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:
1.Tax treatment of fishing business income of Indians.
2.Whether CCA is to be allocated between exempt and non-exempt fishing business income.
3.Tax treatment of E.I. benefits which are based on fishing business income which is in part taxable and in part exempt.
4.Whether a river, which runs through a reserve, is part of the reserve.
Position TAKEN:
1.If all of the fishing is done off reserve, the fishing business income would be much more connected to a location off reserve than to a location on reserve and, consequently, would generally not be exempt from taxation. Nonetheless, if a portion of the fishing is carried on on reserve, a similar portion of the business income would generally be exempt.
2.Generally, if CCA pertains to property which was used to earn both exempt and non-exempt income, the CCA should be allocated between the exempt and non-exempt income.
3.E.I. benefits received by an Indian will be exempt from tax where the employment income (this would include self-employment income of fishermen covered under special E.I. legislation) which gave rise to eligibility for the benefits was itself exempt from tax. If only a portion of the employment/self-employment income was exempt, then a similar portion of the benefits will be exempt.
4.Need details as to which river, and which reserve, to answer.
Reasons FOR POSITION TAKEN:
1.&3.Position taken in other files and based on Williams.
2.Position taken in other files and based on Williams. 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.
4.Officials of the Department of Indian Affairs and Northern Development ("DIAND") advise us that there is no general rule according to which a body of water, that runs through a reserve, is part of the reserve. Such a determination is usually made at the time of establishment of each particular reserve.
June 17, 1997
XXXXXXXXXX Tax Centre HEADQUARTERS
T1 Client Services M. Azzi
957-8953
Attention: XXXXXXXXXX
7-970537
Self-Employed Status Indian Fishermen
This is in reply to your memo of February 25, 1997, wherein you request our views on the tax treatment of fishing business income of status Indian fishermen, and on the allocation of capital cost allowance ("CCA") to such income. You also enquire as to tax treatment of employment insurance ("E.I.") benefits which are based on fishing business income which is in part taxable and in part exempt, and you request confirmation as to whether a river, which runs through a reserve, is part of the reserve.
We understand that the Indian fishermen live on reserve, that fishing trips originate from shoreline on reserve and that the fish are sold to Agents of XXXXXXXXXX (the "Agents"). Certain Agents are located on reserve, while others are located off reserve. We have not been provided with details as to where the actual fishing is done.
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. Furthermore, in Mitchell v. Peguis Indian Band ((1990) 2 SCR 85), the Supreme Court of Canada described the purpose of the Indian Act as being the preservation of the entitlements of Indians to their reserve lands and the prevention of their erosion through taxation, but not the conferring of a general economic benefit upon Indians. In this respect, La Forest, J. stated that:
"... one must guard against ascribing an overly broad purpose to ss. 87 and 89. These provisions are not intended to confer privileges on Indians in respect of any property they may acquire and possess, wherever situated. Rather, their purpose is simply to insulate the property interests of Indians in their reserve lands from the intrusions and interference of the larger society so as to ensure that Indians are not dispossessed of their entitlements.
Indians have a plenary entitlement to their treaty property; it is owed to them qua Indians. Personal property acquired by Indians in normal business dealings is clearly different; it is simply property anyone else might have acquired, and I can see no reason why in those circumstances Indians should not be treated the same as other people." "Property of that nature will only be protected once it can be established that it is situated on a reserve."
La Forest, J. concluded that:
"... Indians, when engaging in the cut and thrust of business dealings in the commercial mainstream are under no illusions that they can expect to compete from a position of privilege with respect to their fellow Canadians."
In addition, 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), however, 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 of the customers of the business. Another significant connecting factor would be the location where the activities are carried out. In the case of a fishing business, however, it is our view that the actual revenue-generating fishing activities would be more significant in determining whether the income from the fishing business is connected to a reserve. Thus, the fact that a bookkeeper may have been employed by an Indian fisherman to maintain the books and records of the business in an on reserve office is not, in itself, sufficient to connect the business income to a location on reserve. Furthermore, in our view, the residence of the fisherman carries little or no weight as a factor connecting the fishing income to a reserve.
Generally, fishing is done off reserve. Therefore, in the situations described in your memo, if all of the fishing is done off reserve, in our view, the fishing business income earned by the Indians from sales to the Agents, regardless of the location of the Agents, would be much more connected to a location off reserve than to a location on reserve and, consequently, would generally not be exempt from taxation. Nonetheless, if a portion of the fishing is carried on on reserve, a similar portion of the business income would generally be exempt.
It should also be noted 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. Therefore, generally, if CCA pertains to property which was used to earn both exempt and non-exempt income, the CCA should be allocated between the exempt and non-exempt income.
As regards to E.I. benefits, in light of Williams, such benefits received by an Indian will be exempt from tax where the employment income (this would include self-employment income of fishermen covered under special E.I. legislation) which gave rise to eligibility for the benefits was itself exempt from tax. If only a portion of the employment/self-employment income was exempt, then a similar portion of the benefits will be exempt.
Officials of the Department of Indian Affairs and Northern Development ("DIAND") advise us that there is no general rule according to which a body of water, that runs through a reserve, is part of the reserve. Such a determination is usually made at the time of establishment of each particular reserve. Thus, details would be required as to which particular body of water is involved in the situations described in your memo, in order to determine whether it is part of a reserve. For confirmation of whether a particular body of water is part of a reserve, you may contact Mr. Richard Simison, Acting Head at the Land Research and Title Clarification Division of DIAND (613-994-3333).
Finally, in response to your request, please note that, other than opinions issued by this Directorate, we are not aware of any material published by the Department, to date, regarding the above-described position on the taxation of Indian fishing business income.
R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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