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. The tax treatment of income earned by a cooperative established by XXXXXXXXXX Indian bands and located on a reserve.
2. The tax treatment of fishing business income earned by status Indians from sales to the cooperative.
Position TAKEN:
1. A cooperative does not qualify for the exemption provided under paragraph 81(1)(a) of the Act and section 87 of the Indian Act. A cooperative will therefore be taxable on its income unless otherwise exempt from taxation under another provision of the Act.
2. If all of the fishing is done off reserve, the fishing business income earned by Indians from sales to the cooperative would be much more connected to a location off reserve than to a location on reserve and, consequently, would generally not be exempt from taxation. Nonetheless, if a portion of the fishing activities are carried on on reserve, a similar portion of the business income would generally be exempt. The limited weight that the on reserve location of the cooperative would otherwise carry, as a connecting factor, will not be recognized if it can reasonably be considered that one of the main purposes for the establishment of the cooperative is to serve as a connection between the fishermen's business income and a reserve, by acting as an intermediary between the fishermen and the actual fish buyers who are located off reserve.
Reasons FOR POSITION TAKEN:
1. A cooperative is generally a corporation; therefore, it is not an "Indian" or "band" as defined in the Indian Act.
2. Connecting factors (Williams). One significant factor that serves to connect business income to a location on reserve or off reserve is the location of the customers of the business. Another significant connecting factor would be the location where the activities are carried out. In the case of a fishing business, however, the actual revenue-generating fishing activities would be more significant in determining whether the income from the fishing business is connected to a reserve. Furthermore, where an arrangement creates an artificial connection between business income and a reserve, the arrangement will carry no weight as a connecting factor.
It was concluded in Peguis that: "...Indians, when engaging in the cut and thrust of business dealings in the commercial mainstream are under no illusions that they can expect to compete from a position of privilege with respect to their fellow Canadians."
5-961721
XXXXXXXXXX M. Azzi
Attention: XXXXXXXXXX
May 7, 1997
Dear Sirs:
Re: Indian Cooperative and Fishing Income
This is in reply to your letter of February 5, 1996, which was forwarded to us for reply by the XXXXXXXXXX Tax Services Office. You have requested our views on the tax treatment of income earned by an Indian cooperative and by status Indian fishermen from sales to the cooperative; as well as our views on the applicability of Employment Insurance legislation. Please note that your concerns regarding Employment Insurance legislation have been forwarded to our CPP/UI Eligibility and Systems Division for reply. We apologize for the delay in responding to your request.
We understand that XXXXXXXXXX Indian bands are considering establishing a cooperative which would be located on a reserve. The bands hold fishing licenses and quota, while a number of the band members hold licenses and/or quota. The cooperative would purchase fish from status Indians and from other sources, and the customers of the cooperative would be located off reserve. We understand that the Indians who earn fishing income from sales to the cooperative may live on or off reserve. From the information provided, it appears that these Indian fishermen are self-employed (rather than employees); therefore, for purposes of this letter, we assume that the fishing income that they earn, from sales to the cooperative, is business income.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R3. However, in response to your request, we are prepared to provide the following comments which are of a general nature and are not binding on the Department.
Cooperative
Paragraph 81(1)(a) of the Income Tax Act (the "Act") and section 87 of the Indian Act provide a tax exemption for the personal property of an Indian or band situated on a reserve. A cooperative is generally a corporation; therefore, it is not an "Indian" or "band" as defined in the Indian Act, and does not qualify for this exemption. Consequently, a cooperative will be taxable on its income unless otherwise exempt from taxation under another provision of the Act.
Self-Employed Indian Fishermen
In Mitchell v. Peguis Indian Band ((1990) 2 SCR 85), the Supreme Court of Canada described the purpose of the Indian Act as being the preservation of the entitlements of Indians to their reserve lands and the prevention of their erosion through taxation, but not the conferring of a general economic benefit upon Indians. In this respect, La Forest, J. stated that:
"... one must guard against ascribing an overly broad purpose to ss. 87 and 89. These provisions are not intended to confer privileges on Indians in respect of any property they may acquire and possess, wherever situated. Rather, their purpose is simply to insulate the property interests of Indians in their reserve lands from the intrusions and interference of the larger society so as to ensure that Indians are not dispossessed of their entitlements.
Indians have a plenary entitlement to their treaty property; it is owed to them qua Indians. Personal property acquired by Indians in normal business dealings is clearly different; it is simply property anyone else might have acquired, and I can see no reason why in those circumstances Indians should not be treated the same as other people." "Property of that nature will only be protected once it can be established that it is situated on a reserve."
La Forest, J. concluded that:
"... Indians, when engaging in the cut and thrust of business dealings in the commercial mainstream are under no illusions that they can expect to compete from a position of privilege with respect to their fellow Canadians."
In addition, the Courts have previously determined that, for purposes of section 87 of the Indian Act, the reference to personal property includes income. In Williams (92 DTC 6320), however, the Supreme Court of Canada reconsidered the approach to use in determining whether income is situated on a reserve. The proper approach in determining the situs of personal property is to evaluate the various connecting factors which tie the property to one location or another. The Supreme Court 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 significant factor that serves to connect business income to a location on reserve or off reserve is the location of the customers of the business. Another significant connecting factor would be the location where the activities are carried out. In the case of a fishing business, however, it is our view that the actual revenue-generating fishing activities would be more significant in determining whether the income from the fishing business is connected to a reserve. Thus, the fact that a bookkeeper was employed by an Indian fisherman to maintain the books and records of the business in an on reserve office is not, in itself, sufficient to connect the business income to a location on reserve. Furthermore, in our view, the residence of the fisherman carries little or no weight as a factor connecting the fishing income to a reserve.
Generally, fishing is done off reserve. Therefore, in the above-described situation, if all of the fishing is done off reserve, in our view, the fishing business income earned by Indians from sales to the cooperative would be much more connected to a location off reserve than to a location on reserve and, consequently, would generally not be exempt from taxation. Nonetheless, if a portion of the fishing activities are carried on on reserve, a similar portion of the business income would generally be exempt.
Finally, we would also like to note that, in our view, where an arrangement creates an artificial connection between business income and a reserve, the arrangement will carry no weight as a connecting factor. Consequently, in the above-described situation, the (limited) weight that the on reserve location of the cooperative would otherwise carry, as a connecting factor, will not be recognized if it can reasonably be considered that one of the main purposes for the establishment of the cooperative is to serve as a connection between the fishermen's business income and a reserve, by acting as an intermediary between the fishermen and the actual fish buyers who are located off reserve.
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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