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: General comment on the taxation of employment income, business income and whether the Indian Act exemption applies to corporations.
Position:
Reasons:
March 10, 2000
Bert Riverso HEADQUARTERS
Federal and Provincial Affairs Division Karen Power, CA
Policy and Legislation Branch (613) 957-8953
320 Queen Street, 22nd Floor
2000-001213
Indian Taxation
We are writing in reply to your correspondence of February 25, 2000, which was forwarded to us for review by Neil Mitchell.
You have requested that we review the following scenarios presented by the Government of New Brunswick with respect to personal, corporate and business taxation relating to status Indians:
Personal Income Tax
1. Natives living on a reserve and earning income from the Band or companies located on the reserve pay no income tax.
2. Natives living on reserve and earning income off reserve pay no income tax.
3. Natives living off reserve and earning income from a business located on the reserve pay no income tax.
4. Natives living off reserve and earning income from a business located off reserve pay income tax.
Corporate Income Tax
1. Incorporated companies with native and/or band shareholders are not covered under the Indian Act. All income is taxable.
Business Income - Sole Proprietor
1. Natives living on a reserve and earning income as a sole proprietor on a reserve pay no income tax.
2. Native living on a reserve and earning income as a sole proprietor off a reserve pay no income tax.
3. Natives living off a reserve and earning income as a sole proprietor on a reserve pay no income tax.
4. Natives living off reserves and earning income as a sole proprietor off a reserve pay income tax.
Employment Income:
Paragraph 81(1)(a) of the Income Tax Act (the "Act") and section 87 of the Indian Act, personal property owned by an Indian and situated on a reserve is exempt from tax. Since the Courts have determined that employment income is personal property, the taxability of employment income earned by an Indian depends on whether such income is situated on a reserve. The court has also directed that connecting factors must be considered when making this determination. In this regard, based on comments made by the Supreme Court in Glenn Williams v. The Queen, 92 DTC 6320, and after receiving representations from interested Indian groups and individuals, the Canada Customs and Revenue Agency ("CCRA") developed the Indian Act Exemption for Employment Income Guidelines (the "Guidelines"). The Guidelines incorporate the various connecting factors, that describe employment situations covered by section 87 of the Indian Act. We attach a copy of the Guidelines for your information and/or for forwarding to the Government of New Brunswick.
The following summarizes the Guidelines:
Guideline 1 will apply to exempt all of the income of an Indian if at least 90% of the employment duties are performed on a reserve regardless of where the employer is resident. When less than 90% of the duties are performed on a reserve and none of the other guidelines apply, only the portion that is performed on a reserve is exempt (the proration rule).
Guideline 2 will apply to exempt all of the employment income of employees who live on reserve provided that the employer is in fact resident on a reserve. The condition that the "employer is resident on a reserve" means that the reserve is the place where the central management and control over the employer organization is actually located. 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.
Guideline 3 would apply to exempt all of the income of an Indian if more than 50% of the employment duties are performed on a reserve and the employer is resident on a reserve or the Indian lives on reserve.
Guideline 4 requires a) that the employer is resident on a reserve; b) that the employer is an Indian band which has a reserve, or a tribal council representing one or more Indian bands which have reserves, or an Indian organization controlled by one or more such bands or tribal councils, if the organization is dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves; and c) that the duties of the employment are 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. These elements must all be satisfied in order for Guideline 4 to apply.
We have not been provided with sufficient information with respect to each of the scenarios to determine whether any of the Guidelines have been met. We would need to consider where the duties of employment are performed and whether the employer's are resident on reserve.
Corporate Income Tax
Paragraph 81(1)(a) of the Income Tax Act (the "Act") and section 87 of the Indian Act provide a tax exemption for the personal property of an Indian or band situated on a reserve. Since a corporation is not an "Indian" or "band", as defined in the Indian Act, it does not qualify for this exemption. Therefore, a corporation will be taxable on its income unless otherwise exempt from taxation under another provision of the Act. The corporation would have to rely on provisions such as paragraph 149(1)(d) or (l) of the Income Tax Act.
Paragraph 149(1)(d):
For taxation years and fiscal periods that begin after 1998, a corporation may be exempt from Part I tax on its taxable income for a particular period under paragraph 149(1)(d.5) of the Act if not less than 90% of its capital is owned by one or more municipalities in Canada and the income of the corporation from activities carried on outside the geographical boundaries of the municipalities does not exceed 10% of its income for the period.
We note that paragraph 149(1)(d.5) of the Act is subject to subsections 149(1.2) and (1.3) of the Act. Subsection 149(1.2) of the Act excludes certain income from the determination of whether more than 10% of the income of a corporation is derived from activities carried on outside the geographical boundaries of the municipality or municipalities that own the corporation. Specifically, income derived from activities carried on pursuant to an agreement in writing with Canada, a province, or a municipality, within its geographical boundaries, is not included in the determination. Subsection 149(1.3) of the Act provides that 90% of the capital of a corporation that has issued share capital is to be considered to be owned by one or more municipalities only if the municipalities are entitled to at least 90% of the votes associated with the shares of the corporation.
