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 an investment fund operated from an Indian reserve will provide its Indian investors with tax-exempt investment income.
Position:
No.
Reasons:
The fund would earn its income from shares and bonds of publicly traded entities. Thus, the investment income would be earned in the commercial mainstream.
960755
XXXXXXXXXX J.D. Brooks
Attention: XXXXXXXXXX
July 31, 1997
Dear Sirs:
This letter is in reply to your letter of February 23, 1996 in which you requested our opinion concerning the taxability of investment income earned by Indians from an investment fund which you envisage. The fund would purchase shares and bonds in publicly traded entities or rated government obligations. We apologize for the delay in replying.
The fact situation which you set out is quite specific and it appears that it may relate to definite contemplated transactions. As explained in Information Circular 70-6R3 dated December 30, 1996, assurance as to the tax consequences of proposed transactions is provided by the Rulings Directorate but only on an advance income tax rulings basis and only with respect to the taxpayers identified in such rulings. Although we are unable to provide any opinion in respect of the specific case you have described, we have set out below some comments of a general nature.
In general terms, it is section 87 of the Indian Act, along with paragraph 81(1)(a) of the Income Tax Act, that establishes 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.
In determining whether the income earned by an Indian is situated on a reserve, and thus exempt from taxation, the approach taken by the Supreme Court of Canada in the 1992 case of Glenn Williams v. Her Majesty the Queen must be followed. This approach requires the examination of all factors connecting income to a reserve to determine if the income is located on the reserve. The Court also indicated that the ultimate question is to determine to what extent each connecting factor is relevant in determining whether taxing the particular kind of property in a particular manner would erode the entitlement of an Indian to personal property situated on a reserve. One general direction provided by the Supreme Court in Williams was that "an overly rigid test which identified one or two factors 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.
In the recent case of Arnold Recalma v. Her Majesty the Queen (1996 DTC 1520; (1996) 3 CTC 2272), the Tax Court of Canada considered the taxability of income earned by an Indian from investments purchased from a branch of a bank situated on a reserve. The securities were bankers' acceptances and mutual funds. It was noted by the Court that the income stream for these 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.
We enclose a copy of the Income Tax Technical News No. 9, which was issued by the Department on February 10, 1997. we refer you to the article entitled "Taxation of Indians - Investment Income" for the Department's comments on the issue as presented at the 1996 Canadian Tax Foundation Conference.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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