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 partnership income received by a Status Indian exempt from tax?
Position: Question of fact. Likely taxable income for both partners.
Reasons: Individuals who are not registered or cannot be registered as Indians under the Indian Act do not qualify for the exemption from tax provided by s. 87 of the Indian Act and paragraph 81(1)(a) of the ITA. The general rules of the ITA will apply to these individuals. It is a question of fact whether the income earned through the partnership by an Indian is situated on a reserved and therefore exempt from tax.
XXXXXXXXXX 2008-029671
L. Zannese
(613) 957-2747
February 24, 2009
Dear XXXXXXXXXX :
Re: Taxation of Partnership Income - Status Indian Partner
We are writing in response to your letter of October 15, 2008, inquiring whether certain partnership income allocated to a partner who is an Indian is taxable under the Income Tax Act (the "Act"). A separate response will be sent to you from the Excise & GST/HST Ruling Directorate addressing your questions about the Excise Tax Act.
In your letter you describe a situation in which a partnership was formed between spouses: one of the spouses is an Indian, as that term is used in the Indian Act, the other spouse is not. The partnership has a head office located on a reserve. The partnership operates XXXXXXXXXX . All of the XXXXXXXXXX are off-reserve, while some of the XXXXXXXXXX are on a reserve. You indicate that the partnership allocates income to each partner equally. You ask whether the income received by each partner is taxable under the Act.
The situation outlined in your letter appears to relate to a factual one, involving specific taxpayers. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance 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 CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve specific taxpayers 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.
The CRA's general views regarding what constitutes a partnership are contained in Interpretation Bulletin IT-90, "What is a Partnership", which is available on our website at http://www.cra-arc.gc.ca/E/pub/tp/it90/README.html. Whether any particular situation is a partnership is a question of fact that can only be determined after reviewing all the facts involved. Under the Act, partnership income is first calculated as if the partnership were a separate person. Each partner's share of the partnership income from each source is then allocated to each partner, and will generally retain its characteristics as to source and nature.
An Indian's personal property is exempt from tax pursuant to paragraph 81(1)(a) of the 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 Williams v. The Queen, the Supreme Court of Canada set out the connecting factors test to assist in this determination. The test requires identifying the various connecting factors that tie the particular income to a location either on or off a reserve and weighing the significance of each such factor.
If an Indian is a member of a partnership, the partnership income that the Indian earns will be taxed in the same way as any other business income. In Southwind v. The Queen the court concluded that the most important connecting factor with respect to business income earned by an Indian is where the income-earning activities of the business are carried out. A second significant factor is the location of the business customers.
Based on the very limited information you have provided, it is not clear to us that the partnership's income-earning activities take place on a reserve. As there appear to be few other significant factors connecting the partnership's income to a reserve it is likely that the income received by the partner who is an Indian will be taxable. As you advise that the other partner is not an Indian, the exemption under s. 87 of the Indian Act and paragraph 81(1)(a) of the Act would not apply to this individual. Finally, we note that whether an allocation of partnership income between partners is reasonable is a question of fact that can only be determined once all the facts for any particular tax year have been reviewed.
We trust that these comments will be of assistance.
Yours truly,
Eliza Erskine
A/Manager
Non-Profit Organizations and Aboriginal Issues
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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