7 December 1998 External T.I. 9830245 - INTEREST INCOME EARNED BY STATUS INDIANS

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: Taxation of interest income earned by status Indians.

Position: Interest not exempt unless it can be shown that it was generated on 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 tax exempt.

		5-983024
XXXXXXXXXX 	Karen Power, CA
(613) 957-8953
December 7, 1998

Dear XXXXXXXXXX:

Re: Taxation of Interest Income Earned by Status Indians

We have been requested by the XXXXXXXXXX Taxation Centre to provide you with our opinion of the tax status of interest earned on guaranteed investment certificates (‘GICs”) that are issued by XXXXXXXXXX.

It is our understanding that XXXXXXXXXX holds the GICs in question on reserve where its head office is located. The GICs provide that “...XXXXXXXXXX ”.

It is XXXXXXXXXX position that since most of its clients work and reside on reserve, and purchase the GICs on reserve with tax exempt income, the income earned on the GICs is situs on reserve and should therefore be tax exempt. XXXXXXXXXX is unable to trace GIC funds to specific sources of 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 location of a savings account on 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 Recalma (98 DTC 6238), the Federal Court of Appeal confirmed the decision of the Tax Court (96 DTC 1520). The court considered the taxation 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 reserve.

Based on the Recalma decision, it is necessary to determine the location of the issuer’s income generating activity of the investment instrument. In our view, the income stream from most term deposits and savings accounts acquired from a financial institution located on reserve cannot be related to a reserve with certainty. As such income may be generated off the reserve or by non-Indians, it would be considered to be earned in the normal economic mainstream and, accordingly, not considered personal property situated on a reserve. In our view, unless the income can be identified as exclusively generated on the reserve, the income is not exempt from tax.

We trust our comments will be of assistance to you.

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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