7 June 1991 Income Tax Severed Letter - Taxation of Indians

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.

Dear Sirs:

Re: Taxation of Indians

This is in reply to your letter dated March 13, 1991 requesting a technical interpretation regarding investment income earned by a status Indian.

The particular circumstances outlined in your letter involve an actual taxpayer and specific proposed transactions. As explained in Information Circular 70-6R2, it is not the Department's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Taxpayers seriously contemplating a proposed transaction are best advised to seek a formal ruling, submitting a complete statement of facts and issues. We are therefore not in a position to give you a definitive answer to your questions. We will however, provide the following general comments which may be of assistance to you.

Our Comments

Investment Income

The Department's position with respect to the source of an Indian's interest income is set out in Interpretation Bulletin IT-62. Paragraph 6(6)(iv) states:

"Interest on a bank account is earned at the location at which the funds are on deposit, i.e. the specific bank branch address."

Interest from guaranteed investment certificates and other interest bearing certificates, such as treasury bills and bonds, is not generally considered to be earned on a reserve. Although the financial instrument may have purchased through a bank or trust company located on the reserve, the interest is considered to be earned and paid from the payor's principal place of business (which is often the issuer's head office). For example in the case of a government bond, regardless of where purchased, the interest will be considered earned in and paid from Ottawa.

Interest Expense

Expenditure incurred for the purpose of gaining or producing income from property are deductible from that income. Provided there is a reasonable expectation of profit, an expense is deductible even if it exceeds interest income earned in a given year. With respect to your second question, the Department's position remains unchanged from the response given in the 1979 Round Table as follows:

The Department would normally consider whether the taxpayer could have expected to make a profit over the length of the borrowing. If, for example, borrowing costs were originally below income, a subsequent increase in the rate of interest would not generally lead to a disallowance. When interest paid originally exceeded income, the taxpayer must demonstrate that there was good reason to expect that interest rates would drop sufficiently below his rate of return to produce an overall profit. Otherwise the excess of the interest paid in the year over the income received in that year would be disallowed.

General Anti-Avoidance Rule

The application of the general anti-avoidance rule (GAAR) presented in subsection 245(2) will deny any tax benefit resulting from an avoidance transaction. A "tax benefit" is defined in subsection 245(1) to be "a reduction, avoidance or deferral of tax or other amount payable under this Act or an increase in a refund of tax or other amount under this Act." The earning of tax free interest from bank account situated on a Reserve would not in our opinion result in the realization of a tax benefit as, in our view, this is within the intent of the statutory exemption from taxation provided under the Indian Act in respect of the personal property of a status Indian situated on a reserve. Therefore GAAR would have no application. We caution however, that the foregoing is merely an expression of opinion and is not binding on the Department.

We trust our comments will be of assistance to you.