1 June 1999 External T.I. 9911575 - BUSINESS INCOME RECEIVED BY STATUS INDIAN

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 business income of status Indians where most of the revenue-generating activities are conducted off the reserve and the customers are located off the reserve, but the administration of the businesses is on the reserve.

Position: The income is probably taxable notwithstanding that the administrative duties are performed on the reserve. The factors connecting the business income to the reserve must be considered. Jurisprudence (Southwind) establishes the main factors as the location of the revenue-generating activities and the location of the business customers.

Reasons: Almost all of the revenue-generating activities are performed off the reserve and all of the business customers were located off the reserve. A similar position was taken on other cases.

XXXXXXXXXX 5-991157
W. Antle
June 1, 1999

Dear XXXXXXXXXX:

We are writing in response to your letter received on April 24, 1999 concerning the taxation of business income received by a status Indian.

You perform bookkeeping and administrative services for three businesses operated by status Indians. These services include picking up mail, issuing cheques, making deposits, issuing invoices, completing payroll, receiving material, taking and forwarding messages from clients, and performing various clerical duties. Your office is located on a reserve and the business operators reside off the reserve.

According to our telephone conversation on May 31, 1999 (Antle/XXXXXXXXXX), each status Indian operates as proprietor of a small business offering services to companies involved in
XXXXXXXXXX

In all cases, the customers are located off the reserve, and the services are performed off the reserve.

You are constructing a shop on the reserve and are considering adding four offices on the second level to be rented to each proprietor as a base of operations for each business. You are questioning whether this will affect the tax status of the income earned by each business.

The particular circumstances in your letter on which you have asked for our views appears to be a factual situation involving specific taxpayers. As explained in Information Circular 70-6R3 enclosed, it is not this Directorate’s practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. However, we are prepared to offer the following comments

Our Comments

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.

Henry Southwind (98 DTC 6084) 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 and said that he had an office on reserve. However, all his income earning activities were carried out off reserve and his sole customer was off reserve. The Tax Court decided that his income from his logging activity was taxable and the taxpayer appealed this decision. The Federal Court of Appeal rendered its decision January 14, 1998, confirming the Tax Court’s decision.

The courts considered two main factors to connect business income to a location on or off a reserve. One significant factor is the location where the revenue generating activities of the business are undertaken, and the other major 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.

The location where the self-employed Indian lives is not a determining factor in connecting the business income to the reserve. While it may carry some weight, the most important considerations are the location of the revenue-generating activities, and the location of the business’s customers. In situations where a portion of the business’s revenue-generating activities are performed on the reserve, then a similar portion may be exempt from tax.

In your particular situation, it appears likely that the income earned by each business would be taxable. While most of the administrative work is performed on a reserve, almost all of the revenue-generating activities and all of the customers are located off the reserve. In our view, the rental of office space on the reserve would not alter the taxability of the income received by each business.

We hope that our comments will be of assistance to you.

Yours truly,

R. Albert, C.A.

for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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