2014-0526471E5 EI Benefits to Self-employed Indian fishers

Principal Issues: If a self-employed Indian’s fishing income is exempt from tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act, is their employment insurance income also exempt from tax under these provisions?

Position: It depends on the strength of the connection between the employment insurance benefits and the fishing income. If the income which gives rise to the entitlement to employment insurance benefits is situated on a reserve and the connection between the employment insurance benefits received and the income is strong, then the employment insurance benefits received by the self-employed Indian fishers would also be situated on the reserve and thus exempt from tax.

Reasons: Paragraph 87(1)(b) of the Indian Act

Author: Mahendran, Anandavally
Section: 81(1)(a), Indian Act 87(1)(b)

XXXXXXXXXX
                                                                                                                                                  2014-052647
                                                                                                                                                  Ananthy Mahendran
                                                                                                                                                  (905) 721-5204
October 23, 2014

Dear XXXXXXXXXX:

Re: Employment Insurance Benefits to Self-Employed Indian Fishers

This is in response to your correspondence of April 2, 2014, wherein you ask for our comments on the tax treatment of employment insurance benefits received by self-employed Indian fishers.

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

The personal property of an Indian, as that term is defined in section 2 of the Indian Act, is exempt from tax pursuant to paragraph 81(1)(a) of the Act and section 87 of the Indian Act if that property is situated on a reserve. The courts have determined that income from employment insurance is personal property for purposes of section 87 of the Indian Act. The Supreme Court of Canada, in Williams v. The Queen, 92 DTC 6320, concluded that the determination of whether income is situated on a reserve, and thus exempt from tax, requires identifying the various factors connecting the income to a reserve and weighing the significance of each such factor.

The type of property is important in identifying the relevant connecting factors. There may be a number of potentially relevant connecting factors in determining the location of employment insurance benefits received by self-employed Indian fishers. The connecting factors identified in Williams for the receipt of unemployment insurance benefits are potentially relevant here.

In Williams, the Supreme Court of Canada identified several connecting factors including the residence of the debtor, the residence of the person receiving the benefits, the place the benefits are paid, and the location of the employment income which gave rise to the qualification for benefits. However, the latter one was considered to be the key connecting factor. The trial judge in Williams noted that the connection between the benefits and the qualifying employment was strong because the benefits are based on premiums arising from the previous employment.

Also, in The Queen v. Ronald Robertson and Roger Saunders, 2012 DTC 5077, the Federal Court of Appeal commented that since income is an intangible property and has no physical location, where it is situated is largely governed by the location of the activities from which the income arises.

In determining whether an Indian’s commercial fishing business income is connected to a reserve, factors that may connect the Indian’s business income to a reserve are:
*     the location of fishing activities - catching, preparing and transporting the fish,
*     the location of selling activities - including the location of customers and the location of the sale of the fish.

In addition, for the 2012 and following tax years, the Indian’s fishing income is connected to a reserve where the following conditions are met:
*     the Indian’s fishing activities are in waters near or abutting the reserve that have a significant historical and continuing important economic connection to the reserve, and 
*     the Indian is a member of a cooperative of band members or a member of a band that owns and operates an organization located on the reserve that has a predominant role in the Indian’s fishing and selling activities and an important role in the general economic life of the reserve.

In recent court cases which dealt with taxation of fishing income of self-employed Indian fishers (Ballantyne v. The Queen, 2012 DTC 5076, The Queen v. Robertson and Saunders, 2012 DTC 5077, and McDonald v. The Queen, 2011 DTC 1314), the courts held that given the connections between the fishing income and the reserve, the fishing income was situated on the reserve and therefore exempt from income tax, despite the delivery of fish off the reserve.

Furthermore, the courts have already held, in Robertson and Saunders and McDonald, that the self-employed Indian fishers’ income from the employment insurance benefits was also situated on the reserve because of the location of the qualifying activities from which the fishing income arises and the connection between the employment insurance benefits and the fishing income. Accordingly if a self-employed Indian’s fishing income which gave rise to the employment insurance benefits was situated on a reserve and therefore exempt from income tax, then the related employment insurance benefits the Indian receives would generally be situated on the reserve and exempt from tax.

We trust that these comments will be of assistance.

Yours truly,

Roger Filion, CPA, CA
Manager
Non-Profit Organizations and Aboriginal Issues
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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