Principal Issues: Can an Indian, as defined under the Indian Act, whose income is fully exempt from tax under paragraph 81(1)(a), constitute a "reporting entity" for purposes of sections 233.3 and 233.4? If so, could such taxpayer be subject to penalties in case of failure to comply with such sections?
Position: Yes. Yes.
Reasons: Wording of the Act and prior positions.
Michel Lévesque Income Tax Rulings Directorate Small and Medium Businesses Directorate Simon Morin Compliance Programs Branch Canada Revenue Agency 2024-103172 December 30, 2024
Dear Mr. Lévesque,
Subject: Concept of reporting entity and status Indian
This is in response to your email of August 12, 2024 (your “Request”) in which you asked us for our opinion regarding the interpretation of the term “reporting entity” for the purposes of sections 233.3 and 233.4 of the Income Tax Act, R.S.C. 1985, c. 1, (5th Supp.), as amended (the “ITA”).
More specifically, you are asking us whether an individual who is an “Indian” within the meaning of the Indian Act (the “IA”), and whose income earned during a given taxation year is exempt from income tax in accordance with paragraph 87(1)(b) of the IA and excluded from the individual’s income under paragraph 81(1)(a) of the ITA, could qualify as a “reporting entity” within the meaning of sections 233.3 and 233.4 of the ITA, and thus be subject to the obligation to file forms T1135 and T1134 provided for, respectively, in subsections 233.3(3) and 233.4(4) of the ITA, as the case may be.
Furthermore, if so, you wish to know whether such a taxpayer would be subject to the various penalties applicable in the event of non-compliance with the filing obligation provided for in subsections 233.3(3) and 233.4(4) of the ITA.
Unless otherwise indicated, all statutory references herein are to provisions of the ITA.
Our Comments
The situation you described in your request involves an individual who is an “Indian” within the meaning of the IA, and whose total income is excluded from the computation of his income for the purposes of Part I of the ITA for a taxation year by the combined effect of paragraph 87(1)(b) of the IA and paragraph 81(1)(a) of the ITA.
Generally, the term “reporting entity” for the purposes of sections 233.3 and 233.4 of the ITA excludes a taxpayer “whose total taxable income for the year is exempt from the tax under Part I”. Subsection 2(2) of the ITA provides that “the taxable income of a taxpayer for a taxation year is the taxpayer’s income for the year plus the additions and minus the deductions permitted by Division C.” Paragraph 87(1)(b) of the IA provides that the personal property of an Indian, as defined in that Act, situated on a reserve, including income, is exempt from taxation. Paragraph 81(1)(a) of the ITA provides that amounts exempt from tax under the IA are not included in computing a taxpayer’s income for a taxation year.
In our view, the effect of paragraph 81(1)(a) of the ITA is not to exempt the taxpayer’s taxable income from the tax under Part I but rather to exclude an amount exempted under paragraph 87(1)(b) of the IA from the computation of the taxpayer’s income. Thus, as stated in document 2009-0350931E5, the income of an individual who is an “Indian” within the meaning of the IA that is not included in the "computation of income" under Division B of Part I of the ITA pursuant to paragraph 81(1)(a) of the ITA, will not be "taxable income" under subsection 2(2) of the ITA. In other words, although the effect of paragraph 81(1)(a) of the ITA may be that the taxable income of such an individual, whose income earned in a particular taxation year is exempt from income tax pursuant to paragraph 87(1)(b) of the IA and paragraph 81(1)(a) of the ITA, i.e. nil, it cannot be concluded that the individual's taxable income is exempt. It follows that such a taxpayer may qualify as a “reporting entity” within the meaning of sections 233.3 and 233.4 insofar as all the other conditions for the application of that definition are otherwise satisfied.
The expression “whose taxable income for the year is exempt from tax under Part I” would refer rather to persons covered by an exemption in one of the paragraphs of subsection 149(1) of the ITA. In general terms, subsection 149(1) provides that no tax is payable under Part I on the taxable income of those persons.
Finally, our conclusion would be consistent with the tax policy underlying paragraph 81(1)(a) and sections 233.3 and 233.4 of the ITA. As previously indicated, paragraph 87(1)(b) of the IA covers the personal property of an Indian, as defined in the IA, that is specifically located on a reserve. Considering the nature of the property covered by the filing obligation provided for in subsections 233.3(3) and 233(4) (i.e. shares in foreign affiliates and other foreign property), it is reasonable to conclude that the legislator intended to subject an individual who is an “Indian” within the meaning of the IA to the obligation to file forms T1134 and T1135, as those specified properties are not located on a reserve.
With regard to your second question, it follows that a filer subject to the filing obligations provided for in paragraphs 233.3(3) and 233.4(4) will also be subject to the various penalties applicable in the event of non-compliance with such obligations.
Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.
We hope you find our comments of assistance.
Best regards,
Sophie Larochelle, LL.B., M. Fisc., MBA
Section Manager
Specialized Taxes Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch