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 the consulting business income of a particular status Indian is exempt from tax.
Position:
Not entirely, although a portion may be exempt.
RATIONALE:
In general, where a business is operated entirely on a reserve and the clients of the business are Indians living on reserve, the business income would be considered to be connected to a reserve and thus exempt from tax in the hands of the proprietor. To the extent that an Indian is operating in the commercial mainstream, the Indian's business income should not be exempt.
Although the taxpayer works towards obtaining improved financial compensation for Indians, the taxpayer himself is in the business of providing consulting services. In XXXXXXXXXX, one of his major clients was not an Indian nor an Indian organization but was a corporation based in XXXXXXXXXX. Also, the financial compensation sought for the Indians is not entirely (if at all) for reserve lands but is for lands that were used by Indians; and thus there is even less of a connection to reserves.
With respect to business income of a consultant, two significant factors that serve to connect the business income to a location on or off reserve are:
1.The place where the consulting services are provided.
2.The location of the residence of the customers.
The locations of offices (one on reserve and one off, in the present case) do not suffice to connect the business income to locations on or off reserve, although they may indicate where the consultant carries out some of his work.
XXXXXXXXXX It is our view that this is not a significant factor in determining whether his current business generates tax-exempt income.
This Indian's business income should be pro-rata exempt taking into consideration primarily the location at which he performs his services and also the location of his customers. We understand that his main residence is located in XXXXXXXXXX and that he maintains an office in this residence, which is situated approximately 500 Km south of his on-reserve residence (which also contains an office); and thus it may be difficult for him, on a factual basis, to demonstrate that he spent much time on reserve. Thus, it would appear that his income from the consulting business would be mostly taxable.
June 10, 1997
John Fennelly HEADQUARTERS
Audit Directorate J.D. Brooks
Small & Medium Business 957-8953
erprises Division
Attention: Luisa Guyan
963510
XXXXXXXXXX
This is in reply to your request of October 18, 1996 in which you requested our views on the taxability of business income earned by XXXXXXXXXX (the "Taxpayer") from his consulting business.
Facts
1.The Taxpayer is a registered Indian and is a member of the XXXXXXXXXX.
2.The Taxpayer maintains an office in his house which is located in XXXXXXXXXX, being off reserve. The books and records of the business are kept at this location. He also has a residence (with an office) on the XXXXXXXXXX reserve which is located about 500 Km. north of XXXXXXXXXX.
3.The Taxpayer earns self-employed income from consulting and representing various Indian bands and councils to
XXXXXXXXXX.
4. XXXXXXXXXX.
5. XXXXXXXXXX.
Representative's View
The Taxpayer's representative has pointed out that the Taxpayer works towards the economic, social and cultural well-being of his band and he is not involved with any commercial activities of the band.
The representative's view draws on Guideline 4 of the Indian Act Exemption for Employment Income Guidelines. These Guidelines were developed for application to employment income situations only, and were not intended to be the basis for determining business income exemption.
As was suggested in the referral of this case from the XXXXXXXXXX Tax Services office, this taxpayer's situation resembles that of Jabob Pete (reference 91 DTC 204). The decision of the Tax Court of Canada in the Pete case was based on the situs of the debtor. However, that case was heard before the decision in Glenn Williams (92 DTC 6320) was issued by the Supreme Court of Canada, which found that the situs of the debtor test was not necessarily the appropriate test to apply in determining whether an Indian's income is connected to a reserve and thus exempt from taxation.
As the courts have noted, the purpose of the Indian Act is to protect the property of an Indian on reserve; it is not intended to provide an economic advantage to an Indian operating in the commercial mainstream. In general, where a business is operated entirely on a reserve and the clients of the business are Indians living on reserve, the business income would be considered to be connected to a reserve and thus exempt from tax in the hands of the proprietor. Where a business is operated entirely off reserve and the clients of the business reside off reserve, the business income would be taxable.
In the case of fishermen and grain growers, we have taken the view that the location of the fishing and grain growing, as the case may be, determines whether the income from the business is exempt. In cases of other types of business, such as that of a consultant, we would consider both the location of the revenue-generating activities and the location of the customers as being the most significant factors that serve to connect the business income to a location that is either on or off reserve. Where some of the revenue-generating activities take place on reserve and some off reserve, and some of the customers live on reserve while others live off reserve, it is our view that a portion of the business income will be taxable and the remaining portion will be exempt.
In the present case, although the taxpayer works towards obtaining improved financial compensation for Indians, the taxpayer himself is in the business of providing consulting services. In XXXXXXXXXX, one of his major clients was not an Indian nor an Indian organization but was a corporation based in XXXXXXXXXX. Also, the financial compensation sought for the Indians is not entirely (if at all) for reserve lands but is for lands that were used by Indians; and thus the consultant's goal in these contracts is not connected to reserves.
The locations of the taxpayer's offices (one on reserve and one off) do not suffice to connect the business income to locations on or off reserve, although they may indicate where the consultant carries out some of his work.
XXXXXXXXXX
it is our view that this is not a significant factor in determining whether his current business generates tax-exempt income.
In summary, this Indian's business income should be pro-rata exempt taking into consideration primarily the location at which he performs his services and also the location of his customers. We understand that his main residence is located in XXXXXXXXXX and that he maintains an office in this residence which is situated approximately 500 Km south of his on-reserve residence (which also contains an office); and thus it may be difficult for him, on a factual basis, to demonstrate that he spent much time on reserve. Thus, it would appear that his income from the consulting business would be mostly taxable.
We would also point out that where a portion of income from a business is exempt and the remaining portion is not exempt, the expenses which pertain to the exempt portion are not deductible. Normally, expenses should be allocated in the same proportion as revenue unless another allocation could be shown to be more reasonable in the circumstances. In a specific situation, it could be that some expenses pertain entirely to the exempt portion or to the taxable portion, and in that case, a specific allocation of the entire expense to its respective portion would be most appropriate.
R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
ENDNOTES
1. We note that the Taxpayer reports his income on the cash basis although one would normally expect such income to be reported on an accrual basis.
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