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:
How is recapture in an Indian’s business considered exempt.
Position:
It should be exempt on basis of the CCA written off against exempt income.
Reasons:
Similar to exemption for pension & RRSPs, and similar to treatment for active business income.
972866
XXXXXXXXXX D. Duff
Attention: XXXXXXXXXX
May 15, 1998
Dear XXXXXXXXXX:
Re: Sale of Business Assets by Yukon Indian
This is in reply to your letter of October 27, 1997 requesting our opinion on the tax consequences of the sale of business assets by one of your clients who is a status Indian resident in the Yukon.
You have stated that his residence is not on a reserve or land set aside as these terms are used by the Department of Indian Affairs and Northern Development. He operates a house construction business from his home, where he stores equipment used in the business. The business builds houses for both Indians and non-Indians on land that is both set aside and not set aside. Each year the business income has been prorated between taxable income and income exempt pursuant to the Indian Act.
The client is proposing to sell his business to an Indian group in the Yukon. The sale proceeds are entirely allocable to the equipment used in the business and will exceed the undepreciated capital cost balance. You requested our comments on the following questions.
1. If title to the assets is conveyed by the client at his home or on land not set aside will all or a portion of the recapture be subject to taxation?
2. If the equipment is located on land that is set aside before the sale is conducted, will the tax treatment in 1. be different?
3. If some or all of the recaptured depreciation is subject to tax, how should it be calculated? By reference to the actual cumulative amount of capital cost allowance deducted in prior years for tax purposes? How would prior disposals of equipment affect the answer?
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. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996. 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.
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 in the case of Williams 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.
In the present situation your client will be selling equipment used in his house construction business and the sale will generate business income in the form of recapture. In our view, the location of where the title is transferred or the location of the assets at that time will not be significant factors in determining whether or not the income is connected to a reserve. Rather a more significant connection would be the proportion of capital cost allowance for each class of property that was written off against exempt income. This method would be similar to the principles used with respect to the determination of exemptions for income from pensions and registered retirement savings plans and for employment insurance benefits earned on exempt income.
We would also like to point out that for an Indian to take advantage of the exemption provided by section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act, the Indian must be entitled to the exemption in the year the income, business or otherwise, is realized. After 1998, by virtue of the Umbrella Final Agreement negotiated with the Yukon First Nations, any Yukon Indian resident in the Yukon will no longer be entitled to this exemption with respect to any income, and any Indian will not be entitled to this exemption with respect to income connected to a reserve in the Yukon.
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
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1998
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1998
Email this Content