25 February 1994 Internal T.I. 9313407 - INDIAN - BUSINESS INCOME

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.

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.

									February 25, 1994

	Saskatoon District Office			Head Office
	Lee Delorme						Rulings Directorate
	Assistant Director, Audit			B. Kerr
(613) 957-8953
	Attention:  M. Wedenig
	            Business Audit

									931340

Indian Taxation
XXXXXXXXXX

This is in reply to your memorandum of May 3, 1993, wherein you requested our guidance with respect to the taxation of the income of the above noted individual and corporation. We also acknowledge our subsequent telephone conversations with your office (Kerr/Wedenig), (Kerr/Johnson) concerning this case. Our understanding of the facts are as follows:

XXXXXXXXXX

XXXXXXXXXX

Taxpayer's Position

XXXXXXXXXX advised you that he did not file tax returns for 1987-91 because he did not have any taxable income during that period. XXXXXXXXXX maintain that the income is from non-taxable sources relating to Indian Bands.

District Office Position

Your position, which is also supported by Mr. Ian Rathwell from General Audit Services, is that some, if not all, of the income is taxable.

Our Comments

The taxability of the income of an Indian is dependent on the source of the income, which is essentially a question of fact. It seems that each of the corporations may be in receipt of income from a business and XXXXXXXXXX may be in receipt of either income from employment or income from a business as well as shareholder benefits, which would be income from property, and a capital gain. Since the District Office is in a better position to determine these important questions of fact as well as other related facts such as the situs of the employer or permanent establishment of the business, as the case may be, and the residence of the client, we can only offer the following comments.

Paragraph 81(1)(a) of the Income Tax 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 exempts from taxation the following property:

(a)the interest of an Indian or a band in reserve lands or surrendered lands, and

(b)the personal property of an Indian or a band situated on a reserve.

No Indian or band is subject to taxation in respect of ownership, occupation, possession or use of property mentioned in paragraphs (a) or (b) or is otherwise subject to taxation in respect to any such property.

The exemption from taxation set out in the Indian Act is available only to status Indians under that Act. Therefore, as indicated in paragraph 6(d) of Interpretation Bulletin IT-62 entitled "Indians", a corporation cannot meet the definition of "Indian" in the Indian Act and its income is not exempted from tax by these provisions.

The Department's position on the taxation of income of Indians was, until 1983, outlined in IT-62. The IT states that the purpose of the exemption in the Indian Act is not to tax an Indian on the income the Indian earns on a reserve. For employment income, the IT states that if the employment duties are performed on a reserve, the employment income is tax exempt.

In 1983, the S.C.C. in the Nowegigick case (83 DTC 5041), determined that as employment income was a simple debt, the situs of the employer determined whether employment income of an Indian was tax exempt. Accordingly, if an employer resided on a reserve, the employment income of an Indian from that employer was tax exempt regardless of where the employment duties were performed. This decision implied that Indians working on a reserve for an employer situated off a reserve would be taxable, which was contrary to long existing practice. As a result, the "Indian Remission Order" was established.

The Indian Remission Order P.C. 1988-787 was effective for 1983 and was renewed each year up to and including the 1992 taxation year. It remitted tax, interest and penalties payable by an Indian on employment income earned on a reserve where the employer was located off a reserve, as well as retirement allowances and pension income in respect of exempt income and training allowances paid to an Indian by a government if the Indian resided on a reserve. This remission order was not renewed after 1992 because in the Department's view all this income will now be exempt under the Indian Act, as a result of the decision in Glen Williams v The Queen, (92 DTC 6320), a case dealing with unemployment insurance benefits where it was decided that the benefits were exempt from tax since the qualifying income that gave rise to the benefits was exempt from tax.

The decision in the Williams case rejected the situs of the employer test as the only test to establish that a status Indian was tax exempt in respect of a particular type of income. Instead, the S.C.C. recommended an analysis of all the relevant factors that connect the income to a location on or off the reserve to be used to determine if a status Indian is taxable with respect to that income. As a result, the Indian Income Tax Remission Order P.C. 1993-523 was put in place to remit for taxation years 1992 and 1993 income tax on salaries and wages received by an Indian from an employer situated on a reserve, and to refund income taxes paid for taxation years 1985-91 by Indians on unemployment insurance benefits that would have been exempt as a result of the Williams interpretation.

Following the decision in the Williams case and as a result of a letter issued by the Department on December 29, 1992, which was followed up with considerable input from the Indian community, the Department has developed "INDIAN ACT EXEMPTION FOR EMPLOYMENT INCOME DETAILED GUIDELINES" which were released on December 15, 1993. These guidelines which were also included in a letter sent by the Taxation Programs Branch on December 20, 1993, to all District Offices, Processing Centres and the International Tax Office identify four types of employment situations to which the tax exemption will apply. The guidelines state:

(1)Employment income of an Indian for duties performed on a reserve will be exempt from income tax.

