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 investment income of status Indians from debentures issued by a corporation "located" on reserve.
Position TAKEN:
The fact that the corporation may be located on a reserve is not sufficient to establish that the investment income received from the corporation is exempt.
It appears that one of the main purposes for the existence of the corporation may be to serve as an artificial connection between the investment income of the Indian investors and a reserve, by acting as an intermediary between the Indians and their investments in securities listed on a stock exchange. It is our view that where an arrangement creates an artificial connection between income and a reserve, the arrangement will carry no weight as a connecting factor.
Reasons FOR POSITION TAKEN:
Based on Williams, the determination of whether investment income is exempt requires a review of all relevant connecting factors specific to each investor. While we have not identified all of the factors connecting investment income to a reserve, given the Recalma decision, if the investment income stream for a financial instrument involves an entity located off reserve, that investment income will not qualify as personal property situated on a reserve.
The corporation is almost entirely capitalized through the issue of its debentures, and its principle business is to invest this capital in securities listed on a stock exchange. All of the income earned by the corporation is earned from entities located off reserve; that is, in the economic mainstream, then transferred to the Indian investors (after deducting operating expenses), such that the corporation has no taxable income.
5-963880
XXXXXXXXXX M. Azzi
September 4, 1997
Dear Sir:
Re: Investment Income of Status Indians
This is in reply to your letter of November 13, 1996, which has been forwarded to us for reply by the Vancouver Tax Services Office. You have requested our views on the tax treatment of investment income earned by status Indians from "corporate debentures", in light of the recent Tax Court of Canada case of Arnold Recalma et al. v. Her Majesty the Queen (96 DTC 1520). We apologize for the delay in responding to your request.
We understand that a newly formed corporation issued the debentures to status Indians living on reserve. You indicate that the corporation is registered as a B.C. incorporated company located on a reserve, and that its office and administration is located on reserve. The corporation is almost entirely capitalized through the issue of its debentures, and its principal business is to invest this capital in securities listed on a stock exchange. You indicate that the corporation has no taxable income after deducting, from its investment income, the interest it pays on its debentures and its operating expenses.
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 submitted in the manner set out in Information Circular 70-6R3. However, we are prepared to provide the following general 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.
In Recalma, 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. The Court also pointed out that the source of the capital used to buy the securities and the location of the bank branch where the securities were purchased are not as significant as other factors.
As a result, in our view, the fact that the above-noted corporation may be located on a reserve is not sufficient to establish that the investment income received from the corporation is exempt. This determination would require a review of all relevant connecting factors specific to each investor. As stated on page 4 of the Income Tax Technical News No. 9, issued by the Department on February 10, 1997 (copy enclosed), while we have not identified all of the factors connecting investment income to a reserve, given the Recalma decision, if the investment income stream for a financial instrument involves an entity located off reserve, that investment income will not qualify as personal property situated on a reserve. In this respect, we note that all of the income earned by the corporation is earned from entities located off reserve; that is, in the economic mainstream, then transferred to the Indian investors, such that the corporation has no taxable income. Based on the Recalma decision, in our view, the investment income would be taxable when received by the Indian investors. In addition, from the limited information provided, it appears that one of the main purposes for the existence of the corporation may be to serve as an artificial connection between the investment income of the Indian investors and a reserve, by acting as an intermediary between the Indians and their investments in securities listed on a stock exchange. In this regard, it should be noted that it is our view that where an arrangement creates an artificial connection between income and a reserve, the arrangement will carry no weight as a connecting factor.
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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