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.
Principal Issues: Whether business income earned by an Indian sole-proprietorship running a XXXXXXXXXX business is exempt. Whether employment income earned by an Indian employee would be exempt.
Position: Business income likely taxable. No opinion on whether employee's income is exempt.
Reasons: Factual determination. The factors connecting the income to the reserve will determine whether business income is situated on a reserve, and therefore exempt. Factors seem to connect the income to an off-reserve location. There is insufficient information to determine whether a future employee's salary would be exempt. Employment Income Guidelines apply.
XXXXXXXXXX
2013-050571
A. Messore
(613) 948-2227
January 20, 2014
Dear XXXXXXXXXX:
Re: Business and Employment Income of an Indian
This is in response to your email request dated September 17, 2013, regarding the business income earned by your spouse, an Indian living on a reserve. You inform us that your spouse is self-employed in the XXXXXXXXXX. His XXXXXXXXXX activities are exclusively performed off-reserve and XXXXXXXXXX. You would like to know if your spouse's business income from these self-employment activities is exempt from income tax. In the future, an Indian employee may be hired for the business and you have asked whether that employee's income would likewise be exempt from tax. For the purposes of our comments, we use the terms "Indian" and "reserve" as they are defined in subsection 2(1) of the Indian Act.
This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings. Although we cannot comment on any specific situation, we hope the following general comments will be of some assistance.
Paragraph 81(1)(a) of the Income Tax Act together with paragraph 87(1)(b) of the Indian Act exempt from income tax the personal property of an Indian situated on a reserve. The courts have determined that for the purpose of section 87 of the Indian Act, income, including self-employment income, is personal property. The determination of whether income is situated on a reserve, and therefore exempt from tax, requires the evaluation of factors connecting the income to a location on reserve.
Generally, the location of the revenue-generating activities is considered to be the most significant connecting factor in determining the location of business income. Based on the information provided, it appears that the core business activities of the sole-proprietorship consist of XXXXXXXXXX services, all of which are provided off-reserve to customers who are also located off-reserve. There do not appear to be any significant factors connecting the business income to a reserve and, in our view, the income would likely not be considered exempt.
You also ask whether the tax exemption would apply to the income of an Indian employee likely to be hired in the future. The Canada Revenue Agency, in conjunction with Aboriginal organizations, developed the "Indian Act Exemption for Employment Income Guidelines" (the "Guidelines") in order to simplify the application of the connecting factors test to basic employment situations. The Guidelines help employers and employees in determining whether an Indian's employment income is situated on a reserve and therefore exempt from taxation. General information regarding the tax exemption for Indians, including the Guidelines, is available at www.cra-arc.gc.ca/brgnls.
We trust these comments will be of assistance.
Yours truly,
Roger Filion, CPA, CA
Manager
Non-Profit Organizations and Aboriginal Issues
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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