Principal Issues: Where an e-commerce business makes a wide variety of products made or manufactured by other entities available through its website, will it be taxable on income earned through sales of these products to off-reserve customers?
Position: Likely yes
Reasons: Because the income is generated by being an intermediary between supplier and consumer, it is reasonable to consider the location of suppliers as a connecting factor. (Cleary v. the Queen) This, in conjunction with the location of customers, the other factor deemed key by the Southwind case, tend to suggest the income is situated off-reserve and therefore would be taxable.
XXXXXXXXXX 2005-011255
Renée Shields
(613) 948-5273
July 18, 2005
Dear XXXXXXXXXX:
Re: Status Indian income from e-commerce
This is in response to your letter of January 10, 2005 inquiring whether income you earn from sales to off-reserve customers of your website will be subject to tax.
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
You have indicated that you are a status Indian operating an e-commerce business, XXXXXXXXXX, which offers web-based retail shopping to its customers. XXXXXXXXXX. For purposes of this reply, we have assumed that your business is an unincorporated one, and that the income you earn is business income as a sole proprietor. This assumption is important because the Indian Act only provides a tax exemption to status Indians and not to corporations.
Section 87 of the Indian Act, in conjunction with paragraph 81(1)(a) of the Income Tax Act, provides that a status Indian's personal property is exempt from taxation if that property is situated on a reserve. The courts have determined that income is personal property. However, because income is intangible, as opposed to a physical object, it can be difficult to determine its location. The Supreme Court of Canada addressed this problem in a case called Williams v. the Queen and developed the connecting factors test. The test requires that we first identify the various connecting factors that are relevant to the particular property. These factors should then be analyzed to determine what weight they should be given in identifying the location of the property. If the most significant factors connect the property to a location on a reserve, the income will be tax-exempt.
Southwind v. the Queen is the leading case in determining the taxation of business income of a status Indian. In that case, the Federal Court of Appeal made the observation that:
The process of determining the tax status of income earned by Natives on Reserves has become quite complex, depending on a sophisticated analysis of a series of factors... All we can do is evaluate the factors and draw the lines as best we can, between business income...that is situated on the Reserve...and income that is primarily derived in the commercial mainstream, working for and dealing with off-reserve people.
In the Southwind case, the court endorsed consideration of a series of factors that would be relevant, but not necessarily of equal significance. These factors were: the location of the business activities, the location of the customers, the location where decisions affecting the business are made, the type of business and nature of work, the place where payment is made, the degree to which the business is in the commercial mainstream, the location of a fixed place of business and location of books and records and finally, the residence of the business owner. In coming to its decision that Mr. Southwind's income was taxable, the court relied heavily on the location of the business customers and the location where income-generating activities took place.
Of note also is a case called Cleary v. the Queen. The Cleary case involved a partnership called "Atuhk" which earned income by acting as an intermediary through which a construction company ordered construction materials. In finding that the partnership income was not situated on reserve and therefore taxable, the Court stated:
In addition to the factors set out in Southwind, we must also add the location of the business' suppliers, given the intermediary nature of Atuhk's business.
The emergence of e-commerce presents new considerations for tax administration purposes, which are still being studied. However, the connecting factors test as developed by the courts remains integral to determining the taxation of a status Indian's business income. We understand that your office is situated on a reserve. We also understand that you are resident on the reserve. However, the nature of your business suggests that the main income generating activity is the provision of products to customers. These products do not originate with you. They originate with other producers and manufacturers, most of whom are off-reserve. Although we do not have full details about the nature of your business operations, XXXXXXXXXX appears to be an intermediary between the manufacturers or producers of commercial mainstream products and the ultimate consumer.
Based on the foregoing, it is our view that sales to off-reserve customers of your website would generate taxable income because the most significant factors connect that income to locations off-reserve.
We trust that these comments will be of assistance.
Yours truly,
Roxane Brazeau-LeBlond, C.A.
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch