15 December 1999 External T.I. 9915395 - TAXATION OF INDIAN FISHERMEN

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: 1. General questions regarding the taxation of Indian fishermen.

2. Whether certain waters are part of Treaty # 5.

Position: 1. General comments provided on employment, business income and connecting factors. 2. Waters can be part of a reserve if so stated in the treaty.

Reasons: N/A

XXXXXXXXXX D. Shugar

Attention: XXXXXXXXXX

December 15, 1999

Dear XXXXXXXXXX:

Re: Self Employed Fishermen and Taxation

We are writing in reply to your correspondence of March 10, 1999, addressed to Ms. Audrey Henderson, of the Winnipeg Tax Services Office, which was forwarded to us for reply. Ms. Henderson had previously written to the XXXXXXXXXX on March 1, 1999, explaining Revenue Canada's position on several issues affecting self-employed First Nation fishermen. As you may be aware, on November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency (the CCRA).

Our Comments

The particular circumstances in your letter on which you have asked for our views appear to be factual situations involving specific taxpayers. As explained in Information Circular 70-6R3, 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 general comments which may be of some assistance to you.

Indian Exemption

In your letter, you indicate that it is your fundamental position that all First Nations are immune from all forms of Canadian taxation by virtue of their aboriginal and treaty rights. Please note that the courts have never recognized that an exemption from taxation was granted under any aboriginal or treaty right. On the contrary, the courts have recognized that the Indian tax exemption is a statutory one.

In general terms, it is section 87 of the Indian Act, along with paragraph 81(1)(a) of the Income Tax Act (the "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.

In Mitchell v. Peguis Indian Band ((1990) 2 SCR 85), the Supreme Court of Canada described the purpose of the Indian Act as being the preservation of the entitlements of Indians to their reserve lands and the prevention of their erosion through taxation, but not the conferring of a general economic benefit upon Indians. In this respect, La Forest, J. stated that:

"... one must guard against ascribing an overly broad purpose to ss. 87 and 89. These provisions are not intended to confer privileges on Indians in respect of any property they may acquire and possess, wherever situated. Rather, their purpose is simply to insulate the property interests of Indians in their reserve lands from the intrusions and interference of the larger society so as to ensure that Indians are not dispossessed of their entitlements.

Indians have a plenary entitlement to their treaty property; it is owed to them qua Indians. Personal property acquired by Indians in normal business dealings is clearly different; it is simply property anyone else might have acquired, and I can see no reason why in those circumstances Indians should not be treated the same as other people." "Property of that nature will only be protected once it can be established that it is situated on a reserve."

La Forest, J. concluded that:

"... Indians, when engaging in the cut and thrust of business dealings in the commercial mainstream are under no illusions that they can expect to compete from a position of privilege with respect to their fellow Canadians."

Corporations

As previously noted, paragraph 81(1)(a) of the Act and section 87 of the Indian Act provide a tax exemption for the personal property of an Indian or band situated on a reserve. Since a corporation is not an "Indian" or "band," as defined in the Indian Act, it does not qualify for this exemption. Therefore, a corporation will be taxable on its income unless otherwise exempt from taxation under another provision of the Act.

For taxation years and fiscal periods that begin after 1998, a corporation may be exempt from Part I tax on its taxable income for a particular period under paragraph 149(1)(d.5) of the Act if not less than 90% of its capital is owned by one or more municipalities in Canada and the income of the corporation from activities carried on outside the geographical boundaries of the municipalities does not exceed 10% of its income for the period. In order for a corporation owned by an Indian band to qualify for the exemption under paragraph 149(1)(d.5) of the Act, the Indian band would have to qualify as a municipality in Canada.

You have noted that you view a corporation owned by an Indian to be a bare trustee for its owner. Where property is held by a bare trust, we will ignore the trust for income tax purposes and will consider the transferor/settlor to be the owner of the property for all purposes of the Act. We generally view a trust under common law to be a bare trust when:

• the trustee has no significant powers or responsibilities, and can take no action without instructions from the settlor;
• the trustee's only function is to hold legal title to the property; and
• the settlor is the sole beneficiary and can cause the property to revert to him or her at any time.

The issue of whether a bare trust has been established in any given situation is a question of fact.

Treaty waters

Officials of the Department of Indian Affairs and Northern Development ("DIAND") have advised us that there is no general rule according to which a body of water, that runs through a reserve, is part of the reserve. Such a determination is usually made at the time of establishment of each particular reserve. Although Treaty # 5, to which you refer in your letter, states that where lakes form the treaty limits, ten miles from the shore of the lake should be included in the treaty, they are not necessarily part of the reserve. Not all lands described in Treaties are reserve lands. Details would be required as to which particular body of water is involved in the fishing situations described in your letter, in order to determine whether it is part of a reserve. For confirmation of whether a particular body of water is part of a reserve, you may contact officials at the Land Research and Title Clarification Division of DIAND.

Employment Guidelines

Your letter states that "Revenue Canada issued very controversial guidelines by implementing its own views toward appropriate factors on income and tax exemptions for treaty Indians." You may be referring to the Indian Act Exemption for Employment Income Guidelines, a copy of which was provided to you by Ms. Henderson with her letter.

There are four general guidelines any one of which, if met, will generally exempt an Indian's income from taxation, however, there may be unusual circumstances not covered in these guidelines. The guidelines are:

1. Where substantially all the duties of employment are performed on a reserve;

2. where the Indian lives on a reserve and the employer is resident on a reserve;

3. where more than half the duties are performed on a reserve and either the Indian lives on a reserve or the employer is resident there; and

4. where the employer is resident on a reserve, the duties are part of certain non-commercial activities of the employer and the employer is an Indian band, tribal council or Indian organization described in Guideline 4.

In addition, employment related income, such as, employment insurance, retiring allowances, Canada or Quebec Pension Plan payments, or registered pension plan benefits, will usually be exempted when received if it relates to employment income that was exempt.

In our view, the Guidelines are a fair and liberal interpretation of the Indian Act exemption, and it would not be appropriate to expand the effect of the Guidelines by interpreting them in a very broad manner. It should be noted that the Guidelines are only in respect of employment income. Accordingly, they can only apply on a case by case basis to the employees of a business. They will not apply to a proprietor, as his income would constitute income from business.

Business income

In determining whether business income is exempt, the CCRA places considerable emphasis on the location of where the business activity is carried on, with a lesser emphasis on the location of the customers. This position was upheld in the Federal Court of Appeal case of Henry Southwind v. The Queen (98 DTC 6084) which is the leading case dealing with the business income of an Indian. While certain activities may be carried on in an on reserve office (i.e., the maintaining of books and records), the actual revenue generating activities would be more significant in determining whether business income is connected to a reserve.

In a fishing business, the location where the fishing is done is a connecting factor of major importance. Generally, fishing is done off reserve. Some revenue generating activities such as preparation, dressing and packing of the fish for market take place on reserve. In such a situation, if a portion of the revenue generating fishing activities are carried on on a reserve, a portion of the business income would generally be exempt. However, it is the Agency's view that the main activity of a fishing business is the fishing itself. Accordingly, the revenue generating activities involved in preparing the fish for market may exempt a small portion of the business income.

It should also be noted that where a portion of income from a business is exempt and the remaining portion is not exempt, the expenses which pertain to the exempt portion are not deductible. Normally, expenses should be allocated in the same proportion as revenue unless another allocation could be shown to be more reasonable in the circumstances.

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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