8 May 1997 External T.I. 9707825 - TAXATION OF INDIANS

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:

Taxation of investment income of status Indians

Position:

Based on connecting factors, would appear to be taxable

Reasons:

Pursuant to decisions of Glen Williams and Arnold Recalma and the guidelines developed by the Department

	                                    	970782
F. Francis

May 8, 1997

Dear Sir:

This is in reply to your letter of March 13, 1997, wherein you requested a ruling on whether interest income earned on a reserve by you is taxable. You have advised that you are an aboriginal member of the XXXXXXXXXX.

We do not provide opinions or rulings in respect of factual transactions and would suggest that you consult with your local taxation services office in this regard. However, we will provide the following general comments.

The decision of the Supreme Court in the case of Glen Williams has required the Department to review its interpretation of the scope of the exemption from income taxation provided under the Indian Act. One general direction provided in Williams was that "an overly rigid test which identified one or two facts 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 was situated on the reserve. The approach adopted in Williams requires an examination of all factors connecting income to a reserve to determine if the income is located on the reserve.

We further cite the case of Arnold Recalma, 1994, where the Tax Court of Canada considered the taxability of income earned by an Indian from investments purchased from a branch of a bank situated on a reserve. The Court concluded that the income was earned in the "economic mainstream" and was therefore taxable.

Based on the foregoing cases, it is our view that the location of a bank account on a reserve would not, in itself, be sufficient to exempt the interest income earned thereon. It is necessary to examine the connecting factors such as the source of funds and the residence of the individuals. Generally, if income subject to tax is invested in a bank account situated on the reserve and the individual is resident off the reserve, the interest income earned thereon would be subject to tax.

Further, it is our position that where contributions to an RRSP relate to income which was subject to taxation and the RRSP funds are invested in a bank account on the reserve, the payments therefrom would also be subject to tax.

Yours truly

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy & Legislation Branch