4 May 2004 Internal T.I. 2004-0066741I7 - Compensatory payment to 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: Would a payment made by an Indian band to compensate a reserve-resident status Indian for the inconvenience of having to move from one house on reserve to another be taxable?

Position: No

Reasons: The connecting factors test, as laid out by Williams v. R appears to be satisfied. All connecting factors tie the payment to the reserve. Accordingly, the payment is considered to be real property situated on reserve and exempt pursuant to 81(1)(a) of the Income Tax Act and 87(1) of the Indian Act.

			May 4, 2004

	 XXXXXXXXXX  TSO		HEADQUARTERS
				Income Tax Rulings
	Attention:  XXXXXXXXXX 			  Directorate
				Renée Shields
(613) 948-5273

				2004-006674

Taxation of compensatory payment to status Indian

This is in response to your letter of March 10, 2004 regarding the taxation of a compensatory payment made by an Indian band to a status Indian (the "Taxpayer").

We understand that the Taxpayer is a status Indian resident on a reserve. The Taxpayer lives in a house owned by the Indian band. The Taxpayer is being required to move to another house on the reserve because the house in which he currently lives must be demolished. To compensate the Taxpayer for the inconvenience of moving, the Indian band will pay the Taxpayer the amount of $XXXXXXXXXX. You have asked whether the amount is taxable.

Paragraph 81(1)(a) of the Income Tax Act, read with paragraph 87(1)(b) of the Indian Act, provides that an Indian's personal property situated on a reserve is exempt from income tax. The courts have determined that for purposes of section 87 of the Indian Act, the reference to personal property includes income. (Nowegijick v. The Queen 83 DTC 5041). In the case of Williams v.The Queen (92 DTC 6320), the Supreme Court of Canada reconsidered the approach to use in determining whether income is situated on a reserve. The proper approach in determining the situs of personal property is to evaluate the various connecting factors that tie the property to one location or another.

In the situation you are examining, there are several possible connecting factors, all of which tie the $XXXXXXXXXX payment to the reserve. We would reference the following as relevant connecting factors:

? The Indian band, as the payer of the amount, is resident on the reserve
? The Taxpayer is resident on the reserve
? The payment is in connection with the planned demolition of the Taxpayer's residence on the reserve
? The payment represents compensation for the inconvenience endured by the Taxpayer in being required by the Indian band to move to another house on the reserve

Given the foregoing, it is our opinion that a sufficient, indeed a significant, connection can be made between the income in question and the reserve. Accordingly, the income would be tax exempt.

In the absence of the payment's connection to the reserve, it would be necessary to determine how the payment should be characterized in order to ascertain its taxability. This determination would require an examination of all of the facts relevant to the situation.

We trust that these comments will be of assistance.

For your information 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 your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Roxane Brazeau-LeBlond, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch