26 March 1999 Internal T.I. 9901777 - INDIAN IN BUSINESS OF TRUCKING.

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:

Whether the income from a trucking business owned by an Indian is taxable. The business consists of hauling and delivering goods from off reserve companies to off reserve customers. The drivers consist of employees and independent truckers, the former who receive XXXXXXXXXX % of gross billings and the latter who receive XXXXXXXXXX % of the gross billings.

Position: The income is taxable.

Reasons:

According to the principles established in Southwind, the off reserve location of the revenue-generating activities of the business would be considered very significant in connecting the taxpayer's business income to a location off the reserve. The activities that did take place on the reserve, i.e., parking and servicing the trucks and scheduling and dispatching loads, were, in our view, incidental business activities and could easily have been done off reserve. It is apparent that the taxpayer has entered the "commercial mainstream," and should therefore be taxed like other taxpayers. However, to the extent that the business income is derived from on reserve activities, it is our view that such portion of the business income should be determined and treated as tax exempt.

		March 26, 1999

	XXXXXXXXXX  Tax Services Office	HEADQUARTERS
	Business Files Audit	J. Gibbons
(613) 957-8953
	Attention: XXXXXXXXXX
		7-990177

XXXXXXXXXX (the "taxpayer")

This is in response to your memorandum of January 21, 1999, in which you requested our views on whether the taxpayer's business income for the XXXXXXXXXX taxation years is tax exempt pursuant to section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act. The taxpayer operates a trucking business.

The relevant facts, as we understand them, are as follows:

• The taxpayer is a status Indian with the XXXXXXXXXX Band.
• During XXXXXXXXXX, the taxpayer lived approximately XXXXXXXXXX kilometres off a reserve.
• The business office and truck terminal were located on a reserve.
• The business consisted primarily of daytime hauling and delivering of drywall and lumber from the off reserve companies of XXXXXXXXXX to off reserve customers. Only XXXXXXXXXX% of the gross revenue from the business was derived from on reserve customers.
• The books and records were maintained by the taxpayer's wife at the business office.
• The accounting functions, including invoicing, accounts payable and payroll, were performed at the business office.
• In XXXXXXXXXX, the taxpayer employed XXXXXXXXXX independent brokers and XXXXXXXXXX employees, all XXXXXXXXXX of which were status Indians.
• In XXXXXXXXXX, the taxpayer employed 1 independent broker and XXXXXXXXXX employees, all XXXXXXXXXX of which were status Indians.
• The brokers were paid XXXXXXXXXX% of their gross billings, and they were required to maintain their own equipment.
• The employees were paid a salary of XXXXXXXXXX% of gross billings, and the taxpayer supplied the trucks and trailers.
• The taxpayer's trucks and trailers are serviced on the reserve and parked at the terminal each night.
• The taxpayer drove only occasionally, generating $XXXXXXXXXX and $XXXXXXXXXX in gross revenue for XXXXXXXXXX, respectively.
• * The taxpayer's role was the management of the business, which included all of the scheduling and dispatching. These functions were all done from the business office using mobile phone access to all of the customers.

The Indian Act exempts from taxation the personal property of an Indian situated on a reserve. The courts have concluded that the reference to personal property includes income. In determining whether income is situated on a reserve, the approach taken by the Supreme Court in the case of Williams (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.

The leading case concerning the taxation of business income earned by an Indian is Southwind (98 DTC 6084). Mr. Southwind was a status Indian who lived on a reserve and who earned income from logging. Mr. Southwind also claimed to have a business office on the reserve. In confirming the Tax Court's decision that Mr. Southwind's income was taxable, the Federal Court of Appeal used two main connecting factors, namely the location where the services were performed and the location of the sole customer. In the decision, Justice Linden stated:

Although Morrell Logging is not the appellant's employer, the significance of its off-reserve location lies in that Morrell Logging was the appellant's only customer and 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 the case.

And:

According to the Supreme Court in Mitchell, where an Indian enters into the "commercial mainstream", he must do so on the same terms as other Canadians with whom he competes. Although the precise meaning of this phrase is far from clear, it is clear that it seeks to differentiate those Native business activities that deal with people mainly off the Reserve, not on it.

Based on the above decisions, it is our view that the location of the revenue-generating activities of the business is a significant factor that serves to connect business income to a location on or off reserve. Another important factor is the location of the business customers. Accordingly, in a situation where 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. In the case of a trucking operation, in addition to the above-noted significant connecting factors, the location of the origin and the destination of the trips would be a significant factor. If all trips originated at a location off reserve and terminated at a location off reserve, the business income would generally not qualify for the Indian exemption. If a portion of the business activities are carried out on a reserve, a similar portion of the business income would be exempt.

In the situation outlined in your letter, most of the taxpayer's business revenue was generated by delivering goods from off reserve companies to off reserve customers. According to the principles established in Southwind, this fact would be considered very significant in connecting the taxpayer's business income to a location off the reserve. The activities that did take place on the reserve, i.e., parking and servicing the trucks and scheduling and dispatching loads, were, in our view, of less relevance. It is apparent that the taxpayer has entered the "commercial mainstream." To the extent that the business income is derived from on reserve activities, it is our view that such portion of the business income should be determined and treated as tax exempt.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.

J.F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate

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