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: 1. Is the business income earned by a self-employed Indian storyteller and presenter exempt from tax?
Position: 1. Likely not in this situation.
Reasons: 1. Income is not situated on a reserve as the income-earning activities are not carried out on a reserve and the customers are not on a reserve.
May 25, 2011
Dear XXXXXXXXXX :
Re: Self-Employment Income
This is in response to your letter of February 15, 2011, in which you ask if income from your self-employment activities would be subject to income tax. You have stated that you are an Indian, as that term is defined in subsection 2(1) of the Indian Act, and that you live on a reserve. You have also indicated that the services you will be providing are those of a First Nations Storyteller, workshop presenter and mentor, which will be provided at local libraries off-reserve, and that you will have an office on the reserve for bookkeeping, receiving payments, researching, writing and editing.
The situation outlined in your letter relates to a factual situation, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings". This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on our website at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. Although we cannot comment on a specific situation, we are able to provide the following general comments, which may be of assistance.
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:
1. the location where the revenue-generating activities are carried out; and
2. the location of the business' customers.
Other factors that were considered relevant, but not necessarily of equal significance, are the location where decisions affecting the business are made, the type and nature of the work, the place where payment is made, the residence of the business owner, the degree to which the business is in the commercial mainstream, the location of a fixed place of business and the location of books and records.
Generally, the CRA considers income earned from work completed on a reserve to have sufficient connecting factors to a reserve to conclude that the income is situated on a reserve. Therefore, self-employed individuals who complete all of their income-earning activities from a location on a reserve will usually qualify for the tax exemption with respect to all of their self-employment income. In the situation outlined in your letter, it appears that most of the self-employment income will result from services provided at the customers' (the local libraries') locations off-reserve. You have also indicated that time will be spent researching, writing, editing and rehearsing at an office on a reserve. It appears that these activities are ancillary to the actual income-earning activities of storytelling, presenting and mentoring and would not be sufficient to connect the income received for those services to a location on a reserve. Additionally, the CRA is of the view that general bookkeeping and other administrative duties completed by a business owner are not considered to be income-earning activities related to specific income located on or off a reserve. Based on these considerations, the income received for the services you have described is likely not situated on a reserve and therefore not exempt from tax.
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. Therefore, if income is received specifically for the services of researching, writing or editing, and these services are provided on a reserve, this income could be considered to be situated on a reserve and therefore may be exempt from tax.
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, to the extent that these expenses have not been otherwise reimbursed. The expenses pertaining to the exempt portion are not deductible in computing income. In order to support a claim for a partial exemption of business income under section 87 of the Indian Act, taxpayers should maintain documentation, for each taxation year, regarding the activities completed under their business contracts and the circumstances surrounding each of those activities. In particular, a taxpayer should maintain a record of whether each activity was performed on or off a reserve and how each activity was linked to generating specific revenue.
We trust that these comments will be of assistance.
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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