3 March 1998 Internal T.I. 9801897 - INDIANS - LOGGING 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: The tax treatment of a status Indian' s income from a logging

business.

Position: The income from the logging business is not exempt from taxation.

Reasons: Consistent with the position taken in other files and Williams and Southwind (similar fact situation). The connecting factors of major importance (where the work was performed and income earned) took place off reserve.

MEMORANDUM NOTE DE SERVICE

TO XXXXXXXXXX Tax Services Office DATE March 3, 1998
A Verification and Enforcement Division
FROM
DE HEADQUARTERS

Karen Power, C.A.

(613) 957-8953
Attention: XXXXXXXXXX

SUBJECT
OBJET Business Income Earned by a Status Indian

This is in reply to your memo of January 19,1998, wherein you request our views on the tax treatment of logging business income earned by XXXXXXXXXX (the “Taxpayer”).

Our understanding of the facts is as follow:

1. The Taxpayer is a status Indian.

2. The Taxpayer earns self-employed income from a logging business. All logging takes place on private land off reserve. The Taxpayer has three main customers all located off reserve. The Taxpayer stated that most of his meetings with customers took place in the bush and not at his sister’s home on reserve.

3. When in town, the Taxpayer resides XXXXXXXXXX on reserve. The Taxpayer indicated that he generally lived in the bush where his logging activities took place.

4. The books and record of the business are kept XXXXXXXXXX on reserve. General accounting services for the logging business are provided by XXXXXXXXXX.

5. The equipment and assets of the business are located in the bush in XXXXXXXXXX off reserve.

Our Comments

Paragraph 81(1)(a) of the Income Tax Act and Section 87 of the Indian Act provide a tax exemption for Indian’ personal property situated on a reserve. The courts have previously determined that, for purpose of section 87 of the Indian Act, the reference to personal property includes income. In William (92 DTC 6320 ), the Supreme Court of Canada reconsidered the approach to use in determining whether income is situated on a reserve. The proper approach in determining the situs of personal property is to evaluate the various connecting factors which tie the property to one location or another. The Supreme Court indicated that the ultimate question is to determine to what extend 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 reserve or off reserve is the location where the activities of the business are carried out. Another significant connecting factor would be the location of the customers of the business. However, as the main aspect of a logging business consists of the felling of trees, the location of the land being cleared would be a connecting factor of major importance with respect to income from such a business.

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. Howerver, all income earned 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 applealed 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 factor, namely the location of the sole customer of the Indian and the location where the service are performed. Speaking on behalf of the unanimous bench, Linden J.A. stated:

"(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 the 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."

The facts that the Taxpayer sometimes resided on reserve, and the books and records of the business are kept on reserve are factors to be given less weight than the others. These factors are not, sufficient to connect the business income to a location on reserve.

Therefore, in the situation described in your memo, if all of the logging is done off reserve and the Indian’s three main cutomers are located off reserve, in our view, the logging business income earned by the Taxpayer, would be much more connected to a location off reserve than a location on reserve and, consequently, would not be exempt from taxation.

Roberta Albert, C.A. for Director
Business and Publication
Income Tax Rulings and Interpretations
Directorate Policy and Legislation Branch