6 August 1997 External T.I. 9707895 - INDIAN EXEMPTION SELF-EMPLOYED 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:

Taxation of business income earned by a self-employed status Indian.

Position:

Facts somewhat unclear. General comments provided.

Reasons:

With respect to business income of a consultant, two significant factors to consider are:

1. The place where the revenue-generating consulting services are provided, and

2. the location of the residence of the customers. The location of an office on reserve for administrative activities does not connect the business income to the reserve.

R. Albert
XXXXXXXXXX	                            	970789

August 6, 1997

Dear Sirs:

Self-employed Income Earned by a Status Indian

We are writing in response to your request of March 20, 1997 for our comments regarding the taxation of income earned by a self-employed status Indian. You have provided the following scenario: the Indian lives on reserve, the head office of the operation is on reserve, books and records are kept on reserve and the business administration is conducted on reserve. We understand that the majority of the revenue-generating activities are conducted off reserve and that the customers are companies located off reserve.

Our comments

The scenario which you set out is quite specific and if it relates to an actual situation it should be addressed to your local tax service office. As explained in Information Circular 70-6R3 dated December 30, 1996, assurance as to the tax consequences of proposed transactions is provided by the Rulings Directorate but only on an advance income tax rulings basis and only with respect to the taxpayers identified in such rulings. However, we are able to provide the following comments.

Section 87 of the Indian Act, along with paragraph 81(1)(a) of the Income Tax Act (the "Act"), establish the Indian exemption from taxation. 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 income is situated on a reserve, the approach taken by the Supreme Court of Canada in the case of Williams (92 DTC 6320) must be followed. The proper approach to determining the situs of personal property is to evaluate the various connecting factors that 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 or off reserve is the location where the revenue generating activities of the business are undertaken. Another significant factor is the location of the business customers. In a situation where all of an Indian's business income is derived from activities carried on off reserve for customers located off reserve, the business income would generally not be exempt from taxation. If a portion of the business activities are carried out on reserve, a similar portion of the business income would generally be exempt. While there may be some administrative activities carried out on reserve, it is our view that the actual revenue generating activities would be more significant in determining whether business income is connected to a reserve. For example, if a bookkeeper were employed to maintain the books and records in an on reserve office of a self-employed Indian who performed all of the actual revenue generating activities off reserve, the business income would be more connected to a location off reserve than it would be to a location on reserve.

We trust that these comments will be of assistance.

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