5 April 2000 Internal T.I. 2000-0018337 - NATIVE FISHERS FISHING 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: Whether business income earned by Native lobster fishers is exempt from taxation by virtue of the Indian Act.

Position: Generally no.

Reasons: Based on the Williams case, one must look at the connecting factors. In a fishing business, where the fishing takes place is a connecting factor of major importance. Generally the fishing takes place off reserve. If all of the fishing is done off reserve, in our view, the fishing business income earned by a status Indian, would be more connected to a location off reserve than to a location on reserve and, consequently, would generally not be exempt from taxation

		April 5, 2000

	XXXXXXXXXX 	HEADQUARTERS
	Audit	Karen Power, CA
	XXXXXXXXXX  Tax Services Office	(613) 957-8953

		2000-001833

Taxation of Native Fisher's Fishing Income

We are writing in reply to your correspondence of April 3, 2000, which was forwarded to us for our comments by XXXXXXXXXX.

You have requested the Canada Customs and Revenue Agency's ("CCRA") position on the tax status of fishing income from lobster fishing by Native fishers.

You have provided us with the following situation:

XXXXXXXXXX.

In addition, you have asked for comments on the following questions:

a) If the Band establishes a lobster pound on the reserve that will buy all of the Native Fisher's catch and then sell the catch to retailers and wholesalers, will the income from the pound be non-taxable? Secondly, would this arrangement change the character or the taxability of the Native Fisher's income as the fish would definitely be sold to the band on reserve?

b) Would workers hired by the pound, unloading the catch, buying the fish and selling it be exempt from tax on their employment income?

Our Comments:

Paragraph 81(1)(a) of the Income Tax Act (the "Act") and section 87 of the Indian Act provide a tax exemption for an Indian's personal property situated on a reserve. The courts have previously determined that, for purposes of section 87 of the Indian Act, the reference to personal property includes income. In Williams (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 which tie the property to one location or another.

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.

In our view, one significant factor that serves to connect business income to a location on reserve or off reserve is the location where the activities are carried out. Another factor would be the location of the customer's of the business. While there may be some activities carried on in an office located on reserve, in our view, 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 a self-employed Indian to maintain the books and records in an on-reserve office, but the actual revenue-generating activities of the business were off reserve, the business income would be more connected to a location off reserve than it would to a location on reserve.

In our view, in the case of a lobster fishing business, the location where the fishing is done is a connecting factor of major importance. Generally, fishing is done off reserve. Therefore, in the situation described above, if all of the fishing is done off reserve, in our view, the fishing business income earned by a status Indian, would be more connected to a location off reserve than to a location on reserve and, consequently, would generally not be exempt from taxation. In your situation, neither the fact that the Native Fishers leave from harbours located on reserve, nor the location of the customers would be sufficient to connect the business income to a reserve.

If a portion of the revenue generating fishing activities (such as preparation, dressing and packing of the fish) are carried on reserve, a portion of the business income would generally be exempt. However, it is the Agency's view that the main activity of a fishing business is the fishing itself. Accordingly, the revenue generating activities involved in preparing the fish for market may exempt a small portion of the business income.

It should also be noted that where a portion of income from a business is exempt and the remaining portion is not exempt, the expenses which pertain to the exempt portion are not deductible. Normally, expenses should be allocated in the same proportion as revenue unless another allocation could be shown to be more reasonable in the circumstances.

Question a)

The taxation of income from the pound depends on whether the Band itself is subject to income tax and whether the pound is an incorporated entity.

An Indian band may exempt from tax by virtue of paragraph 149(1)(c) of the Act. Paragraph 149(1)(c) of the Act provides an exemption from income taxes for municipalities in Canada or public bodies performing a function of government in Canada. It is a question of fact as to whether an Indian band may be considered to be a public body performing a function of government in Canada and thereby qualify for exemption from Part I tax pursuant to paragraph 149(1)(c) of the Act. The Department considers that an Indian band that has passed at least one by-law under each of sections 81 and 83 of the Indian Act is a public body performing a function of government. The Department also considers bands that had reached an advanced stage of development as was formerly required by section 83 of the Indian Act to be public bodies performing a function of government. Bands that do not meet these requirements can be considered on a case-by-case basis to determine whether the band performs a function of government such as negotiating and implementing Treaty Land Entitlements.

If the Indian Band is exempt from tax by virtue of paragraph 149(1)(c), as a public body performing a function of government or as a Canadian municipality, any income earned from an unincorporated pound business established and run by the band would not be subject to income tax. However, if the pound is an incorporated entity owned by the band, its income may be exempt from tax by virtue of paragraph 149(1)(d.5) of the Act only if the band qualifies as a Canadian municipality.

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.

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.

You have also asked us to comment on whether the pound arrangement would affect the taxability of the business income earned by Native Fishers. We have previously indicated, that the limited weight that an on reserve customer would otherwise carry as a connecting factor will not be recognized if it can reasonably be considered that one of the main purposes for the location of the customer on reserve is to serve as a connection between the fishermen's business and a reserve, by acting as an intermediary between the fishermen and the actual fish buyers who are located off reserve. Thus, in the above situation, the establishment of a lobster pound located on reserve, would not serve to connect the Native Fisher's business income to a reserve.

Question b):

Based on comments made by the Supreme Court in Williams, 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 DFO.

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.

In our view, any of guidelines 1, 2 or 3 could be used in your situation to exempt the employment income of individuals hired by the pound.

We trust that our comments will assist you in responding to the DFO.

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

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