(2)Employment income of an Indian for duties performed off a reserve will normally be exempt from income tax where

(a) the employer is resident on a reserve, and

(b) the Indian lives on a reserve,

except where it can reasonably be considered that one of the main purposes for the existence of the employment relationship is to establish a connecting factor between the income in question and a reserve.

(3)Employment income of an Indian for duties performed off a reserve will normally be exempt from income tax where

(a)the duties of the employment are principally performed on a reserve, and

(b)the employer is resident on a reserve, or

(c)the Indian lives on a reserve,

except where it can reasonably be considered that one of the main purposes for the existence of the employment relationship is to establish a connecting factor between the income in question and a reserve.

(4)Employment income of an Indian for duties performed off a reserve will normally be exempt from income tax where

(a)the employer is an Indian band which has a reserve, a tribal council representing one or more Indian bands which have reserves, or an Indian organization controlled by one or more such bands or tribal councils and dedicated exclusively to the social, cultural or economic development of Indians who for the most part live on reserves,

(b)the duties of employment are part of the non-commercial activities of the band, council or organization, and

(c)the band, council or organization is resident on a reserve.

The term "Indian lives on the reserve" means the Indian lives on the reserve in a domestic establishment that is his or her principal place of residence and which is the centre of his or her daily routine.

Where a portion of the employment income could be viewed as exempt because employment duties related to that portion are performed on a reserve, and the off reserve portion of the income is not otherwise exempt by virtue of the application of the other guidelines, the Department will view the exemption as applying as follows:

(a)In a case where substantially all of the employment duties are performed on a reserve, the exemption applies to the whole of the employment income;

(b)In a case where substantially all of the employment duties are not performed on a reserve, the whole of the employment income will be taxable; and

(c)In any other case, the employment income is to be prorated between the duties performed on a reserve and the duties not performed on a reserve, with the exemption applying to the portion of the income related to the duties performed on the reserve.

In calculating the time spent performing the employment duties on a reserve, travel time to and from the reserve is not included.

As these guidelines were only just recently released, the Government will be extending the transition period to December 31, 1994, to allow those who may be negatively affected sufficient time to become aware of the implications of the guidelines and to arrange their affairs if necessary. This extended transition period will only apply to arrangements already in place.

As indicated in the December 30, 1992 memorandum from the Taxation Programs Branch sent to all District Offices, Taxation Centres and the International Tax Office, the Department's position with regard to business income remains as described in IT-62. This position will remain until the Jacob Pete, (91 DTC 204) and Constant Charleson, (91 DTC 844) cases are resolved. The position is that business income of an Indian is tax exempt if the permanent establishment of the business is located on a reserve. In determining the location of the permanent establishment of a business, the factors to consider are:

-the location where the business activities are carried out, which includes where the employees report for work, where transactions with customers are arranged, and where the inventory is located;

-the location of the head office; and

-the location of the books and records.

In the determination of whether a taxpayer is an employee in receipt of income from employment, or an independent contractor (ie. self employed) in receipt of income from a business, the courts have basically established four tests that must be applied in order to determine whether a particular contract is a contract of service or a contract for service. Those four tests are:

(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 and it does not usually 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 test is the test of control. 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. For additional comments on some of the tests to be used in making this determination you may wish to refer to the cases of Wiebe Door Services Ltd. v. M.N.R., (87 DTC 5025) and Moosejaw Flying Fins Inc. v. M.N.R., (88 DTC 6099).

In regards to income from property, such as dividends on shares or shareholder benefits received from a company whose head office, principal place of business activity and share register are on a reserve, the dividends will normally be considered to be earned on the reserve and if so earned on the reserve would be exempt. Taxable capital gains from the disposition of property situated on a reserve would be exempt.

In our view, based on the limited information submitted and from our discussions, it appears that XXXXXXXXXX was self-employed during the taxation years in question and in receipt of income from business. It appears that until at least XXXXXXXXXX the permanent establishment of the business was located in Saskatoon and not on a reserve. Consequently, all business income would be taxable and the exemption from taxation under paragraph 81(1)(a) of the Act and subsection 87(1) of the Indian Act would not apply. For the periods subsequent to XXXXXXXXXX you would have to establish whether the permanent establishment was in fact relocated to the reserve, if so then the business income would be subject to the exemption and therefore not taxable, if not it would continue to be taxable. However, this view is subject to the results of your audit concerning the determination and review of all relevant facts and taking into consideration all of our comments as stated herein.

R. Albert
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch