6 November 1996 Internal T.I. 9632857 - 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.

							November 6, 1996

	SURREY TAX CENTRE			HEADQUARTERS
M. Azzi
	Attention: N. Bouzek		(613) 957-8953

							7-963285

Interest Income of a Status Indian

This is in reply to your memo of October 1, 1996, requesting our views on the tax treatment of interest income of XXXXXXXXXX a status Indian.

We understand that XXXXXXXXXX has requested an adjustment to her 1995 income tax return to remove interest in the amount of $XXXXXXXXXX which she had originally reported from T5 slips issued by XXXXXXXXXX As explanation for the requested adjustment, she indicates that "Interest income earned on a reserve by an Indian is exempt from income tax under section 81(1)(a) of the Income Tax Act".

Our Comments

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.

We have not been provided with sufficient information in order to determine whether XXXXXXXXXX above-noted interest income is exempt from tax. This determination would require a review of all relevant connecting factors, such as the source of the funds invested, XXXXXXXXXX residence, the location of the bank, and the nature and location of the investment instrument(s). In this respect, we wish to draw to your attention the recent case of Arnold Recalma v. Her Majesty the Queen (94-1971(IT)G), where 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.

Should you wish to submit additional information on the connecting factors relevant to XXXXXXXXXX interest income, we would be pleased to provide you with our views on the taxability of this income.

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