7 June 1991 Income Tax Severed Letter - Indian-owned Businesses and Indian Employees

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: Indian-Owned Businesses and Indian Employees

This is in reply to your letter of April 22, 1991 wherein you request information concerning the taxation of Indian-owned businesses and their Indian employees.

Exemption from Taxation

Paragraph 81(1)(a) of the Income Tax Act (the Act) exempts from taxation "an amount that is declared to be exempt from income tax by any other enactment of the Parliament of Canada".

Section 87 of the Indian Act provides that the personal property of an Indian situated on a reserve is exempt from taxation. While the exemption in the Indian Act refers to `property' and the tax imposed under the Income Tax Act is a tax calculated on the income of a person rather than a tax in respect of his property, it is considered that the intention of the Indian Act is not to tax Indians on income earned on a reserve. Income earned by an Indian off a reserve, however, does not come within this exemption, and is therefore subject to tax under the Income Tax Act.

Business Income

In specific cases the determination as to whether income is earned on or off the reserve is a question of fact to be determined from an examination of all the facts. The issue of the appropriate criteria to be used to determine whether business income is earned on or off the reserve is currently before the courts. Our position is that the determination is made on the basis of where the business has its permanent establishment and where is principally carried on. Some important factors to be considered in making such a determination include:

• • location of the business office - where the books and records are kept - where business transactions with customers and suppliers are arranged - where employees report for work or are paid from - where inventory is ordered and often maintained.

In our view where it can be established that the permanent establishment of a business is located on the reserve, then all of the business income earned by individual status indians would be exempt. Where, however the income is earned by a corporation of which band members are shareholders such income is taxable to the corporation in that a corporation is not an Indian and the exemption does not apply.

Partnerships

A partnership is not a person, however, paragraph 96(1)(a) of the Act provides that in determining each partners income the partnership income is first computed as if the partnership were a separate person. A member's share of the income of the partnership from each source then flows to him pursuant to paragraph 96(1)(f) of the Act, retaining its characteristics in respect of its source and nature.

To determine whether partnership income is earned on or off the reserve the permanent establishment test described above would be applied in respect of the partnership activities.

Joint Ventures

A joint venture is not a legal entity, therefore, the determination as to whether a particular joint venturer's income is earned on or off the reserve must be made by applying the permanent establishment test independently to each joint venturer. Consequently, since the permanent establish test is applied to each joint venturer independently, it is possible that some joint venturers income will be considered to be earned on the reserve and others off the reserve even though it is from the same joint venture.

Indian Employees

The tax status of income earned by Indian employees has been considered by the Courts. Since the courts have determined that salary or a right to salary is property, the relevant issue is whether the personal property of an Indian (i.e. his salary) is situated on a reserve. This issue was considered by the Federal Court-Trail Division in The Queen v. The National Indian Brotherhood [[1978] C.T.C. 680] 78 DEC 6488. The court held that the right to a salary, being a simple contract debt, has as its situs the residence of the debtor or the place where the debtor is found. Thus, it was concluded in the National Indian Brotherhood case:

"As the salaries in question of the individual Indians until paid were simple contract debts owned by a corporation not resident on a reserve, it is my view that they were not situated on a reserve within the meaning of subsection 87(1)."

In obiter, the Supreme Court of Canada, in the case of Nowegijick v. The Queen [[1983] C.T.C. 20] 83 DEC 5041 cited this judgement with approval. Accordingly, it is the residence of the employer which determines whether a salary is "situated on the reserve".

As a result, income earned by an Indian from employment on a reserve but paid to him or her by an employer situated off the reserve (which was previously thought to be exempt from tax) is now taxable. Therefore, a Remission Order, meant to temporarily address the concerns of the Native community regarding the effect of this court decision, was issued for the 1983 to 1985 taxation years. The Order remitted to an Indian the difference between the income taxes payable by an Indian for those years and the income taxes that would be payable by an Indian for those years if that portion of his or her income from employment that is attributable to work performed on a reserve were not included in computing income for those years. This Order has been extended through 1990.

Consequently, for the years 1983 to 1990 inclusive, the employment income of an Indian is exempt if the employee performs the services on the reserve or if the employer is considered to have a permanent establishment on the reserve.

We trust our comments will be of assistance to you.