3 December 1996 Internal T.I. 9636430 - INDIANS - EMPLOYMENT, INVESTMENT, BUSINESS INCOME

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.

Please note that the following document, although believed
to be correct at the time of issue, may not represent the
current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis,

peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Various Indian taxation issues:

- employment income
- investment income
- business income

INDIAN ACT EXEMPTION ISSUE CONFERENCE
Prairie & Pacific Regions
November 20 - 21, 1996

INCOME TAX RULINGS AND INTERPRETATIONS DIRECTORATE

Introduction

The Income Tax Rulings & Interpretations Directorate is part of the Policy and Legislation Branch. (refer to organization chart) The organization chart is highlighted to illustrate that Roberta Albert and myself, John Brooks, work in the Business and Property Income and Exempt Organizations Section, which is part of the Business and Publications Division. There are four divisions within the

Income Tax Rulings and Interpretations Directorate, which is one of nine directorates within the Policy and Legislation Branch. The Department is divided into six branches. Jamie McInnis is from the GST Rulings and Interpretations Directorate, whereas John Fennelly and Louisa Guyan are from the Verification Enforcement and Compliance Research Branch.

We play a consultative role in the Department. Our primary role is to interpret the provisions of the Income Tax Act and related statutes, including the Indian Act (as it relates to income tax matters), to establish Revenue Canada's interpretative policy.

As the name of our Directorate indicates, we provide rulings and interpretations. The rulings that we supply are advance income tax rulings that are provided to taxpayers or their representatives, and they provide written confirmation with respect to proposed transactions as to how the Department will apply specific income tax provisions. Rulings are provided on a fee-for-service basis. We also provide written interpretations and verbal consultations to both internal and external clients, dealing with specific provisions of the Income Tax Act. A lot of our workload comes from within the Department -- from Tax Services offices, Taxation Centres and other Headquarters functions.

Last year, we handled about 1,000 written requests from internal clients, which represents approximately 30% of all written requests we received. We also had 4,000 telephone calls from within the Department, representing approximately 25% of this type of workload.

EMPLOYMENT INCOME OF INDIANS

The Department's position on the taxation of Indians was, until 1983, contained in Interpretation Bulletin IT-62 (cancelled July 15, 1995 by the Special Release to IT-397R).

The bulletin stated that it was considered that the intention of the Indian Act was to not tax Indians on income earned on a reserve.

Salary and wages were, in the bulletin, considered to be earned where the services were performed. However, in 1983, the Supreme Court of Canada in the Nowegijick case (83 DTC 5041) said that employment income was a simple debt and that the location of the debt, which was determined by the location of the debtor, determined whether the property was on reserve.

As this implied that Indians working on a reserve for an employer sited off reserve would be taxable, which was not appropriate in policy terms, the Departments of Indian Affairs and Northern Development ("DIAND") and Finance sponsored the Indian Remission Order. This Order remitted tax on employment income earned on a reserve as well as retirement allowances and pension income in respect of exempt income and training allowances from a government when the Indian resided on reserve.

The Remission Order was originally in effect for 1983 and was renewed three times to extend to 1992.

Williams Case

The Supreme Court's decision in Williams (92 DTC 6320) called into question the conclusions drawn from the earlier Nowegijick case. In Williams, the taxpayer's employer was located on reserve, as were his duties of employment. After being laid off, he received enhanced UI benefits as a result of a job creation project on a reserve. The taxpayer was assessed on the basis that the debtor with respect to the UI payments, the federal Crown, was located off reserve. The Court rejected the situs of the debtor test derived from the Nowegijick case as the sole test for determining whether or not a particular property was on reserve, saying that "any overly rigid test which identified one or two factors as having controlling force ... would be open to manipulation and abuse." Instead, the Court recommended the following approach:

(a) analyze the matter in terms of categories of property and types of taxation;

(b) identify the various connecting factors (i.e. factors connecting the property to a location on or off reserve); and

(c) determine the weight to be given to the connecting factors in light of three considerations:

(i)the purpose of the exemption under the Indian Act (which is to ensure that the property of an Indian on reserve would not be eroded through taxation by government -- its purpose is not to confer a general economic benefit on Indians),

(ii)the type of property in question (income), and

(iii)the nature of taxation of the property (tax on income).

Consultations

After the Williams decision was released, our Department entered into inter-departmental consultations to determine the effect of the case. One significant conclusion reached was that the old Remission Order need not be renewed again because the various types of income to which the old Remission Order applied are now considered exempt. However, another Remission Order was put in place to refund income taxes paid by Indians on unemployment insurance benefits received from 1985 to 1991 that should have been exempted pursuant to the Williams decision.

This new Remission Order also provided a reasonable period of transition for taxpayers who may have arranged their affairs on the basis of the Nowegijick case and who may be negatively affected by the application of the Williams case.

This order was effective until the end of 1993, extended to 1994 for an office or employment that was held continuously since before 1994. It remitted tax on salaries and wages received by an Indian from an employer situated on reserve where such salaries and wages would have been exempt prior to the Williams decision. An example of such a situation would be employees who worked for agencies situated on reserve but performed their services off reserve.

The Indian Act Exemption for Employment Income Guidelines

In summary, salary and wages were considered, until 1983, to be earned where the services were performed. The Nowegijick case changed this understanding, turning the focus to the residence of the employer. In Williams, the Supreme Court stated that "the location of the employment must be re-examined."

In order to implement the direction provided by the Court, considerable representations from Indian groups and individuals and other interested parties were considered.

This culminated in creation of the Indian Act Exemption for Employment Income Guidelines.

Guideline 4

Guideline 4 is a generous interpretation of the direction provided by the Courts in Williams, so it is appropriate to restrict its application to situations that fit squarely within it.

In order for Guideline 4 to apply, the employer must be an Indian organization controlled by one or more Indian bands which have reserves or tribal councils representing one or more Indian bands which have reserves. The concept of control in Guideline 4 is the kind that exits where there is power to command and direct. Where a band or tribal council can replace the directors of an organization, the band or tribal council could be said to control the organization.

The intention of the word "exclusively" is to restrict Guideline 4 to those organizations which are dedicated only to the social, cultural, educational or economic development of Indians living on reserve. It would not be sufficient to have these being only part of an organization's objectives.

The employment duties would also have to be considered to determine if, as required under Guideline 4, they were in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on reserves. While the employer may have a non-profit mandate, this does not necessarily mean that all of its activities are non-commercial.

INVESTMENT INCOME OF INDIANS

Before Williams, one of the Department's positions on investment income was that interest earned on a bank account located on reserve was exempt. However, in 1995, based on Williams we said that the location of a savings account on a reserve would not, in and by itself, be sufficient to exempt the interest income earned thereon. Of course, when all potential factors indicate a reserve location, the investment income will be subject to exemption. For instance, when a status Indian lives on-reserve, earns exempt income and makes deposits of funds into a savings account in a branch of a bank located on a reserve, that Indian's interest income on such account will be exempt from taxation. At the other extreme, when a status Indian lives off-reserve and earns only taxable income, the deposit of funds into a savings account located on-reserve, by means of an automated teller machine located off-reserve, will not be sufficient to exempt the interest income earned on such account.

This year, the issue of the taxability of investment income was considered by the Tax Court of Canada in the combined cases of Arnold, Laura and R. Mark Recalma v. Her Majesty the Queen (94-1971, 1972, 1973(IT)G).

The taxpayers invested in bankers' acceptances and mutual funds. At issue was whether the income earned therefrom was connected to an Indian reserve so as to be exempt from taxation under paragraph 87(b) of the Indian Act.

The Court observed that the property in question was an income stream from securities and thus the location of the securities is not a significant factor. The Court identified several connecting factors which could be relevant to determining the situs of investment income, and it was pointed out that the source of the capital used to buy the securities and the location of the bank branch where
the securities were purchased are not as significant as other factors.

With respect to bankers' acceptances, the Court noted that these investments are relatively sophisticated financial instruments that are issued by a third party and guaranteed by a bank. Since the income stream from the bankers' acceptances and the managed funds was generated from companies that were located off reserve, it was held that the investment income of the taxpayer was not personal property situated on a reserve. Rather, the income was earned in the economic mainstream. This follows the proposition stated by La Forest, J. in the case of Mitchell v. Peguis Indian Band, that the purpose of the Indian Act is not to remedy the economically disadvantaged position of Indians by ensuring that Indians may acquire, hold, and deal with property in the commercial mainstream on different terms than their fellow citizens.

In conclusion, it is our view that the decision supports the Position that income earned in the economic mainstream is so strongly connected to a location off reserve that it will generally outweigh other factors that may indicate the income is connected to a location on reserve. This decision has been appealed.

BUSINESS INCOME OF INDIANS

Southwind is the leading case dealing with business income of Indians and it is presently under appeal. The case concerns income earned from logging, where a status Indian lived on reserve and said that he had an office on reserve.

However, all his income earning activities were carried out off reserve and his customers were off reserve. The judge decided that his income from this logging activity was taxable.

In our view, one significant factor that serves to connect business income to a location on reserve or off reserve is the location of the company's customers. Other significant connecting factors would be the location where the activities are carried out as well as, in the case of a delivery service business, the location of the origin and the destination of trips. Accordingly, if all trips were to
originate at a location off reserve and terminate at a location off reserve and the customers were off reserve, the business income would generally not be exempt from income taxation. If a portion of the revenue-generating activities were carried out on reserve, a similar portion of the business income may be exempt.

While there may be some activities carried on in an office located on reserve, it is our view that the actual revenue-generating activities would be more significant in determining whether the business income is connected to a reserve. Thus, for example, if a bookkeeper were employed by the Indian contractor to maintain the books and records of the business in an on-reserve office, but the contractor performed all of the actual revenue-generating activities off reserve, the business income would be more connected to a location off reserve than it would to a location on reserve.

The following is an excerpt from a recent letter which we have written regarding business income:

Fisherman

One significant factor that serves to connect business income to a location on reserve or off reserve is the location of the business' customers. Another significant connecting factor would be the location where the activities are carried out. Generally, fishing is done off reserve. Therefore, where all of an Indian fisherman's business income was derived from customers located off reserve
and all of the fishing was done off reserve, the business income would generally not be exempt from taxation. If a portion of the fishing activities were carried on on reserve, a similar portion of the business income would generally be exempt. While there may be some activities carried on in an office located on reserve, it is our view that the actual revenue-generating fishing activities
would be more significant in determining whether the business income is connected to a reserve. Thus, the fact that a bookkeeper was employed by an Indian fisherman to maintain the books and records of the business in an on reserve office is not, in itself, sufficient to connect the business income to a location on reserve.

Trucker

In the case of a trucker, in addition to the above-noted significant connecting factors, the location of the origin and he destination of the trips would be a significant factor. Accordingly, if all trips originated at a location off reserve and terminated at a location off reserve and the customers were off reserve, the business income would generally not be exempt from income taxation. If a portion of the activities were carried out on reserve, a similar portion of the business income would generally be exempt. Again, the fact that a bookkeeper was employed to maintain books and records in an on reserve office is not, in itself, sufficient to connect an Indian trucker's business income to a location on reserve.

Bookkeeping Service

As indicated above, significant factors that serve to connect business income to a location on or off reserve are the location of the business' customers and the location where the activities are carried out. Therefore, if all of an Indian bookkeeper's business income was derived from customers located off reserve and all of the bookkeeping work was carried on off reserve, the business income would generally not be exempt from taxation. If a portion of the bookkeeping activities were carried on on reserve, a similar portion of the business income would generally be exempt.

Submitted Questions

Re Guideline 4 of the Indian Act Exemption for Employment Income Guidelines

1. Can an employer organization hold its (board of directors') meetings on any reserve or must they be held on reserves served by the organization?

The reason for the requirement that an Indian organization must be controlled by one or more bands that have reserves is that "bands that have reserves" establish a connection to reserves, and it is the property (including income) of an Indian on a reserve that is exempt from taxation. While one might anticipate that an organization, if it were to hold its board meetings on reserve, would
hold its meetings on the reserve(s) that control it, there is no such requirement.

As noted in the "Meaning of Terms Used" in the Guidelines, "the central management and control of an organization is usually considered to be exercised by the group that performs the function of a board of directors of the organization.

However, it may be that the real management and control of an organization is exercised by some other person or group." Thus, the fact that an annual meeting of an organization is held on a reserve does not necessarily mean that the organization is controlled from reserve.

2. What factors are relevant in determining the location from which an organization is controlled?

Where an organization asserts that it satisfies the requirement of being resident on reserve because it holds its board of directors meetings on reserve, it would generally be considered to satisfy the definition where management and control over the
organization is legitimately exercised during those meetings. A review of the minutes of board of directors meetings and resolutions or by-laws passed at those meetings would be required to conclusively resolve this question of fact. Where the board of directors meets on a reserve, at which decisions are made which direct an organization's operations, such an organization would generally be
considered to be resident on a reserve.

3. Does the source of an organization's funding (e.g. it negotiates its funding directly) have any relevance in determining where the organization is situated?

No. The fact that an organization is funded by a band on a reserve does not determine the location of the organization. The residence of an organization is determined by the location at which the organization's central management and control is exercised.

4.(a) It is too easy for an organization to qualify under Guideline 4 since it appears that they merely have to hold their Board of Directors meetings on reserve in order to be considered to be resident on reserve. Furthermore, perhaps they need only
teleconference with members on reserve.

In order for an employee to qualify under Guideline 4, there are several criteria that must be met:

(i) the employer must be resident on reserve;

(ii) where the employer is an organization, the organization must be controlled by an Indian band(s) having reserves, and the organization must be dedicated to the ... development of Indians living on reserve; and

(iii) the duties of the employee must be in connection with non-commercial activities carried on for the benefit of Indians on reserve.

Thus, the residence of the employer is but one of several requirements that must be met. The basis for determining the residence of an organization is borrowed from general principles and was therefore viewed as being appropriate and defensible.

As to teleconferencing, we have not adopted the view for purposes of Guideline 4 that teleconferencing will suffice to establish that the organization is resident on reserve.

(b) How many, or what percentage of, meetings must be held on reserve in order for the organization to be considered to be resident on reserve?

There must be sufficient control exercised from a reserve in order for the organization to be considered to be resident there. In practical terms, it is recognized that this is a question-of-fact issue and thus there is no quick and easy answer.

It is our view that one should consider the residence of the employer on an annual basis. If there is a change in the residence throughout a year and the exemption of the employee's income rests on the employer's residence, it would be appropriate to
prorate the employee's exemption for that year.

5. Where educational institutions (e.g. XXXXXXXXXX) serve students that are Indians, one must consider the residence
of the students. Are Indians who leave a reserve to attend school but who return to the reserve after each school year considered to live on reserve? Would the answer differ if the students are minors?

The fact that students may have to leave their reserve to pursue higher education does not alter the fact that they may have changed their place of residence. In the Guidelines, a reference to an Indian living on reserve means the Indian lives on a reserve in a domestic establishment that is his or her principal place of residence and that is the centre of his or her daily routine. If the students do not for the most part live on reserve while attending an educational institution, the employees of the institution would not fit the requirements of Guideline 4.

On one hand, if students live in residence and return to their home regularly and for holidays, we would consider them to reside at their home. On the other hand, if the students had previously established residence in an apartment in town prior to attending
the educational institution, and they rarely return home for visits, we would consider them to reside at the apartment.

The age of the students has no direct impact on the issue.

6. Concerning the control aspect of an organization, many social organizations are set up by a group of bands none of which has control of the organization. If four bands equally control an organization, no one band will have control of the organization. Does this mean that the organization could not meet the requirements of Guideline 4?

Bands have reserves and that is why we look to control by a band having a reserve or a tribal council of bands having reserves. An organization might be controlled by a few Indians who happen to live on reserve and may represent a particular segment of Indians on reserve, but that does not establish the same connection to a reserve that is established where the band itself controls the organization. Guideline 4 contemplates that a group of bands could control an organization through a tribal council that represents them. In addition, where a group of bands is in a position to be able to collectively control an organization, this aspect of the control requirement would be considered to be met.

Indian Corporations

7. ( XXXXXXXXXX )

A tribal council of bands having reserves creates a Holdco to hold investments which, to date, consist of shares of an Opco that carries on business off reserve.

Can Holdco claim exemption under paragraph 149(1)(d) of the Income Tax Act?

Generally, it is our view that an Indian band will qualify for exemption under paragraph 149(1)(c) of the Income Tax Act as "public body performing a function of government in Canada" if it has passed bylaws under both sections 81 and 83 of the Indian Act. Having passed such bylaws would not be sufficient to have the band considered to be a municipality for purposes of either paragraph 149(1)(c) or (d) of the Income Tax Act. In order for an Indian band to be considered to be a municipality, it would have to fit within the facts of the Pas Band in the Otineka case (94 DTC 1234). There, the band had passed bylaws under both sections 81 and 83 of the Indian Act and it provided considerable services to the band members. (In Otineka, the band held shares in a corporation that owned and operated a shopping mall on the reserve, and the band also held shares in a second corporation that
owned and operated a building supply business located on the reserve.) As a comment, one representative on a file that we were dealing with suggested that only about 60 to 70 bands have passed bylaws under both sections 81 and 83 of the Indian Act so that not that many bands could be considered to be a Canadian municipality.

A tribal council would not be considered to be a municipality since a tribal council does not pass bylaws under sections 81 and 83. If the shares of Opco were held jointly by each of the bands instead of by the tribal council, one would have to consider whether
each of the bands qualified as a municipality. This is unlikely to be the case since we understand that most bands have not passed bylaws under both sections 81 and 83, and even fewer bands would be providing the level of service to their members on the scale that the Pas Band provides services.

We have no information concerning the named taxpayer.

The Department of Finance is aware of the decision in Otineka and it is our understanding that they have no policy concerns where the band-owned corporation operates within the jurisdiction of the band. It is recognized that the present legislation does not place
any restrictions on the operations of a corporation that otherwise qualifies. In conclusion, a Holdco owned by a Tribal Council that is not recognized by the Department of Indians and Northern Development (DIAND) as a band would not qualify for exemption under paragraph 149(1)(d) of the Income Tax Act. Such a corporation may, based on the facts, qualify under paragraph 149(1)(l), in which case income in its subsidiary would be subject to tax in the hands of the subsidiary but dividends paid to the Holdco would be exempt. Tax exempt entities may indirectly conduct business activities through a taxable subsidiary; however, the entity must qualify in its own right as exempt. There is nothing in the known facts to suggest that Holdco would qualify under paragraph 149(1)(l).

8. ( XXXXXXXXXX )

A particular Indian band acquired all of the shares of Opco about 5 years prior to the Court's decision in Otineka. Opco previously filed as a taxable entity but it now feels that it should have qualified previously as tax-exempt on the basis of the Otineka decision. If one can assume that the Indian band that owns the corporation qualifies as a municipality, at what time would we consider paragraph 149(1)(d) to apply to provide exemption to the corporation, and when does the disposition deemed by subsection 149(10) occur?

If paragraph 149(1)(d) applies, one must consider the timing of the application of subsection 149(10) of the Act. It is our view in the present fact situation that the corporation would have become exempt from Part I tax no sooner than at the start of the taxation year that includes January 28, 1994, being the time of the decision in Otineka, since prior to that time the corporation was considered to be taxable. If the 1994 T2 return is not under objection or appeal, the taxpayer would be constrained by the status claimed on filing, and the time of the change in status would therefore occur on the first day of the 1995 fiscal year. Thus, subsection 149(10) would apply on the first day of its 1995 fiscal year and its income would be exempt throughout 1995 and subsequently.

9. Where an Indian band that qualifies as a municipality acquires shares of a taxable corporation, is there any way it can do so (e.g. by way of acquisition through a trust or a partnership) such that it can avoid triggering subsection 149(10)?

Subsection 149(10) applies when a corporation becomes or ceases to be exempt from Part I tax. Thus, regardless of the structure, if the corporation's status changes, subsection 149(10) applies.

Misc.

10. ( XXXXXXXXXX )

A group of tribal councils acquires, through a chain of taxable corporations, control of a taxable corporation.

Thereafter, the corporation pays management fees to each tribal council in proportion to each council's shareholdings, such that the corporation's income is reduced to nil. How can this arrangement be attacked?

You pointed out that it will be very difficult to attack such an arrangement. On the other hand, it may be very difficult for the bands/corporation to defend such an arrangement considering the "reasonableness" provision of section 67 of the Income Tax Act.

Also, it is not evident on what basis the tribal councils may be exempt from tax. Since tribal councils do not have the authority to pass bylaws of the type that bands can pass, it is our view that they would not normally qualify under paragraph 149(1)(c) of the
Income Tax Act as being public bodies performing a function of government in Canada. They might be more in the nature of an association of municipalities. It could be that they previously qualified under paragraph 149(1)(l) and if that is the case, the provision of management services to another entity for a fee could disqualify the tribal council on the basis that it was
not "operated exclusively for ... any other purpose except profit."

Questions From the Floor

11. XXXXXXXXXX

12. Should the proration rule be used to exempt all income related to time spent on a reserve? For example, some
Revenue Canada status Indian employees have had a three-day conference on a reserve. Is their income related to these three days exempt? Please provide a rationale.

Section 87(b) of the Indian Act exempts the personal property of an Indian or band situated on a reserve.

In order to determine whether employment income is exempt, we need to connect the income to a reserve so that it can be considered to be situated there. One example provided in relation to the proration rule was where Mr. E works regularly on the reserve for small periods of time which in total represents 10% of Mr. E's employment duties. The other example relates to a concentrated amount of time spent on the reserve of one month and this amounts to 8% of Ms. F's employment duties. In both of these examples, the income is exempt because there is a connection to the reserve.

