2014-0553331E5 Indian Business Income XXXXXXXXXX

Principal Issues: Whether business income earned by an Indian XXXXXXXXXX who provides XXXXXXXXXX services to First Nation individuals in XXXXXXXXXX facilities on-reserve and off-reserve is considered to be tax exempt pursuant to paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act?

Position: Whether business income earned by an Indian XXXXXXXXXX is taxable or exempt is a question of fact. However, based on the information submitted, the income earned from the business activities carried out at XXXXXXXXXX (off-reserve) would likely not be exempt from tax.

Author: Mahendran, Anandavally
Section: 81(1)(a) of the Income Tax Act and 87(1)(b) of the Indian Act

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                                                      2014-055333
                                                      Ananthy Mahendran
                                                      (905) 721-5204

June 16, 2015

Dear XXXXXXXXXX:

Re: Self-employment Income Earned by an Indian

This is in response to your correspondence of October 28, 2014, wherein you asked whether all of the income from your self-employment activities is exempt from income tax. We also acknowledge the additional information provided to us in your subsequent correspondence dated February 17, 2015 and April 30, 2015.

These are the facts as we understand them from you:

*     You are an Indian, as that term is defined in subsection 2(1) of the Indian Act, and you live on a reserve.

*     You are a self-employed XXXXXXXXXX and have a private XXXXXXXXXX practice office on the reserve. Your self-employment activities include a full-time XXXXXXXXXX at your private practice office on the reserve from XXXXXXXXXX. The majority of the clients live off a reserve.

*     In addition, you have a contract with a XXXXXXXXXX off the reserve for XXXXXXXXXX. The majority of these clients live off a reserve.

*     You believe that all of your self-employment income should be exempt from tax under section 87 of the Indian Act.

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 IC70-6R6, Advance Income Tax Rulings and Technical Interpretation.

Whether income earned by an individual is employment income or business income is dependent on whether the individual is an employee or an independent contractor. Based on the information that you have provided, the income in question appears to be business income and therefore, we have provided our general comments with respect to business income. We note that the Indian Act Exemption for Employment Income Guidelines, which can be found on the CRA webpage at http://www.cra-arc.gc.ca/brgnls /gdlns-eng.html, only apply to employment and employment-related income.

Paragraph 81(1)(a) of the Act, together with paragraph 87(1)(b) of the Indian Act, exempt from tax “the personal property of an Indian or a band situated on a reserve”. For the purposes of the exemption, an Indian is defined in subsection 2(1) of the Indian Act as a person who is registered as an Indian or is entitled to be registered as an Indian. The courts have determined that income, including business income, is personal property for purposes of section 87 of the Indian Act. Therefore, business income earned by an Indian will be exempt from tax if it is situated on a reserve.

The determination of whether income is situated on a reserve, and thus exempt from tax, requires the identification and evaluation of factors connecting the income to a location on a reserve. In the case of a self-employed individual’s business income, the courts have established certain criteria as relevant connecting factors. For example, the place where a self-employed individual carries on his or her business activities, the place where major decisions affecting the business are made, the place where the payment is made, the type of business and nature of the work, the location of a fixed place of business and the location of books and records, and the residence of the business owner. These connecting factors will have different relevance and weight depending upon the facts of each case.

In the situation you have described, it appears that you are receiving income from two different sources: (1) income derived from the private practice, and (2) income derived from the contract work with XXXXXXXXXX.

Income derived from the private practice

To determine whether any particular stream of income earned by an Indian is exempt from tax under section 87 of the Indian Act, a connecting factors analysis must first be done to establish whether that income is situated on a reserve. 

Based on the information that you have provided, the factors connecting this income to the reserve are as follows:

*     The business activities are carried out at an office on the reserve.

*     All work-related decisions are made at the office on the reserve.

*     The business owner lives on the reserve.

*     The business books and records are kept at the office on the reserve.

Considering all of these factors, we are of the view that the income derived from the private practice would likely qualify as property situated on a reserve and thus would be exempt from tax under paragraph 81(1)(a) of the Act and section 87 of the Indian Act.

Income derived from the contract work with XXXXXXXXXX

Determining whether the above-noted income is exempt from tax is based on the factors that connect the income to a reserve. To establish a substantial connection between the income and the reserve, the courts have indicated that one must identify and evaluate all the relevant components of the business, including the quantity, quality, and nature of the services provided and to whom the services are being rendered. The courts have also indicated that with respect to business income, most weight must be attached to the business activity generating that income.

Based on the information you submitted, the following factors demonstrate only a weak connection to the reserve:

*     The business activities are carried out at XXXXXXXXXX off the reserve.
*     The majority of the clients whom the business serves live off the reserve.
*     XXXXXXXXXX as a client is located off the reserve. 
*     Most of the business decisions are likely made at XXXXXXXXXX off the reserve.

In the present situation, even though you live on a reserve and the overall administrative and bookkeeping activities take place on a reserve, this particular income arises solely from services provided off the reserve. Therefore, it is our view that the income derived from the business activities carried out at XXXXXXXXXX off the reserve would not be considered to be situated on a reserve and therefore would not be exempt from tax under paragraph 81(1)(a) of the Act and section 87 of the Indian Act.  

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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