25 March 2008 External T.I. 2007-0258701E5 - Tax Exemption: E-Commerce Income of Status Indian

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: Application of Indian Act tax exemption to e-commerce income earned by a status Indian through a sole proprietorship

Position: General comments given. The fact that the goods are manufactured on the reserve using raw materials originating from the reserve is likely a significant connecting factor.

Reasons: Factual situation

									2007-025870
XXXXXXXXXX 								M. Raffoul
									613-957-9226
March 25, 2008

Dear XXXXXXXXXX ,

Re: Tax Exemption for E-Commerce Income of a Status Indian

We are writing in response to your letter sent to us on November 7, 2007, in which you inquired whether certain e-commerce income earned by a status Indian through a sole-proprietorship is subject to tax.

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on a proposed transaction involving a specific taxpayer other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency (CRA) publications can be accessed on the Internet at 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. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

A status 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. In the case of Williams v. the Queen, the Supreme Court of Canada created the connecting factors test to assist in this determination. The test requires identification of various connecting factors that tie the property to a location either on or off a reserve and a weighing of the significance of each such factor. If the most significant factors connect the property to a location on a reserve, the income will be tax-exempt.

Southwind v. the Queen is the leading case in determining the taxation of business income of a status Indian. In that case, the Federal Court of Appeal made the observation that:

"The process of determining the tax status of income earned by Natives on Reserves has become quite complex, depending on a sophisticated analysis of a series of factors... All we can do is evaluate the factors and draw the lines as best we can, between business income... that is situated on the Reserve... and income that is primarily derived in the commercial mainstream, working for and dealing with off-reserve people."

In the Southwind case, the court endorsed consideration of a series of factors that would be relevant, but not necessarily of equal significance. These factors were: the location of the business activities, the location of the customers, the location where decisions affecting the business are made, the type of business and nature of work, the place where 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 books and records and finally, the residence of the business owner. In addition to the factors set out in Southwind, the courts have also considered the location of a business' suppliers, which may be significant in the situation outlined in your letter given the intermediary nature of e-commerce business.

The emergence of e-commerce presents new considerations for tax administration purposes which are still being studied. However, the connecting factors test as developed by the courts remains integral to determining the taxation of a status Indian's business income.

It is always a question of fact whether any particular status Indian's income is situated on a reserve and therefore exempt from tax. In the scenario outlined in your letter, there are significant factors connecting the business income to the reserve, in particular the fact that the goods sold are manufactured on reserve using raw materials originating from the reserve. However, the determination of whether a particular source of income qualifies for the exemption from tax is a question of fact that can only be determined by the taxpayer's TSO, taking into account all the circumstances of the taxpayer's situation.

We trust that these comments will be of assistance.

Yours truly,

Robin Maley
Manager
Non-Profit Organizations and Aboriginal Issues
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch