23 March 1998 External T.I. 9716845 - INTEREST INCOME EARNED ON A RESERVE

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:

Interest income earned in a savings account in a bank on reserve.

Position:

Not exempt unless it can be shown that it was generated on the reserve.

Reasons:

Based on the Recalma decision and 970231, the investment income is the property in question and if it was not generated on reserve it is considered to be earned in the economic mainstream and is not exempt.

XXXXXXXXXX 971684
D. Duff

March 23, 1998

Dear XXXXXXXXXX:

Re: Interest Income Earned on a Reserve

This is in reply to your letter of June 11, 1997, wherein you requested our views with respect to interest earned in a savings account with a bank on a reserve.

You stated that, in 1996, you earned interest in a savings account in a bank on the XXXXXXXXXX Reserve. The bank advised you that the interest was not taxable and should not be reported on your income tax return. You were subsequently reassessed by Revenue Canada and the interest was included in your income. You also indicated that the source of your investment funds was an inheritance from your aunt and she had lived all her life on a reserve.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Department.

In general terms, it is section 87 of the Indian Act, along with paragraph 81(1)(a) of the Income Tax Act, that establish the exemption from taxation for status Indians. 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 the income earned by an Indian is situated on a reserve, and thus exempt from taxation, the approach taken by the Supreme Court of Canada in the 1992 case of Glenn Williams v. Her Majesty the Queen (92 DTC 6320) is followed. This approach requires the examination of all factors connecting income to a reserve to determine if the income is located on the reserve. The Supreme Court also 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 general direction provided in Williams was that "an overly rigid test which identified one or two factors 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 or band was situated on a reserve.

Based on Williams, in our view, the location of a savings account on a reserve would not, in itself, be sufficient to exempt the interest income earned thereon. Where a bank account is considered to be situated at a location on reserve, this is one factor to weigh in determining whether interest earned on deposits in that account is exempt from taxation. There could be other factors that would connect the income to a location off reserve.

In the recent case of Arnold Recalma v. Her Majesty the Queen (96 DTC 1520), the Tax Court of Canada considered the taxability of income earned by an Indian living on reserve, from investments purchased from an on reserve branch of a bank. The securities were bankers’ acceptances and managed funds. It was noted by the Court that the income stream for such financial instruments started with companies that were located off reserve, and it was held that the investment income of the taxpayer was not personal property situated on a reserve. Rather, the income was earned in the economic mainstream.

As stated above, in our view, the fact that funds were deposited in a savings account on a reserve branch of a bank is not sufficient to establish that the interest earned on the funds is exempt. While the determination would require a review of all relevant connecting factors and consideration as to how much weight should be given to each factor, the major determining factor is the source of the income. Based on the Recalma decision, unless the income can be identified as exclusively generated on the reserve, it is our position that the income is not exempt.

We trust our comments will be of assistance to you.

Roberta Albert, C.A.

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