9 January 1996 External T.I. 9528665 - TAXATION OF INVESTMENT INCOME OF INDIAN BANDS

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:

1.Do Indian bands qualify for a tax exemption under paragraph 149(1)(c) of the Income Tax Act (the "Act")?

2.Tax treatment of investment income earned by Indian bands.

Position TAKEN:

1.Indian band councils do not qualify as municipalities, unless they are in the exact same situation as The Pas Indian Band Council in Otineka. They may, however, depending on all the circumstances, be a "public body performing a function of government in Canada" and therefore be exempt from tax under paragraph 149(1)(c) of the Act.

2.If an Indian band does not qualify for exemption under paragraph 149(1)(c) of the Act, the investment income it earns may nonetheless be exempt from tax by virtue of section 87 of the Indian Act. The connecting factors specific to an Indian Band would have to be examined.

Reasons FOR POSITION TAKEN:

1.The Department's position is that band councils that had reached the advanced stage of development formerly required by section 83 of the Indian Act (prior to a 1988 amendment to that provision) qualify for tax exemption under paragraph 149(1)(c) of the Act, as public bodies performing a function of government. In the case of band councils that had not reached the advanced stage of development, the Department's policy is to regard the band councils as public bodies performing a function of government, where they exercise or have exercised the powers authorized under both sections 81 and 83 of the Indian Act, having passed at least one by-law under each of these sections.

2.In Williams, the Supreme Court rejected the situs of the debtor test as the sole test for determining whether the personal property of an Indian or band 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.

		5-952866
XXXXXXXXXX		M. Azzi

Attention: XXXXXXXXXX

January 9, 1996

Dear XXXXXXXXXX:

Re: Taxation of Investment Income of Indian Bands

This is in reply to your letter of October 19, 1995, requesting information on the tax treatment of investment income earned by Indian bands and, in particular, information as to when an Indian band qualifies for a tax exemption under paragraph 149(1)(c) of the Income Tax Act (the "Act") as a "municipal authority". We understand that you have received inquiries regarding Indian bands who wish to invest non-registered funds off-reserve.

Our Comments

While section 83 of the Indian Act provides that Indian band councils may enact laws in certain areas which are typically within the jurisdiction of municipal governments, in our view, this similarity falls short of leading to the conclusion that Indian band councils are municipalities. They may, however, depending on all the circumstances, be a "public body performing a function of government in Canada" and therefore be exempt from tax under paragraph 149(1)(c) of the Act.

The Department's position is that band councils that had reached the advanced stage of development formerly required by section 83 of the Indian Act, prior to a 1988 amendment to that provision which deleted the reference to the advanced stage of development, qualify for tax exemption under paragraph 149(1)(c) of the Act, as public bodies performing a function of government. In the case of band councils that had not reached the advanced stage of development, the Department's policy is to regard the band councils as public bodies performing a function of government, for purposes of paragraph 149(1)(c) of the Act, where they exercise or have exercised the powers authorized under both sections 81 and 83 of the Indian Act, having passed at least one by-law under each of these sections.

If an Indian band does not qualify for exemption under paragraph 149(1)(c) of the Act, as described above, the investment income it earns may nonetheless be exempt from tax by virtue of section 87 of the Indian Act. Section 87 of the Indian Act exempts from taxation the personal property of an Indian or band situated on a reserve.

In determining where the personal property of an Indian or band is "situated", one general direction provided by the Supreme Court of Canada in Williams v. Her Majesty the Queen, 92 DTC 6320, (1992) 1 CTC 225, 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 or band 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 example, 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.

As the connecting factors specific to each Indian band would have to be examined, we cannot provide you with assurance as to the tax treatment of the above-noted investment of non-registered funds. However, Indian bands can request confirmation from the Department of the taxability of their particular investment.

With respect to your query regarding Interpretation Bulletin IT-62, please note that that bulletin has been cancelled by the Special Release to Interpretation Bulletin IT-397R dated July 15, 1995, because IT-62 did not reflect recent jurisprudence or amendments to the Indian Act. We have enclosed a copy of the Special Release for your information.

We trust that these comments will be of assistance.

Yours truly,

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