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: tax treatment of business income of self employed Indian
Position: general comments, must examine connecting factors, mainly location of revenue generating activities and location of business customers
Reasons: these factors considered to be most significant connecting factors in determining location of income on or off a reserve.
XXXXXXXXXX 981096
N. Graham, CA
August 27, 1998
Dear Sir/Madam:
We are writing in response to your April 27, 1998, letter wherein you requested information regarding the income tax treatment of income from a business that you are contemplating.
You are a status Indian looking to start a business on your reserve. Your business plan proposes that you buy logs and wood from logging companies and resell them to mills situated on and off reserves. You may construct and upgrade a logging road on the reserve to have access to private land situated next to the reserve boundary lines. This road would be used to transport the logs and wood to local mills. The logs held for resale would be stored temporarily on reserve land until sold to a mill. You may, at some point, harvest lumber on the reserve.
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 procedure 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 Service Office. However, we are prepared to provide the following comments which may be of assistance.
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 of Canada in the case of Williams (92 DTC 6320) must be followed. The proper approach to determining the situs of personal property is to evaluate 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 out 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. While there may be some administrative activities carried out on reserve, it is our view that the actual revenue generating activities would be more significant in determining whether business income is connected to a reserve. For example, if a bookkeeper were employed to maintain the books and records in an on reserve office of a self employed Indian who performed all of the actual revenue generating activities off reserve, the business income would be more connected to a location off reserve than it would be to a location on reserve.
Based on the information you have provided, it appears the business income would be connected to a location off reserve as the income generating activities of acquiring and hauling logs and wood are off reserve, from off reserve suppliers, to off reserve customers. The storage of the logs on reserve would not carry signficant weight as a factor connecting the income to the reserve. If, at some point, you were to harvest logs on the reserve, this would be considered an important connecting factor in determining the location of that income.
We trust that these comments will be of assistance.
Yours truly,
Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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