31 March 1999 External T.I. 9905415 - INDIANS: INTEREST 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: Is investment income of Indians exempt, when investments are issued by XXXXXXXXXX Trust.

Position: Question of fact: depends on income generating activity of XXXXXXXXXX

Reasons: Recalma cases

XXXXXXXXXX 	D. Duff
		990541
Attention: XXXXXXXXXX 

March 31, 1999

Dear Sirs:

Re: Taxation of Interest Income Earned by Status Indians

This is in reply to your letter of February 23, 1999 regarding our previous letter of December 7, 1998 on this issue. Please note that due to the confidentiality provisions of the Income Tax Act (the “Act”) we cannot discuss the affairs of a particular taxpayer without the taxpayer’s written authorization.

You disagreed with our position that the location of a savings account on reserve would not in itself be sufficient to exempt the interest income earned thereon. We consider this to be only one factor to weigh in determining whether the income is exempt, however, there are other factors to consider and these factors may carry more weight. It is your submission “... that the court only invokes the connecting factors test when it is not reasonable to attribute situs to a reserve. Where an account is on reserve, its situs is that reserve and, whether those funds are later injected into the mainstream economy is immaterial.” We maintain our position that, based on the Supreme Court’s decision in Williams, the location of the account is only one factor.

You also question the separation of the situs of the investment income from the situs of the investment instrument and conclude that Recalma (96 DTC 1520) does not support this. In our view, this is clearly supported in Recalma. Hamlyn J. clearly states that “The investment income in issue is the personal property of the Appellants and is owned by the Appellants who are Status Indians. The investment income is the subject of the reassessments before this Court. The key question to be decided is whether the investment income is situated on the reserve.” He then goes on to list numerous connecting elements to consider “... for determining the situs of the investment income...”. Only one of these connecting elements is the location of the investment instruments and he does not give it as much weight as the location of the income generating activity of the issuer. The concluding remarks emphasize the importance of the income generating activity of the issuer. He states “Thus, to earn an income stream from the economic mainstream from economic activites located, generated and structured off the reserve is the choice the Appellants made. The Apellants, by making the choice, chose to enter the main economic mainstream of normal business conducted off the reserve.”

When the Federal Court of Appeal upheld this decision (98 DTC 6328) it also emphasized that the property in question was the investment income. It stated “So too, where investment income is at issue, it must be viewed in relation to its connection to the Reserve, its benefit to the traditional Native way of life, the potential danger to the erosion of Native property and the extent to which it may be considered as being derived from economic mainstream activity. In our view, the Tax Court judge correctly placed considerable weight on the way the investment income was generated, just as the Courts have done in cases involving employment, U.I. benefits and business income”.

Therefore in determining whether investment is exempt, it remains our position that there may be many factors to consider but that the primary factor is the income generating activity of the issuer of the investments.

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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