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) (A) Application of the Indian Act exemption to a Status Indian's business income earned by operating a logging business on an off reserve land, whereas his sole client is a Band located on reserve.
(1) (B) What if the services are contracted to other clients off reserve as well as the Band?
(2) Application of the Indian Act exemption to a Status Indian's business income earned by operating a logging business where his sole client is a private company located on reserve.
(3) Application of the Indian Act exemption to a Status Indian's royalty income for writing books on reserve. Status Indian is resident on reserve.
Position:
(1) (A) Business income is not exempt.
(1) (B) Business income is not exempt.
(2) Business income is not exempt.
(3) Royalty income is not exempt.
Reasons:
(1) (A) Location where the services are performed is the most significant connection in this case. Location of the sole client is relevant except when it can reasonably be considered that one of the main purposes for the establishment of the business-client relationship with the band is to serve as a connection between the logger's business income and a reserve.
(1) (B) Same reason as (1)(A).
(2) Same reason as (1)(A).
(3) Sourcing of royalty income is discussed in paragraph 32 of IT-270R2. The location where books are written or the payee's residence are not relevant in determining the source of the royalty payment. In the case of royalty payments, sourcing is territorial and corresponds to the location where the copyright laws prohibit the reproduction of the writer's work.
March 26, 1998
XXXXXXXXXX TAX CENTRE HEADQUARTERS
XXXXXXXXXX P.-A. Sarrazin
T1 Client Services (613) 957-8984
Enquiries and Adjustments
7-971227Indian Act exemption for royalty and business income
This is in response to your enquiry of May 7, 1997. You were requesting our comments on the application of the Indian Act exemption, particularly in two situations involving a Status Indian's business income and in one situation involving royalty income earned by a Status Indian.
Facts
Situation #1 involves a Status Indian, resident on reserve, who operates a business as an independent logger as a sole proprietor. His contracting services during 1996 were exclusively to a Band located on reserve. The business activities of cutting and clearing trees were performed on Crown land which has not been designated as a reserve, but where Indians are allowed to clear the land for the benefit and use of the Indians. Books and records are kept by an accountant off-reserve, while the equipment such as the skidder is kept on the cutting site (Crown land) during the season. In the off-season, the equipment is maintained and stored at the Indian's residence on the reserve. The client's representative also requests your opinion for 1997, as the client is considering contracting his services to other clients not necessarily resident on reserve.
Situation #2 involves a similar scenario except that the contract is with a private logging company which is resident on reserve and the books and records are kept on reserve, at the Indian's residence. You mention that at least XXXXXXXXXX individuals are in this same situation and they all claimed the exemption.
Situation #3, for which you provided a limited amount of information, involves an Indian receiving royalty payments. The Indian is resident on reserve, but the royalty payments come from an off-reserve source and are with respect to XXXXXXXXXX books written on reserve. The location where the books are sold is unknown at the moment.
Southwind is the leading case dealing with the business income of an Indian. The case concerns income earned from logging, where a Status Indian lived on reserve and said that he had an office on reserve. However, all his income earning activities were carried out off reserve and his sole customer was off reserve. The Tax Court decided that his income from this logging activity was taxable and the taxpayer appealed this decision. The Federal Court of Appeal rendered its decision on January 14, 1998, confirming the Tax Court's decision. In reaching its decision, the Court used two main connecting factors, namely the location where the services are performed and the location of the sole customer of the Indian. Speaking on behalf of the unanimous bench, Linden J.A. stated, on page 9 of the attached copy of the judgment:
"(15) Although Morell Logging is not the appellant's employer, the significance of its off-reserve location lies in that Morell Logging was the appellant's only customer and debtor in the taxation year. The nature of the appellant's business income must be determined, in part, by reference to the source from which that business income is received. In this respect, the appellant's situation is distinguishable from Nowegijick, where the debtor employer was located on a Reserve. Moreover, all of the services performed by the appellant were done off the Reserve, a very significant feature of this case. I agree with Mr. Nadjiwan that the method of payment by cheque drawn on an off-reserve bank, though relevant, is not as important as it was thought to be by the Tax Court Judge."
In Mr. Southwind's case, both the location of the sole client and the location where the services were performed were situated off reserve. In situation #1, however, the Indian's sole customer is a band, located on reserve, while the services are performed off reserve. In such a circumstance, in our view, it must be taken into consideration that where an arrangement creates an artificial connection between business income and a reserve, the arrangement will carry no weight as a connecting factor. Consequently, in the above-described situation, the weight that the on-reserve location of the band would otherwise carry, as a connecting factor, will not be recognized if it can reasonably be considered that one of the main purposes for the establishment of the business-client relationship with the band is to serve as a connection between the logger's business income and a reserve, by acting as an intermediary between the logger and actual log buyers who are located off reserve. In the odd eventuality that the band is purchasing the logs for use in its on-reserve community, a case might be made to consider the location of the sole customer as a valid connecting factor.
Similarly, in the event this Indian contracts his services to other, off-reserve customers, this would only reinforce our position that his business income is not exempt.
In situation #2, again we would look at the location where the services are performed. For the same reasons as in situation #1, it is likely that no weight should be given to the location of the sole client as a connecting factor. Since the actual cutting and skidding activities are performed off reserve, the business income will not be exempt.
In situation #3, the income earned by the Indian is royalty income. The sourcing of royalties is discussed in paragraph 32 of IT-270R2. In the case of royalty payments, sourcing is geographical and corresponds to the location where the related right is sued or exploited. The location where the book was written and the residence of the payee are not relevant in determining the source of royalties. Copyright royalties are sourced where the copyright laws would otherwise have prohibited the reproduction of the writer's work by anyone else. With the above set of facts, we are unable to connect the Indian's royalty payment to a reserve and, in our view, the royalty income is taxable.
Roberta Albert, CA
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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