2016-0675631I7 Interest earned on Common Experience Payments

Principal Issues: Whether interest income earned on Common Experience Payments is exempt from tax.

Position: Question of fact.

Reasons: The income is not exempt on the basis that the investment is funded with CEP, but may be exempt if the income is otherwise sufficiently connected to a reserve.

Author: Meers, Rob
Section: 81(1)(a) Income Tax Act; 87 Indian Act

                                                                                                               March 27, 2017

Individual Returns Directorate                                                                Income Tax Rulings Directorate
Assessment, Benefit, and Service Branch                                             Business and Employment Division
Rm E06-625B, 750 Heron Road                                                            Rob Meers
Ottawa ON  K1A 0L5                                                                              (613) 670-9037

                                                                                                               2016-067563
Attention: Stephanie Melin
Senior Programs Officer
Legislation Section
Program Support and Services Division

        Interest earned on Common Experience Payments

This is in response to your request dated November 10, 2016, wherein you asked for our comments as to whether interest income earned on investments funded by Common Experience Payments (“CEP”) is exempt from tax.

As part of the Indian Residential Schools Settlement Agreement (“Settlement Agreement”), eligible former students of Indian Residential Schools were entitled to CEP’s. Some individuals may have also received payments under the Independent Assessment Process (“IAP”). CEP’s and IAP payments are not taxable under the Income Tax Act (the “Act”). However, any interest income earned on the investment of the CEP will be subject to general income tax rules, including consideration of the tax exemption in section 87 of the Indian Act.

Generally, Indians, as that term is defined in section 2 of the Indian Act, are taxable in Canada on the same basis and in the same manner as non-Indians. However, 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 situated on a reserve. The courts have determined that for the purpose of section 87 of the Indian Act income, including interest 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, 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 the Estate of Rolland Bastien v. The Queen, 2011 DTC 5118, and Dubé v. The Queen et al, 2011 DTC 5120 (“Bastien and Dubé), and found that their 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 (i.e.: 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 CRA’s website was updated in 2011 to explain that interest income earned by an Indian is exempt 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 a question of fact whether there are sufficient connecting factors to situate an individual’s interest income on a reserve. If the only connecting factor is the CEP, that, in and of itself, would not be sufficient to connect the interest income to a reserve. We do not have sufficient information to comment further on the specific situation.

As part of your submission, you also asked us to comment on a letter you received from an Indigenous group stating that interest income received by one of their members is exempt from income tax. They noted that the invested money originally came from the member’s CEP. The group also referenced a document they included in their submission that states:
 
“The Federal Representative will recommend to the Deputy Prime Minister that the Minister of Finance designate that the Designated Amount be entitled to earn interest pursuant to Canada’s policy applicable thereto; any interest would be added to the Designated Amount.”

It appears that their position is that the Designated Amount is the member’s CEP. Upon doing some research, we have determined that the document in question is the Agreement in Principle that preceded the Settlement Agreement.

The Designated Amount is a defined term in both the Agreement in Principle and the Settlement Agreement. It is defined in the Settlement Agreement to be $1,900,000,000 less any amounts paid by way of advance payments, if any, as at the Implementation Date. The Designated Amount is to be held in the Designated Amount Fund to be allocated in the manner set out in Article Five of the Settlement Agreement (Common Experience Payment).

Essentially, the Designated Amount is the amount set aside to pay the CEP’s and is not the CEP’s themselves. Therefore, the reference they provided has no impact on the taxation of the interest earned on an invested CEP.

We trust that these comments will be of assistance.

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. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

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

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