15 February 1999 Income Tax Severed Letter e9901237.txt - 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: Whether interest received by an "Indian" living on a reserve from term deposits and savings accounts acquired from a financial institution located on a reserve is taxable.

Position: Yes.

Reasons: The income stream for most term deposits and savings accounts cannot be traced to the reserve with certaintly. Accordingly, it would be considered to be earned in the normal economic mainstream, and thus not considered personal property on a reserve.

		February 15, 1999

	Vancouver Island Tax	HEADQUARTERS
	  Services Office	J. Gibbons
	Verification and Enforcement Division	(613)957-8953

	Attention: Cathy Schuetze
		7-990123
	XXXXXXXXXX 

This is in response to your facsimile of January 14, 1999, in which you requested our help in responding to comments made by XXXXXXXXXX solicitors in a counter-reply to your proposed adjustments. In a letter to the taxpayers following a review of their 1995, 1996 and 1997 returns, you indicated that you were proposing to reassess them to disallow their deductions for term deposit interest, which they had claimed pursuant to section 87 of the Indian Act and section 81 of the Income Tax Act. As agreed, we have provided you with comments which you can use in responding to the taxpayers’ solicitors.

The taxpayers’ solicitors refer to the Bank Act provisions relating to deposit accounts as supporting their view that this case is distinguishable from the decision in Recalma (98 DTC 6238). In this regard, they refer to the fact that, pursuant to the Bank Act, a deposit account is only payable “at the branch of account” and may only be claimed “at the place where the branch account is situated.

Our Comments:

In general terms, it is section 87 of the Indian Act, along with paragraph 81(1)(a) of the Income Tax Act, that establish the exemption from taxation for status Indians. Section 87 of the Indian Act exempts from taxation the personal property of an Indian situated on a reserve, and the courts have previously concluded that the reference to personal property in section 87 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 the 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”. The Supreme Court rejected the situs of the debtor test as the sole test for determining whether the personal property of an Indian or band was situated on a reserve.

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 Recalma, 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.

J.F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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