2015-0585231E5 Business Income of Self-employed Indian Fishers

Principal Issues: Whether the fishing income of a self-employed Indian who lives on-reserve, keeps his books and records at his residence on-reserve, but fishes off-reserve, would be exempt from tax under section 87 of the Indian Act.

Position: Question of fact, but in the present situation, in the absence of any other connecting factors, the income would not be exempt from tax.

Reasons: The facts that the Indian lives on-reserve and the bookkeeping and accounting activities take place on-reserve are not in and of themselves sufficient to situate the income on-reserve.

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

XXXXXXXXXX                                2015-058523
                                                        Ananthy Mahendran
                                                        (905) 721-5204
October 20, 2015

Dear XXXXXXXXXX:

Re: Business Income of Self-Employed Indian Fishers

This is in response to your correspondence of April 28, 2015, regarding the tax treatment of business income earned by self-employed Indian fishers. We also acknowledge additional information you provided in subsequent telephone conversations (XXXXXXXXXX/Messore). Specifically, you would like to know whether the fishing income of a self-employed Indian who lives on-reserve, keeps his books and records at his residence on-reserve, but fishes off-reserve, would 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 IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

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. The type of property is important in identifying the relevant connecting factors. In this case, the property is fishing business income.

In the case of a self-employed Indian fisher’s business income, the courts have established certain criteria as relevant connecting factors in determining whether the income is situated on a reserve. In The Queen v. Robertson and 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 business activities from which the income arises.

In determining whether a self-employed Indian fisher’s commercial fishing business income is connected to a reserve, the factors that may connect the Indian’s business income to a reserve are:

*     the location of fishing activities - catching, preparing and transporting the fish, and

*     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, a self-employed 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.

Whether business income earned by an Indian fisher is taxable or exempt is a question of fact. However, the courts have established that the location of the residence and the location of the books and records are not considered to be decisive factors on their own merits in making a determination of whether or not the income earned by the self-employed fishers is situated on-reserve. In the present situation, it is not clear whether there are any other connecting factors, such as the ones described in the previous paragraphs, which may assist in locating the income on-reserve.

It is our view that the fact that the Indian lives on-reserve and the fact that the bookkeeping and accounting activities take place on-reserve are not in and of themselves sufficient to situate the income on-reserve. Thus, based on the information we have been provided and in the absence of any other connecting factors, the income derived from the fishing activities carried out off-reserve 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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