Dear Sirs:
Re: Unincorporated Indian Owned Businesses
This is in reply to your letter of March 7, 1991, concerning the following hypothetical fact situation
The hypothetical facts given are:
1.
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Since your letter appears to refer to a factual situation involving a specific taxpayer, your questions should be directed to your District Taxation Office which has the responsibility of determining the tax consequences of completed transactions and their implications to the specific taxpayers. However, we are prepared to offer the following general comments.
OUR COMMENTS
The income of all residents of Canada, including status Indians, is subject to taxation under the Income Tax Act (the "Act") unless it can be brought within an exempting provision such as the statutory exemptions referred to by subsection 81(1) of the Act. Paragraph 81(1)(a) of the Act refers to exemptions provided for in other statutes of the Parliament of Canada. In conjunction with paragraph 81(1)(a) of the Act, section 87 of the Indian Act provides a tax exemption to a status Indian only with respect to personal property situated on a reserve. The Canadian Supreme Court decision, Nowegijick v. The Queen et al, 83 DTC 5041, established that, with respect to employment income, it is the "situs of the payer" which determines whether the income is situated on a reserve. Thus, employment income of an Indian working anywhere, where the employer is located on the Reserve, is not taxable (paragraph 81(1)(a) of the Act via section 87 of the Indian Act) nor is it pensionable (for CPP purposes), but it is insurable (for Unemployment Insurance Purposes), and prescribed U.I. deductions are required.
If it is established that a reserve is the permanent establishment, then all of that business income generated by a sole proprietorship will be exempt from taxation in the hands of the status Indian owner. Moreover, the courts have determined that salary or a right to salary is property, thus the relevant issue for the purposes of paragraph 87(b) of the Indian Act is whether the personal property of an Indian is "situated on a reserve". The courts held that the right to a salary, being a simple contract debt, has as its situs the residence of the payor or place where the payor is found.
However, the determination of whether a taxpayer is an employee or an independent contractor (i.e. proprietor of a business to provide proprietor's services) is a question of fact. The court decisions relating to the subject have basically established four tests that must be applied in determining whether a particular contract is a contract of service or a contract for services.
Following is a brief discussion of these tests:
(a) TEST OF CONTROL
The objective of this test is to assess if the individual is limited or restricted under a master-servant relationship. It recognizes that in most cases, the degree of control of an employer over his employee is greater than that which is exercised in an independent contractor relationship. For instance, in a master-servant relationship, the master can order or require not only what is to be done, but how and when it shall be done. In contrast, an independent contractor is usually allowed to choose the manner in which the services are performed.
(b) INTEGRATION TEST
This test acknowledges that work performed by an employee under an employment contract is done as an integral part of the business, whereas under a contract for services, his work, although done for the business, is not integrated into it, but is only accessory to it.
(c) ECONOMIC REALITY TEST
This test assesses the economic aspects of the relationship between the parties to determine whether the taxpayer is carrying on business for himself or for someone else. The objective of this test is to verify the existence of various factors of an economic nature, and, using these facts, attempt to assess the nature of the relationship. Factors to be considered in applying this test include the required investments to be made by the individual, permanency of the relationship, and the skill required by the individual
(d) SPECIFIED RESULTS TEST
This test acknowledges that an independent contractor relationship usually involves the undertaking of a specific task after which the relationship ceases. Also it usually does not require that the undertaking be carried out by a particular individual. In contrast, in an employer - employee relationship, the employee makes himself available to the employer to be used by the employer without reference to a specified result.
Not all of the foregoing tests will be relevant in all cases or have the same degree of importance in all cases and no single test will in all circumstances be viewed as conclusive. However, cases to date have in most instances indicated that the most important distinguishing factor is the nature of control exercised by the employer over the employee. It is necessary to review and analyze carefully the facts of the particular situation to which the above tests are to be applied, and determine whether the relationship is either one of a contract of services or a contract for services.
As previously mentioned, the determination of whether a taxpayer is an employee or an independent contractor is a question of fact.
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Any questions regarding your particular fact situation, however, should be directed to your District Taxation Office.
The above comments are only expressions of opinion on the application of the Income Tax Act to the hypothetical example and as such should not be construed as advance income tax rulings, nor are they binding on the Department.
We trust our comments will be of assistance.
for DirectorBusiness and general DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch