26 March 1998 Internal T.I. 9717087 - INTEREST FROM RESERVE BASED CO

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 from a GIC issued by a reserve based trust company.

Position: Insufficient information, but not exempt unless it can be shown that it was generated on the reserve.

Reasons: 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.

		March 26, 1998

	Winnipeg Taxation Centre	HEADQUARTERS
	T1 Client Services	D. Duff
	Enquiries and Adjustments 	957-8953

	Attention: Liz Pasieczka
		7-971708

Interest on GICs issued by reserve based trust company

This is in reply to your letter dated June 19, 1997 requesting our opinion on the tax status of interest earned on guaranteed investment certificates (“GICs”) that are issued by the XXXXXXXXXX.

You asked us to review two fact situations as a result of the recent Tax Court of Canada case of Arnold Recalma v. Her Majesty the Queen (96 DTC 1520).

Situation 1:

A status Indian resident on a reserve acquires GICs from XXXXXXXXXX. The GICs were acquired with tax exempt income. XXXXXXXXXX holds the GICs on reserve where its head office is located. The GIC also provides that “...it is understood and agreed that although the Certificate may be serviced or dealt with off an Indian Reserve, the Certificate and any other monies governed by the terms of this Certificate shall be, and be deemed to be, held at the Head Office of the Company on the XXXXXXXXXX Indian Reserve at XXXXXXXXXX”.

Situation 2:

This is the same as in situation 1, except that the GICs are acquired with taxable income.

Our Comments

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 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 purchase of GICs from an institution on reserve would not, in itself, be sufficient to exempt the interest income earned thereon. While this is one factor to weigh in determining whether interest earned on term deposits is exempt from taxation there could be other factors that would connect the income to a location off reserve.

In Recalma, the court considered the taxability of income earned by an Indian living on reserve, from investments purchased from an on reserve branch of a bank. It should be noted that the nature of the property in question was the income from the investments and not the investments themselves. The court had to determine if the investment income was situated on the reserve. This determination required a review of all relevant connecting factors and consideration as to how much weight should be given to each factor. The following were considered in determining the situs of the investment income:

a) the residence of the taxpayer;

b) the origin or location of the capital used to buy the securities;

c) the location of the bank branch where the securities were bought;

d) the location where the investment income is used;

e) the location of the investment instruments;

f) the location where the investment income payment is made; and

g) the nature of the securities and in particular:

(i) the residence of the issuer;

(ii) the location of the issuer’s income generating activity from which the investment is made, and

(iii) the location of the issuer’s property in the event of a default that could be subject to potential seizure.

While the court considered all of these factors it placed considerable weight on (g)(ii), the location of the income generating activity of the issuer of the securities. In Recalma, the income in question was interest from banker’s acceptances and income from mutual fund units. Basically the court concluded that income from these investments started with companies off the reserve and was passed through a bank on reserve to the taxpayers. It was held that the investment income of the taxpayer was not personal property situated on a reserve. The court concluded that in making these investments the taxpayers chose to invest in the economic mainstream of normal business conducted off the reserve.

Since, presumably, XXXXXXXXXX can use the funds received to make loans to Indians off the reserve or to non-Indians or to invest in off reserve activities, it may not be possible to trace the interest earned on these funds directly to the reserve. Based on this, unless the interest income on the GICs can be identified as being generated on the reserve, in our view the income is not exempt from tax.

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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