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: taxation of employment and investment income of Status Indians
Position: Employment income taxation is determined under the Indian Act Exemption for employment income Guidelines; Recalma is basis of investment income taxation position
Reasons: Taxpayer requested general comments
June 26, 1998
XXXXXXXXXX
Dear XXXXXXXXXX:
We are writing in reply to your letter of April 18, 1998 concerning a number of issues related to the taxation of income and property held by Indians. In your inquiry, you specifically ask for information related to:
1. exemptions from income tax in relation to personal property including income earned on investments;
2. estate tax matters; and
3. treaty money tax exemptions.
You also requested copies of the form TD1-IN, Determination of Exemption of an Indian's Employment Income. We have enclosed copies of these forms.
Our Comments
1. Exemptions from income tax in relation to personal property
In general terms, it is section 87 of the Indian Act, along with paragraph 81(1)(a) of the Income Tax Act, that establishes the exemption from taxation for status Indians. Section 87 of the Indian Act exempts from taxation the personal property of an Indian situated on a reserve. The courts have previously concluded that the reference to personal property in section 87 includes income. In determining whether the income earned by an Indian is situated on reserve, and thus exempt from taxation, the approach taken by the Supreme Court of Canada in the 1992 case of Glenn Williams v. Her Majesty the Queen (92 DTC 6320) is followed. This approach requires the examination of all factors connecting income to a reserve to determine if the income is located on the reserve and therefore exempt from income tax. The Supreme Court also 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. One general direction provided in Williams was that an overly rigid test which identified one or two factors as having controlling force “...would be open to manipulation and abuse.” The Supreme Court rejected the previously adopted test that situs of the debtor was the sole test for determining whether the personal property of an Indian or band was situated on a reserve.
Employment Income Guidelines
Based on the guidance provided in Williams and after receiving representations from interested Indian groups and individuals, the Department identified a number of connecting factors that can be used to determine whether employment income is situated on a reserve. With a view to assisting the Indian community, the Department developed the Indian Act Exemption for Employment Income Guidelines (the “Guidelines”), incorporating the various connecting factors that describe the employment situations covered the Indian Act. We have enclosed a copy of the Guidelines for your information.
Investment Income
In your correspondence, you outline a concern about the taxation of investment income and identify the use of a bank on a reserve as a possible method of generating tax exempt income. Based on Williams, in our view, the location of a savings account on a reserve would not, in itself, be sufficient to exempt the interest income earned thereon. Where a bank account is considered to be situated at a location on reserve, this is one factor to weigh in determining whether interest earned on deposits in that account is exempt from taxation. There could be other factors that would connect the income to a location off reserve.
In the recent case of Arnold Recalma v. Her Majesty the Queen (96 DTC 1520), the Tax Court of Canada considered the taxability of income earned by an Indian living on reserve, from investments purchased from an on reserve branch of a bank. In Recalma, the following were considered in determining the situs of the investment income:
a) the residence of the taxpayer;
b) the origin or location of the capital used to buy the securities;
c) the location of the bank branch where the securities were bought;
d) the location where the investment income is used;
e) the location of the investment instruments;
f) the location where the investment income payment is made; and
g) the nature of the securities and in particular:
(i) the residence of the issuer;
(ii) the location of the issuer's income generating activity from which the investment is made, and
(iii) the location of the issuer's property in the event of a default that could be subject to potential seizure.
In any given situation, a few of these factors might support an argument for exemption, however, the court placed considerable weight on (g)(ii), the location of the income generating activity of the bank. In Recalma, the income in question was interest from banker's acceptances and income from mutual fund units. Basically, the court concluded that income from these investments started with companies off the reserve and was passed through a bank on reserve to the taxpayers. It was held that the investment income of the taxpayer was not personal property situated on a reserve. The court concluded that in making these investments the taxpayers chose to invest in the economic mainstream of normal business conducted off the reserve.
Since the bank can use the funds received to make loans to Indians off the reserve or to non-Indians or to invest in off reserve activities, it may not be possible to trace the interest earned on these funds directly to the reserve. Based on this, unless the investment income can be identified as being generated exclusively on the reserve, it is our position that the income is not exempt from tax.
2. Estate tax matters
By ‘estate tax’ we understand your inquiry to relate to the levying of a tax on the value of a deceased’s estate prior to the distribution of the estate to the beneficiaries. Under federal income tax legislation, there is no ‘estate tax.’ Provincial legislation levies ‘probate fees’ on the transfer of certain properties after death. You should contact the Ontario Ministry of Finance should you have further queries.
3. Treaty monies
We have interpreted your comments concerning ‘treaty monies’ as being monies paid to a Band under section 90 of the Indian Act. Generally, the initial receipt of these monies by a Band is exempt from income tax. Whether income earned on these monies is exempt or taxable depends on the facts of any particular situation, including whether the monies are held in a trust, and, if so, the allocation of trust income and whether the Band is considered exempt under paragraph 149(1)(c) of the Income Tax Act as a public body performing a function of government.
We trust our comments will be of assistance to you.
Yours sincerely,
Roy C. Shultis Director General Income Tax Rulings and Interpretations Directorate Policy and Legislation Branch
Encls.
Nancy Graham
957-2136
June 24, 1998
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