However, in the last example the income of Mrs. G relating to the delivery on rare occasions to a reserve is not exempt because the time spent on reserve is merely occasional and not a meaningful connecting factor. It will always be a question of fact as to whether income can be considered to be situated on a reserve but where one's duties are always carried out in a certain location and one spends just some incidental time on a reserve, in our view, there is not a strong connection to the reserve. The closer the amount of time spent on reserve is to nil, the greater the likelihood that the time spent on reserve is incidental and taxable. The closer the amount of time spent on reserve is to 10% of total duties, the greater the likelihood that the proration rule should apply.

However, we did not want any minimum percentage to be `cast in stone' so the examples were specifically chosen to reflect what would be considered to be connected to a reserve and those incidental amounts that were not. Basically, when the time spent on the reserve is minimal it is considered incidental and does not qualify for exemption.

13. Are positions and interpretations for the Income Tax

Act to be imported into our work with the Indian Act?

As the Indian Act provides for the exemption from income tax, in our view, positions and interpretations for the Income Tax Act should similarly be used. For instance, our views on when an `employer is resident on a reserve' are based on the DeBeers case and this case is also used for the determination of corporate residence for purposes of the Income Tax Act. As another example, our view that an employee must be required by an employer to perform their duties on a reserve in order to fall within the employment
guidelines is similar to an employee being required by their employer to maintain an office in the home in order for expenses related to it to be deductible. In maintaining a uniform application of the exemption, in our view, we need to parallel when possible with our positions for purposes of the Income Tax Act.

14. A question was posed which made reference to putting funds into a trust account until Audit issues are resolved.

Based on our past experience, requests for putting funds into trust accounts should definitely not be accommodated.

15. Is "land set aside" to be treated as a reserve? In particular, is "land set aside" in the Yukon to be treated as a reserve?

According to the Indian Act, a reserve means a tract of land, the legal title to which is vested in Her Majesty, that has been set apart by Her Majesty for the use and benefit of a band, and, except for certain provisions of the Indian Act, includes designated
lands.

Land set aside is not a reserve. However, it may be treated as a reserve by a Remission Order. In particular, a Remission Order cited as the "Income Tax Remission Order (Yukon Territory Lands)", treats lands in the Yukon Territory that are reserved or set aside by notation in the property records of the Department of Indian Affairs and Northern Development as a reserve since the end of 1984. This Remission Order which remits taxes payable under the Income Tax Act will remain in effect until the end of the third calendar
year after the calendar year in which the Yukon First Nations Self-Government Act comes into force. (We understand that the Remission Order will be in place effectively until the end of 1998.)

16. A TSO representative had noted that a band council in their district seems to have begun to act like a leasing agency in that, in 1995, they had numerous employees which they did not have before the Employment Guidelines can into effect.

The situation is an area of concern with respect to the anti-avoidance clause in the Employment Guidelines. It may well be that one of the main purposes for the existence of the particular employment relationships with the band council was to establish a connecting factor between the income in question and the reserve in which case the Guidelines would not apply to exempt the income. On the other hand, we noted that there are cases where the employment relationship with the band council may be legitimate and the Guidelines would apply. Whether the Guidelines apply to these situations is a question of fact.

17. Many comments about the lack of access to LIB and LAD were made.

The issue was looked into further upon arrival back at the office and it was determined that access to LIB has been limited and granted on a need to know basis. The numerous amounts of confidential information on the system has required that it be limited to Technical Advisors and a few others in each TSO. On the other hand, LAD should be available to anyone who has access to PEIB so it should be more widely available. LAD has been developed as a response to satisfy our Access to Information requirements and was not developed as a research tool, however, it can be used as one.

As we realize that LAD will not provide the individual and band specific information requested by the TSOs and TCs, we will send a copy of our Indian-related responses to client inquiries to the appropriate TSO and TC based on the address on the incoming inquiry.

18. A question arose as to whether the Southwind and Recalma cases should be followed for auditing and assessing purposes.

The approach adopted in Williams requires an examination of all factors connecting income to a reserve to determine if the income is located on the reserve. This approach should be used in audits and upon assessing. The cases of Southwind and Recalma reflect the courts current views on connecting factors as they relate to business income and some investment ncome, respectively. Although both have been appealed, they provide some guidance.