8 May 1997 Internal T.I. 9706097 - INVESTMENT INCOME OF INDIANS

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.

Principal Issues:

taxability of investment income of status Indian

Position:

based on connecting factors

Reasons:

decisions of Williams and Recalma

			May 8, 1997

	MISSISSAUGA TSO 62	HEADQUARTERS
	Client Assistance Division	F. Francis
	1st floor west, section 471.21					(613) 957-8953
	Section 471.21

	Attention:  Paul Van Wyck
			970609

Taxability of investment income from an Indian reserve

This is in reply to your memorandum dated March 3, 1997, requesting our views on the tax treatment of interest income earned by XXXXXXXXXX, both status Indians. We understand that the taxpayers contend that the interest income which was reported by XXXXXXXXXX is not taxable by virtue of the Indian Act. You have advised that the taxpayers are retired and reside in XXXXXXXXXX. Further, they earn pension income which is taxable and, prior to retiring, they earned employment income which was also taxable.

The decision of the Supreme Court in the case of Glen Williams has required the Department to review its interpretation of the scope of the exemption from income taxation provided under the Indian Act. One general direction provided in Williams was that "an overly rigid test which identified one or two facts as having controlling force ... would be open to manipulation and abuse." The Supreme Court rejected the situs of the debtor test as the sole test for determining whether the personal property of an Indian was situated on a reserve. The approach adopted in Williams requires an examination of all factors connecting income to a reserve to determine if the income is located on the reserve.

We further cite the case of Arnold Recalma v. Her Majesty the Queen, 1994, where the Tax Court of Canada considered the taxability of income earned by an Indian from investments purchased from a branch of a bank situated on a reserve. The Court concluded that the income was earned in the "economic mainstream" and was therefore taxable.

Based on the foregoing cases, it is our view that the location of a bank account on a reserve would not, in itself, be sufficient to exempt the interest income earned thereon. It is necessary to examine the connecting factors such as the source of funds and the residence of the Indians. In this situation, you have advised that the taxpayers both reside off-reserve and they both earn pension income which is considered taxable. In our view, where the source of the funds invested in the bank account can be traced to the pension income and employment income, the interest income earned thereon will also be taxable.

We trust the above comments are of assistance to you.

for Director
Financial Industries Division
Income Tax Rulings and
Intepretations Directorate