17 November 1998 Income Tax Severed Letter E9823318.txt - INDIAN LOGGING BUSINESS WHETHER EXEMPT

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:

Whether Indian’s income from a logging business on and off reserve and employee's employment income is tax exempt.

Position: Business income likely taxable; employment income may be exempt.

Reasons:

Question of fact. Connecting factors include location of the logging whether on or off reserve. Guidelines for employment income attached.

XXXXXXXXXX

Dear XXXXXXXXXX:

The Honourable Herb Dhaliwal, Minister of National Revenue, has asked me to reply to your letter of August 24, 1998, concerning the exemption from income tax for income earned by an Indian-owned logging business and its employees.

The Indian Act exempts from taxation the personal property of an Indian situated on a reserve. The courts have previously concluded that the reference to personal property includes income. In determining whether income is situated on a reserve, the approach taken by the Supreme Court in the case of Williams must be followed. The proper approach to determine the situs of personal property is to evaluate the various 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 erodes the entitlement of an Indian to personal property situated on a reserve.

One significant factor that serves to connect business income to a location on or off reserve is the location where the revenue-generating activities of the business are undertaken. Another factor is the location of the business customers. In a situation where all of an Indian’s business income is derived from activities carried on off reserve for customers located off reserve, the business income is generally not exempt from taxation. If a portion of the business activities are carried out on reserve for on-reserve customers, a similar portion of the business income is generally exempt.

While there may be some administrative activities carried out on reserve, it is our view that the actual revenue generating activities of the business are more significant in determining whether business income is connected to a reserve. As the main aspect of a logging business consists of the felling of trees, the location of the land being cleared is a connecting factor of major importance with respect to income from such a business. Accordingly, based on the facts of your particular situation in which the land being cleared is off reserve, the income from the business appears to be more connected to a location off reserve.

Based on the guidance provided in Williams and after receiving representations from interested Indian groups and individuals, 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 Department developed the enclosed Indian Act Exemption for Employment Income Guidelines, incorporating the various connecting factors that describe the employment situations covered by the Indian Act. Whether a particular guideline applies to exempt the employment income of an employee depends on the facts relating to each particular case. In your situation, depending on where the partnership as employer is resident, where the employee is resident, and where the duties of employment are performed, any of Guideline 1 and the proration rule, Guideline 2 or 3 could apply to exempt the employment income.

I trust my comments will clarify the issues you have raised.

		Yours sincerely,

		Bill McCloskey
		Assistant Deputy Minister
		Policy and Legislation Branch

Attachment

Author: Roxane Brazeau-LeBlond
957-2136
November 4, 1998

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