12 May 1998 External T.I. E9721735 - INDIAN ACT EXEMPTION FOR BUSINESS 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:

Application of the Indian Act exemption to a Status Indian’s business income when the revenue-generating activities take place off reserve, but the main customers are located on reserve.

Position:

Question of fact as to whether the location of the customers is a significant connecting factor..

Reasons:

The location of customers is relevant except where it can reasonable be considered that one of the main purposes for the establishment of the business-client relationship with the First Nation organization is to serve as a connection between the Indian’s business income and a reserve.

		5-972173
XXXXXXXXXX 	Karen Power, C.A.
(613) 957-8953

Attention:  XXXXXXXXXX 

May 12, 1998

Dear Sirs:

Re: Self-employed Income Earned by a Status Indian

We are writing in response to your letter of August 11, 1997 wherein you requested our comments regarding the taxation of income earned by a self-employed status Indian. We apologize for the delay in responding.

You have provided us with the following scenario: the Indian lives on reserve, the head office of the operation is on reserve, books and records are kept on reserve and the business administration is conducted on reserve. It is our understanding that the majority of the revenue-generating activities are conducted off reserve but on traditional lands and that the customers are First Nation organizations located on reserve.

Our Comments

As indicated in our previous correspondence, the particular circumstances in your letter on which you have asked for our views appears to be a factual situation involving a specific taxpayer. 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 comments.

Henry Southwind 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. In reaching its decision, the Court used two main connecting factors, namely the location where the services are performed and the location of the sole customer of the Indian. Speaking on behalf of the unanimous bench, Linden J.A. stated the following:

“(15) Although Morell Logging is not the appellant’s employer, the significance of its off-reserve location lies in that Morell Logging was the appellant’s only customer and debtor in the taxation year. The nature of the appellant’s business income must be determined, in part, by reference to the source from which that business income is received. In this respect, the appellant’s situation is distinguishable from Nowegijick, where the debtor employer was located on a Reserve. Moreover, all of the services performed by the appellant were done off the Reserve, a very significant feature of this case. I agree with Mr. Nadjiwan that the method of payment by cheque drawn on an off-reserve bank, though relevant, is not as important as it was thought to be by the Tax Court Judge.”

In Mr. Southwind’s case, both the location of the sole client and the location where the services were performed were situated off reserve.

In your situation, however, the Indian’s customers are First Nation organizations located on reserve, while the majority of services are performed off reserve. In such circumstances, in our view, it must be taken into consideration that where an arrangement creates an artificial connection between business income and a reserve, the arrangement will carry no weight as a connecting factor. Consequently, in the above-described situation, the weight that the on-reserve location of the customers 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 establishment of the business-client relationship with the First Nation organization is to serve as a connection between the logger’s business income and a reserve, by acting as an intermediary between the logger and actual log buyers who are located off reserve. In the eventuality that the First Nation organizations purchase the wood for direct use in their on-reserve community, which is a question of fact best resolved by a Taxation Services Office, we would consider the location of the customers as a valid connecting factor. We would then need to weigh the connecting factors to determine whether the income is more connected to a location on reserve or off reserve. In our view, generally, the location of the actual revenue generating activity is the most significant factor.

We trust our comments will be of assistance to you.

Roberta Albert, C.A.

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

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