13 January 2000 External T.I. 9926775 - INVESTMENT INCOME OF 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: Income tax treatment of investments held by status Indians in banks located on reserves.

Position: Likely taxable.

Reasons: Unless the income can be identified as exclusively on the reserve, the income is not exempt from tax.

XXXXXXXXXX 	J. Gibbons
		5-992677
January 13, 2000

Dear XXXXXXXXXX:

We are replying to your letter of September 20, 1999, in which you requested information on the income tax treatment of investments held by status Indians in banks located on reserves.

As requested, we have provided some comments below. However, we cannot confirm the tax implications of particular transactions unless the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. Thus, our comments are of a general nature only.

Paragraph 81(1)(a) of the Income Tax Act (the "Act") and section 87 of the Indian Act provide a tax exemption for an Indian's personal property situated on a reserve. In this regard, the courts have ruled that the reference to personal property in section 87 of the Indian Act 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 an 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."

Based on Williams, it is our view that the location of a savings account on a reserve would not, in itself, be sufficient to exempt the interest income earned thereon. Although this is one factor that must be considered in determining whether such interest is exempt from taxation, other factors must also be considered. In another case, Recalma (98 DTC 6238), the Federal Court of Appeal considered the taxability of income earned by an Indian living on a reserve from investments purchased from a bank branch located on the reserve. It should be noted that the nature of the property in question was the income from the investments and not the investments themselves. In determining that the investment income was situated off reserve, the Court referred to the following connecting factors and considered how much weight should be given to each:

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;

(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 the 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 activities. In our view, the income stream from most term deposits and savings accounts acquired from a financial institution located on reserve cannot be traced to a reserve with certainty. Because 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 would not be exempt from income tax.

We trust that our comments will be of assistance.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate

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