6 November 1996 External T.I. 9627905 - TAXATION OF INTEREST INCOME OF AN INDIAN

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 interest income of a status Indian.

Position TAKEN:

Insufficient information provided; therefore we provided general comments:

Based on Williams, the location of a savings account on a reserve would not, in itself, be sufficient to exempt the interest income earned thereon. There could be other factors that would connect the income to a location off reserve. In Recalma, the Tax Court noted that the income stream for bankers' acceptances and managed funds 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.

Reasons FOR POSITION TAKEN:

See above.

									5-962790
XXXXXXXXXX							M. Azzi

November 6, 1996

Dear Sir:

Re: Interest Income

This is in reply to your letter of August 21, 1996, wherein you requested our views on the tax treatment of interest income in the amount of $1,536 which you earned in 1995.

We understand that you are a status Indian. You indicate that you sold your home, which was on a reserve, for $48,000 and deposited the money in an on reserve branch of a bank. You also note that your spouse is employed on reserve and earns exempt income. From the information provided, it appears that your employment income is not exempt. We understand that the above-noted interest was assessed as being taxable; however, in your view, this interest is not taxable as it is accumulated from "non-taxable" income.

Our Comments

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 ruling request. Where the particular transactions are completed, the enquiry (including a request to appeal a decision of the Department) should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Department.

In general terms, it is section 87 of the Indian Act, along with paragraph 81(1)(a) of the Income Tax Act, that establish the exemption from taxation for status Indians. 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 (92 DTC 6320) 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 Supreme 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 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.

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.

In conclusion, in our view, the fact that funds were deposited in an on reserve branch of a bank is not sufficient to establish that the interest earned on the funds is exempt. This determination would require a review of all relevant connecting factors, such as the source of the funds invested, your residence, the location of the bank, and the nature and location of the investment instrument(s). It is unclear from the information provided whether the above-noted interest related to funds received from the sale of your home or from employment earnings, whether you live on or off reserve, and whether the interest was earned on a bank account or on a particular investment instrument purchased at the bank (such as a term deposit, guaranteed investment certificate or bankers' acceptance).

Should you wish to submit further information or would like further clarification on the tax treatment of the above-noted interest, we suggest that you contact your local Tax Services Office for their assistance.

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