7 March 1997 Internal T.I. 9639467 - INDIAN - GRAIN FARMING BUSINESS INCOME

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 a status Indian's income from a grain farming business.

Position TAKEN:

The grain farming business income is much more connected to a location on reserve than to a location off reserve and should generally be exempt.

Reasons FOR POSITION TAKEN:

As the main aspects of a grain farming business consist of the growing and harvesting of crops, the location of the land being farmed would be a connecting factor of major importance with respect to income from such a business (however, it should not be interpreted as being of major importance for all types of farming businesses). In this situation, all of the land that the Indian farms in his grain farming business is located on reserve and the major activity of this business is carried on on reserve, although there is limited business activity that occurs off reserve (i.e., the delivery of grain to off reserve elevators).

							March 7, 1997

	Saskatoon Tax Services		HEADQUARTERS
	Client Services			M. Azzi
(613) 957-8953
Attention: Angela Pedley
							7-963946

Status Indian - Grain Farming Income

This is in reply to your memo of November 25, 1996, wherein you requested our views on the tax treatment of a status Indian's income from a farming business.

We understand that the Indian lives off reserve; but that all of the land that he farms is located on reserve. We are also advised that the contracts for the land rental are negotiated on reserve and that the equipment used in the farming business is stored on reserve when the Indian is working the land, while at all other times it is stored off reserve. The taxpayer indicates that the grain is stored off reserve and, therefore, for purposes of this letter, we assume that the farming business involved is strictly a grain farming business. Finally, the books and records of the business are maintained off reserve at the accountant's office.

Our Comments

Paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act provide a tax exemption for an Indian's personal property situated on a reserve. 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), 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 where the activities of the business are carried out. Another significant connecting factor would be the location of the customers of the business. However, as the main aspects of a grain farming business consist of the growing and harvesting of crops, the location of the land being farmed would be a connecting factor of major importance with respect to income from such a business. Furthermore, while there may be some activities carried on in an office, it is our view that the actual revenue-generating farming activities would be more significant in determining whether the income from a grain farming business is connected to a reserve. Thus, the fact that an accountant was employed by the Indian farmer to maintain the books and records of the business in an off reserve office is not, in itself, sufficient to connect the business income to a location off reserve.

In the above-described situation, all of the land that the Indian farms in his grain farming business is located on reserve and the major activity of this business (i.e., the growing and harvesting, as indicated above) is carried on on reserve, although there is limited business activity that occurs off reserve (i.e., the delivery of grain to off reserve elevators). Consequently, in our view, in this situation, the grain farming business income is much more connected to a location on reserve than to a location off reserve and should generally be exempt. You may, however, wish to confirm that there is no other land being used by the Indian in the farming business, as it is unclear, from the information provided, where the grain is stored and where the farming equipment is stored when it is not being used to farm the land located on reserve.

In closing, we wish to emphasize that, although the location of the land being farmed is a connecting factor of major importance in the case of a grain farming business, it should not be interpreted as being of major importance for all types of farming businesses. The significance of the location of land, as a connecting factor, may vary depending on the type of farming business involved.

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