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: Is income received by Indian fishers for preparing fish for transportation exempt from tax if the fish are prepared on a reserve?
Position: Possibly.
Reasons: The income related to preparing the fish must be separately identifiable from the fishing income and not be incidental to the fishing income.
June 24, 2011
Audit Manager Headquarters
XXXXXXXXXX Tax Services Office Income Tax Rulings
Directorate
P. Burnley
(613) 957-2100
Attention: XXXXXXXXXX
2011-039765
Proration of Indian Fishing Income
This is in response to your email correspondence of March 1, 2011, regarding fishing income received by self-employed Indians who live on a reserve. We understand that the terms "Indian" and "reserve" have the meaning assigned to them in subsection 2(1) of the Indian Act. You have asked for our comments as to whether a portion of the fishing income is exempt from tax.
In your email, you have explained that the fishing does not take place on a reserve. However, due to the isolated location where the fish are caught and the method of transportation, the fish must be "prepared" (heads cut off, fish gutted and packed on ice) before being shipped to the buyer (the XXXXXXXXXX ) in XXXXXXXXXX . The fish are prepared by the fishers at the XXXXXXXXXX on a reserve; all fish sent from this fishing station must be prepared in this manner. XXXXXXXXXX . The amount of time preparing the fish for transport in relation to the time spent actually fishing can vary based on the fish stock in the lake. However, the price paid for the fish, prepared or unprepared, is based solely on weight. The price paid to the fishers is set by the XXXXXXXXXX ; currently the price for prepared fish is $XXXXXXXXXX /kg and for Round (unprepared) fish is $XXXXXXXXXX /kg. Additionally, the fishers spend time on the reserve at the beginning of the season getting their boats and nets ready.
An Indian's personal property is exempt from tax pursuant to paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act if that property is situated on a reserve. Although income is personal property, its intangible nature makes it difficult to determine its location. The leading court case with respect to the taxation of business income earned by an Indian is Southwind v. The Queen, 98 DTC 6084 (FCA). In Southwind, the Federal Court of Appeal concluded that the most significant factors that serve to connect business income to a location on or off a reserve are the location where the revenue-generating activities are carried out and the location of the business' customers. The Canada Revenue Agency (the "CRA") specifically looks to the principles set out in Bell v. The Queen, 2000 DTC 6365 (FCA) when reviewing whether business income earned by an Indian from fishing is exempt from tax. This decision indicates that, for self-employed fishers, the location of the fishing activities is the key factor to consider with respect to whether fishing income is situated on a reserve. In most situations, Indians fish in waters that are not part of a reserve, which generally results in the business income earned being taxable.
Where an individual earns business income through the completion of specific tasks on or off a reserve, to which specific income can be directly attributed, the CRA will allow the individual to claim the tax exemption on the portion of the income that is situated on a reserve. In the situation you have outlined, the income that is directly related to fishing would not be exempt from tax. Time spent on the reserve getting boats and nets ready for the fishing season would be considered ancillary to the actual income-earning activities of fishing and therefore would not be sufficient to connect any of the fishing income to a reserve. However, income that is directly related to preparing the fish may be exempt from tax, if this income can be identified separately from income received for fishing and if the activity of preparing the fish is carried out on a reserve.
You have also asked about an appropriate method for prorating the income if a portion received for preparing the fish can be exempt from tax. Because income is earned based on weight and type of fish (Round or prepared), and not on an hourly basis, the number of hours either spent fishing or preparing the fish does not appear to be relevant, in this particular case, in determining the amount of income exempt from tax. However, you may wish to consider whether a reasonable amount of income to attribute to preparing the fish on the reserve is the amount paid for prepared fish over the amount paid for Round fish by the XXXXXXXXXX . If some of the fish are not prepared on the reserve, the income received for preparing the fish would have to be prorated accordingly.
As a final note, if a portion of the business income is determined to be tax-exempt, business expenses incurred must be allocated reasonably between the income that is exempt and the income that is taxable. The expenses pertaining to the exempt portion are not deductible in computing income.
We trust that these comments will be of assistance.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Mrs. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.
Eliza Erskine
Manager
Non-Profit Organizations and Aboriginal Issues Section
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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