19 January 2000 External T.I. 9931785 - INDIANS INVESTMENT IN MUTUAL FUNDS

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: Whether the income earned by Indians from mutual funds will be exempt from tax

Position: No

Reasons: The income will be earned in the commercial mainstream, not on a reserve.

XXXXXXXXXX 1999-001365
M. Shea-DesRosiers
Attention: XXXXXXXXXX

January 19, 2000

Dear Sirs:

Re: Investment in Mutual Funds by Natives through a
Branch of a Financial Institution Situated on a Reserve

This is in reply to your letter of November 22, 1999, wherein you requested our opinion as to whether the income earned from the investment in mutual funds (i.e. interest, dividend, capital gains, etc.) by a Native through an independent financial Planner's Branch office established on a native reserve to serve the native population would be taxable in the hands of the Native or tax exempt by virtue of the Indian Act. For purposes of our response, we assume that your question concerns status Indians and reserves as defined in the Indian Act.

According to section 87 of the Indian Act, the personal property of an Indian situated on a reserve is exempt from taxation. The issue of taxability of investment income was considered in Recalma et al v. The Queen, 96 DTC 1520. In these cases, the taxpayers invested in bankers' acceptance and mutual funds, making their investments through a bank branch situated on a reserve. The taxpayers lived on a reserve and earned exempt income. The Court observed that the property in question was an income stream from securities in the form of interest and not the securities themselves. The Tax Court of Canada, at page 1523, referred to the comments made by LaForest, J., in the case of Mitchell v. Peguis Indian Band, (1990) 2 S.C.R. 85, to the effect that the purpose of the provisions of the Indian Act is not to give an economic advantage to Indians and that property held in the economic mainstream should be held on the same terms as all other Canadians. In Recalma et al v. The Queen, the Tax Court of Canada considered several connecting factors for determining the situs of the investment income, and it was pointed out that the origin of the capital that was used to buy the securities and the location of the bank branch where the underlying securities were purchased are not as significant as other factors. The income stream from the bankers' acceptances and the managed funds was generated from companies that were located off the reserve, and it was held that the investment income of the taxpayers was not personal property situated on a reserve. Rather, the income was earned in the economic mainstream and as such was taxable.

This position was upheld in the Federal Court of Appeal, 98 DTC 6238.

As stated by Linden, J. A., for the Federal Court of Appeal, at page 6240,

"...the investment income earned by these taxpayers cannot be said to be personal property "situated on a reserve" and, hence, is not exempt from income taxation.

To hold otherwise would open the door to wealthy Natives living on reserves across Canada to place their holdings into banks or other financial institutions situated on reserves and through these agencies invest in stocks, bonds and mortgages across Canada and the world without attracting any income tax on their profits. We cannot imagine that such a result was meant to be achieved by the drafters of section 87. The result may, of course, be otherwise in factual circumstances where funds invested directly or through banks on reserves are used exclusively or mainly for loans to Natives on reserves. When Natives, however worthy and committed to their traditions, choose to invest their funds in the general mainstream of the economy, they cannot shield themselves from tax merely by using a financial institution situated on a reserve to do so."

Accordingly, in our view, investment income earned by Indian investors in the situation described above, would not be exempt from taxation by virtue of the Indian Act.

We trust that our comments will be of assistance to you.

Yours truly,

Roberta Albert, CA
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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