As indicated above, in order for a corporation owned by an Indian band to qualify for the exemption under paragraph 149(1)(d.5) of the Act, the Indian band would have to qualify as a municipality in Canada. In our view, having passed bylaws under sections 81 and 83 of the Indian Act would not be sufficient to have the Indian band considered to be a municipality for purposes of paragraph 149(1)(d.5) of the Act.
In the 1994 case of Otineka Development Corporation Limited and 72902 Manitoba Limited v. Her Majesty the Queen (94 DTC 1234), the Tax Court of Canada concluded that, since there is no definition of a "Canadian municipality" in the Act, the term must be given its ordinary meaning and is not to be solely determined by the provincial legislation governing municipalities. In the Court's views, the powers conferred under the Indian Act and their exercise by The Pas Indian Band created a form of self-government that is an essential attribute of a municipality. In that case, the band had passed by-laws to regulate water, garbage disposal, weed control, domestic animal control, law and order, the provision of housing and other by-laws. It also provided services to band members in areas such as education, health care, social services, employment and training services, counselling and economic development. In the end, the Court concluded that the band was a municipality for the purposes of former paragraph 149(1)(d) of the Act (the relevant section prior to the enactment of paragraph 149(1)(d.5) of the Act) and that corporations owned by the band were exempt from taxation as municipally-owned corporations. It is our view that for an Indian band to be considered a municipality in Canada, it would have to demonstrate that it fits within the facts of the Otineka case.
Paragraph 149(1)(l):
In order for a corporation to be exempt under paragraph 149(1)(l), inter alia, it must be organized as well as operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit and no part of its income may be payable to or otherwise available for the personal benefit of any of its members or shareholders. To establish the purpose for which a corporation was organized, the CCRA will normally look to the instruments by which it was created such as letters patent and articles of incorporation. Whether or not a corporation was operated for such purposes is a question of fact that can only be determined retrospectively based on a review of its operations in the period concerned.
Paragraph 149(1)(l) contemplates that an organization may carry on income generating activities and earn income and still qualify for exempt status provided that there is a causal relationship between the profit making activity and the exempt purpose of the organization. That is, the income generating activity cannot be the principal activity of the corporation and must be carried on, and the resulting income must be used, by the corporation to achieve its declared exempt objectives. It is a question of fact whether such a relationship exists. In this regard, we refer you to the case of Gull Bay Development Corporation v. Her Majesty the Queen (84 DTC 6040).
Where an organization that otherwise qualifies as a non-profit organization proposes to engage in an unrelated profit making enterprise, it is our view that, if the organization were to carry out this unrelated activity in a taxable, wholly-owned corporation and this corporation were to pay dividends out of its after-tax profits to the organization to enable the organization to carry out its non-profit activities, the organization may qualify as a non-profit organization as set-out in paragraph 149(1)(l) of the Act.
Business Income - Sole Proprietor
In determining whether income is situated on a reserve, the approach taken by the Supreme Court of Canada in the case of Williams (92 DTC 6320) must be followed. The proper approach to determining the situs of personal property is to evaluate connecting factors that tie the property to one location or another. The Supreme Court indicated that the ultimate question is to determine to what extent each connecting factor is relevant in determining whether taxing the particular kind of property in a particular manner would erode the entitlement of an Indian to personal property situated on a reserve.
Henry Southwind (98 DTC 6084) is the leading case dealing with the business income of an Indian. 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 sole customer was off reserve. The Tax Court decided that his income from his logging activity was taxable and the taxpayer appealed this decision. The Federal Court of Appeal confirmed the Tax Court's decision.
The courts considered two main factors to connect business income to a location on or off a reserve. One significant factor is the location where the revenue generating activities of the business are undertaken, and the other major factor is the location of the business customers. In a situation where all of an Indian's business income is derived from activities carried out off reserve for customers located off reserve, the business income would generally not be exempt from taxation. If a portion of the business activities are carried out on reserve, a similar portion of the business income would generally be exempt. While there may be some administrative activities carried out on reserve, it is our view that the actual revenue generating activities would be more significant in determining whether business income is connected to a reserve. For example, if a bookkeeper were employed to maintain the books and records in an on reserve office of a self-employed Indian who 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 be to a location on reserve.
The location where the self-employed Indian lives is not a determining factor in connecting the business income to the reserve. While it may carry some weight, the most important considerations are the location of the revenue-generating activities, and the location of the customers of the business. In situations where a portion of the revenue-generating activities of the business are performed on the reserve, then a similar portion may be exempt from tax.
We have not been provided with sufficient information with respect to each of the business scenarios to determine whether any of the business income would be considered connected to a reserve. We would need to consider other factors such as where the revenue-generating activities are performed and the locations of the businesses customers.
We trust that our comments will assist you in responding to the Government of New Brunswick.
Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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