13 September 1998 External T.I. E9823435 - INDIAN BUSINESS INCOME 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:

This is a summary of the Henry Southwind vs. Her Majesty the Queen case prepared for discussion at the 1998 Canadian Tax Foundation. However, the case was not discussed. It deals with the main connecting factors that are to be examined to determine whether business income of an indian is personal property situated on a reserve.

Position:

The main factors to be examined are the location of the business activity, and the location of the customers. Other less significant factors include where decisions affecting the business are made

* the type of business and the nature of the work
* the place where the payment is made
* the degree to which the business is in the commercial mainstream
* the location of a fixed place of business and the location of the books and records
* the residence of the business owner

Reasons:

Stems from the judgement in this case

Case: Henry Southwind v. Her Majesty the Queen
Federal Court of Appeal

January 14, 1998

Issue:

Whether the taxpayer's business income is property situated on a reserve

Court findings:

The Federal Court of Appeal found that the business income was not property situated on a reserve.

"While it is significant that the appellant lives on a reserve, engages in some administrative work out of his home on the reserve, and stores the business records and the business assets which he owns on the reserve when they are not in use, the appellant in my view, is engaged not in a business that is integral to the life of the reserve, but in a business that is in the "commercial mainstream." According to the Supreme Court in Mitchell, where an Indian enters into the "commercial mainstream," he must do so on the same terms as other Canadians with whom he competes."

Law:

Paragraph 81(1)(a) of the Income Tax 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. 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 would erode the entitlement of an Indian to personal property situated on a reserve.

Facts:

1. The taxpayer was an Indian engaged in the logging business as a self-employed one man operation.

2. He cut logs off reserve under contract to a non-Indian business, which was neither located on nor operated on a reserve.

3. The non-Indian business took delivery of any logs cut at a road near to the work site, and paid based on weigh scale slips issued by the mill that took delivery of the logs.

4. The taxpayer was paid by a cheque drawn on an off-reserve bank account.

5. Logs were never stored on a reserve.

6. The taxpayer resided on a reserve, except that when he was cutting logs, he would live in a trailer at the work site.

7. The books and records of the taxpayer's business were kept on the reserve and any related paper work, other than the preparation of financial statements, was done by the taxpayer on the reserve.

8. Financial statements were prepared by an off-reserve bookkeeper.

The Department assessed the taxpayer for 1990 on the basis that his logging income was not exempt under the Indian Act. As the "debtor" in this case was off-reserve, the assessment was believed to be consistent with the Tax Court decisions in Pete and Charleson, and given the number and significance of the factors pointing to an off-reserve situs for the logging income, to also be consistent with the Supreme Court's decision in Williams.

The taxpayer had appealed to the Tax Court of Canada.

Taxpayer's position:

The taxpayer should not be treated as an employee of the off-reserve corporation as it appears to the counsel for the appellant that the Tax Court Judge has done.

The Court should consider the following connecting factors:

1. the on-reserve location of the taxpayer's head office

2. the on-reserve location of the residence of the taxpayer as the business owner

3. the location where the work is performed *

* (although the work is performed off reserve, the taxpayer's counsel expressed the view that the situation is no different than that in Nowegijik where a taxpayer who resided on a reserve and worked for a business which was located on a reserve but which employed the taxpayer on logging sites off the reserve and was entitled to an exemption on his employment income)

Department's position:

The main factors that should be examined are the following:

1. the location of the business activities

2. the location of the customers (debtors) of the business

Other less significant factors include:

• where decisions affecting the business are made
• the type of business and the nature of the work
• the place where the payment is made
• the degree to which the business is in the commercial mainstream
• the location of a fixed place of business and the location of the books and records
• the residence of the business owner

Impact:

This decision confirms our position that the location of the business activities and the location of the customers are the main factors to consider when determining whether business income can be connected to a reserve.

Author:	R.Brazeau-LeBlond, CA
File:		982343
Date:		1998-09-28