2016-0632951I7 Indian Tax Exemption - Investment Income

Principal Issues: Is the investment income earned by an Indian from mutual funds purchased at a bank branch located on a reserve exempted from tax?

Position: No

Reasons: Bastien and Dube

Author: Townsend, Ann
Section: 81(1)(a)

Tera Capps
Manager, Policy and Program Support Section
Non-filer and Non-resident Division
Individual Compliance Directorate
395 Terminal Ave
5th Floor, 5033                                                                                                                             Ann Townsend
Ottawa, Ontario  K1A 0L5                                                                                                            2016-063295

August 9, 2016

Dear Ms. Capps,

This is in response to your email dated February 19, 2016, requesting our comments on whether the decisions of the Supreme Court of Canada (SCC) in the Estate of Rolland Bastien v. The Queen, 2011 DTC 5118, and Dubé v. The Queen et al, 2011 DTC 5120, applies to investment income earned from mutual funds purchased at the branch of a bank located on a reserve.  You have requested our comments in the context of a particular taxpayer who is an Indian, as that term is defined in section 2 of the Indian Act, who has earned investment income from the mutual funds.

Paragraph 81(1)(a) of the Income Tax Act (the “Act”) together with paragraph 87(1)(b) of the Indian Act exempts from income tax the personal property of an Indian situated on a reserve. The courts have determined that for the purpose of section 87 of the Indian Act income, including investment income, is personal property and is therefore exempt from income tax if it is situated on a reserve. The SCC, in Williams v. The Queen, 92 D.T.C. 6320, has 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.

On July 11, 2011, the SCC released its decisions in the cases of Bastien and Dubé and found that interest income from fixed rate term deposits was personal property of an Indian situated on a reserve and exempt from tax. The facts in Bastien and Dubé concerned interest income earned from fixed rate term deposits purchased from caisse populaires located on a reserve. Each of the financial institutions involved had only one physical location, which was on a reserve. The substance and the form of the term deposits tied the interest income to a reserve since the interest income resulted from a contractual obligation to pay set sums of money on a reserve, under a contract entered into on the reserve with an institution located on that reserve. Bastien and Dubé suggested that the following connecting factors should be present to connect the investment income to a reserve:

*     Contract entered into on a reserve (ie:, acquisition of the interest-bearing investment instrument on a reserve);

*     Payment of interest on a reserve (place of performance); and

*     Location of debtor (issuer) on a reserve.

The Canada Revenue Agency’s (CRA) website was updated following the Bastien and Dubé cases to advise that the CRA will apply the SCC decision to interest income that is earned in similar situations where all of the following conditions are met:

1.    the interest income is from a savings or chequing account, or from a term deposit or guaranteed investment certificate (GIC);

2.    the savings or chequing account, or the term deposit or GIC, was obtained at a financial institution (including a bank branch) located on a reserve;

3.    the financial institution is required to pay the interest income at a location of the financial institution on a reserve; and

4.    if the investment is a term deposit or GIC, then the interest rate is fixed or can be calculated at the time the investment was obtained.

It is our understanding that the mutual funds in your situation were purchased from and the accounts managed by XXXXXXXXXX (the issuers) neither of whom are resident on a reserve. Their products are sold through the branch of the bank with which they are affiliated but this does not make the issuer resident on a reserve. The mutual fund managers are located at the bank’s head office or other locations that are not on a reserve and the investment income earned is not at a fixed rate but is reliant on the fund’s performance and investment decisions made by the mutual fund managers. Generally, the purchase of a unit in a mutual fund is not considered to result in a contractual obligation to pay set sums of money. The income-generating activities of the mutual funds, which entirely determine the rates of return of the investors, were in general commercial markets off the reserve. As a result, it is our view that the investment income earned from these mutual funds does not have the same factors connecting it to a reserve that the SCC found connected the interest income to a reserve in the Bastien and Dubé cases. Therefore, we agree with your view that the investment income is not situated on a reserve and exempt from tax.

There may be two other factors that would support your assessment for which we have insufficient information.

First, as far as the place of performance, it is unclear where the dividends and proceeds of disposition are being deposited. They may be paid to the taxpayer by cheque, or deposited directly into the taxpayer’s bank account at the branch, or at any other financial institution, or into the taxpayer’s brokerage account and reinvested. Given that the brokerage firms are not considered resident on a reserve it is doubtful that accounts held with a brokerage firm would be considered resident on a reserve even if opened on reserve through the bank branch. Bank branches have specific legislation that deems a deposit account in the bank, for all purposes, to be situated at the place where the branch of account is situated. If possible, we recommend that you gather more information about the place of performance.

Second, you were advised by the taxpayer that the mutual funds were purchased at the branch of a bank located on a reserve. If possible, we recommend that you gather more information about where the contracts were entered into. It is not clear to us that trades over the internet or phone would be considered to have been entered into on a reserve.

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. A severed copy will also be distributed to the commercial tax publishers, following a 90-day waiting period (unless advised otherwise to extend this waiting period), for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be e-mailed to: ITRACCESSG@cra-arc.gc.ca. In such cases, a copy will be sent to you for delivery to the taxpayer.

We trust these comments will be of assistance.

Yours truly,

Roger, Filion, CPA, CA
Manager
NPO and Aboriginal Issues Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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