty the Queen (94-1971(IT)G), the Tax Court of Canada considered the taxability of income earned by an Indian living on reserve, from investments purchased from an on reserve branch of a bank. The securities were bankers' acceptances and managed funds. It was noted by the Court that the income stream for such financial instruments started with companies that were located off reserve, and it was held that the investment income of the taxpayer was not personal property situated on a reserve. Rather, the income was earned in the economic mainstream. The Court also pointed out that the source of the capital used to buy the securities and the location of the bank branch where the securities were purchased are not as significant as other factors.
As a result, in our view, the fact that a trust may be situated on a reserve is not sufficient to establish that the investment income received from the trust is exempt. This determination would require a review of all relevant connecting factors specific to each investor, including the nature and location of the investment instrument(s) from which the investment income was earned. While we have not identified all of the factors connecting investment income to a reserve, given the Recalma decision, if the investment income stream for a financial instrument involves an entity located off reserve, that investment income will not qualify as personal property situated on a reserve.
R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
.../cont'd
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