2016-0663541E5 Dividends received by an Indian

Principal Issues: Are the dividends received by an Indian who is resident on a reserve exempt from tax?

Position: Question of fact.

Reasons: See discussion below.

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

XXXXXXXXXX
                                                                                                           2016-066354
                                                                                                           Ann Townsend
May 19, 2017

Dear XXXXXXXXXX:

Re:  Dividends Received from a Corporation located on a Reserve

This is in response to your letter of August 10, 2016, asking whether dividend income received by an Indigenous shareholder is exempt from income tax after both the shareholder and the corporation’s head office move to a reserve.  Additionally, you have asked whether the dividends will be exempt if they are paid from the equity accumulated while the corporation and the shareholder were located off-reserve.

OUR COMMENTS

This technical interpretation provides general comments about the provisions of the Income Tax Act (Act) and related legislation (where referenced). 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. Although we cannot comment on your specific situation, we are able to provide the following general comments that may be of assistance.

Paragraph 81(1)(a) of the Act together with paragraph 87(1)(b) of the Indian Act exempts from income tax the personal property of an Indian, as that term is defined in section 2 of the Indian Act, situated on a reserve. The courts have determined that for the purpose of section 87 of the Indian Act, income is personal property and is therefore exempt from income tax if it is situated on a reserve. The Supreme Court of Canada (SCC), in Williams v The Queen, (1992) 1 S.C.R. 877, 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.  This test is referred to as the “connecting factors” test.

In your incoming letter, you refer to the shareholder of the corporation as an Indigenous person. As noted above, the tax exemption available under the Indian Act only applies to an individual who is an “Indian” as defined in the Indian Act.  Not all Indigenous people meet this definition of Indian and qualify for the tax exemption.

In addition, section 87 of the Indian Act does not apply to corporations, even if they are owned or controlled by an Indian and are resident on a reserve. A corporation is treated as a separate taxpayer and is not considered an Indian for purposes of the exemption.  Therefore, the corporation described in your letter will be required to pay income tax on its taxable income regardless of where its head office is located.

If you meet the definition of Indian in the Indian Act, and if you are a shareholder of a corporation that operates only on a reserve, any dividends you receive from the corporation will be eligible for the tax exemption under section 87 of the Indian Act. This applies when the head office, management, and principal income-generating activities of the corporation that pays your dividends are situated on a reserve.

The location of a corporation’s head office or administrative offices on a reserve are factors that may be used to connect income to a reserve.  However, they are not sufficient, in and of themselves, to enable one to conclude that the dividends arising from the corporation’s business is connected to a reserve. The determination of whether dividends are situated on a reserve also requires the identification and evaluation of factors connecting the principal income-generating activities of the corporation that pays the dividend to a location on a reserve.  Some of the relevant factors that connect income-generating activities to a location have been identified by the courts as:

* the type of business and location of business activities;

* the location of customers of the business and where the payment was made;

* the nature of the work;

* the location where the management and decision-making activities affecting the business are made;

* the place where books and records are kept; and

* the residence of the business owners.

These connecting factors will have different relevance and weight depending upon the facts of each case. The courts have also stated that factors that are considered abusive or artificial will not be taken into consideration.

It is unclear from your letter whether the dividends will be considered to be connected to a reserve after the corporation relocates its head office to a reserve.  Therefore, we cannot comment on whether the dividends will be exempt from tax at that time.

You have also asked whether the dividends received by a shareholder from the equity accumulated while the corporation was not located on a reserve is taxable to the shareholder if the dividends are paid after the corporation and the shareholder both move to a reserve.  Based on the limited information in your letter, it appears that the corporation’s income that generated the equity to pay the dividends was earned off the reserve and there are no other factors indicated that would connect the dividends to a reserve. Therefore, the dividends would not be 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
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2017

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2017