7 October 1999 Internal T.I. 9M19157 - TAXATION OF STATUS INDIAN FISHING 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.

		October 7, 1999

	XXXXXXXXXX 	HEADQUARTERS
	XXXXXXXXXX 	R. Albert
	Client Services	(613) 957-8953

Taxability of Status Indian Fishing Income

We are responding to your request of October 6, 1999, for our comments regarding the taxation of business income of self-employed lobster fishers and the employment income of their employees.

Our Comments

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. The courts have previously determined that, for purposes of section 87 of the Indian Act, the reference to personal property includes income. In Williams (92 DTC 6320), the Supreme Court of Canada reconsidered the approach to use in determining whether income is situated on a reserve. The proper approach in determining the situs of personal property is to evaluate the various connecting factors which tie the property to one location or another.

Southwind is the leading case dealing with business income of Indians. The case concerned 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 this logging activity was taxable. The Federal Court of Appeal confirmed the Tax Court's decision in January, 1998.

In our view, one significant factor that serves to connect business income to a location on reserve or off reserve is the location where the activities are carried out. Another factor would be the location of the business' customer's. While there may be some activities carried on in an office located on reserve, in our view, the actual revenue-generating activities would be more significant in determining whether the business income is connected to a reserve. Thus, for example, if a bookkeeper were employed by a self-employed Indian to maintain the books and records in an on-reserve office, but the business' actual revenue-generating activities were off reserve, the business income would be more connected to a location off reserve than it would to a location on reserve.

In our view, in the case of a lobster fishing business, where the lobster fishing is done off reserve and the customer's are located off reserve, the business income would be taxable. In a similar situation, where the lobster fishing is done off reserve but the customer's are located on reserve, we would take a similar view that the off reserve location of the actual revenue-generating activities, the more significant factor, would situate the business income off reserve and, thus, taxable. In a previous opinion, we had noted that the limited weight that an on reserve customer would otherwise carry as a connecting factor will not be recognized if it can reasonably be considered that one of the main purposes for the location of the customer on reserve is to serve as a connection between the fishermen's business and a reserve, by acting as an intermediary between the fishermen and the actual fish buyers who are located off reserve.

To determine the tax status of the employment income of an employee of a self-employed Indian proprietor, the Indian Act Exemption for Employment Income Guidelines (the "Guidelines") should be used. Based on the guidance provided in Williams and after receiving representations from interested Indian groups, the Department identified a number of connecting factors that can be used to determine whether employment income is situated on a reserve. With a view to assisting the Indian community, the Guidelines were developed, incorporating the various connecting factors that describe the employment situations covered by the Indian Act. The fact situation involving each individual Indian employee would need to be considered to determine whether their employment income is exempt. The fact that the business income of the self-employed Indian fisher that an employee works for is taxable does not, in and by itself, render the employee's employment income taxable as the factors that connect business income to a reserve are not the same as those that connect employment income to a reserve.

Guideline 1 will not apply to exempt an employee's income in this lobster situation as likely less that 90% of the employment duties will be performed on a reserve. However, the proration rule will apply to exempt whatever portion of activities may be carried out on reserve. Guideline 2 will apply to exempt all of an employee's income if they live on reserve and the employer is resident on reserve. The condition that the "employer is resident on a reserve" means that the reserve is the place where the central management and control over the employer organization is actually located. This is a question of fact, however, for a proprietorship, the residence of proprietorship may be a different location than the location of the actual revenue-generating activities. Guideline 3 may apply to exempt all of the income of an employee if more than 50% of their employment duties are performed on a reserve and either the employer is resident on a reserve or the employee is resident on a reserve. Guideline 4 will not apply to exempt the employment income of employees as many of the requirements are not met including that the duties of employment must be non-commercial in nature.

The recent case of Walkus, which has been appealed to the Federal Court of Appeal by the taxpayers, involved status Indian employees of a corporation which was involved in the commercial fishing industry. In that case, based on a review of the connecting factors, the most important of which the judge thought was the nature of the employment and the manner in which it was carried out, the employment income was determined to be taxable.

There are currently four employment cases which have been appealed and which will be heard by the Federal Court of Appeal. Until these decisions are rendered, the Department's Guidelines continue to apply and any assessing action should be based on them.

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