2021-0879621E5 Artist & Section 87 of the Indian Act

Principal Issues: Is the income earned by an Indigenous artist exempt from tax under Section 87 of the Indian Act.

Position: It depends. The connecting factors test must be applied to determine if the business income is situated on a reserve.

Reasons: Business income earned in a year by an individual who is registered under the Indian Act, is exempt under section 87 of the Indian Act only if it is determined that the business income earned in that year is situated on a reserve.

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

XXXXXXXXXX                                                         Ann Townsend
                                                                                 2021-087962

May 19, 2022

Dear XXXXXXXXXX:

Re: Business income and the tax exemption under Section 87 of the Indian Act

This is in response to your correspondence asking whether the income earned by a musician/artist (Artist), who is registered or entitled to be registered under the Indian Act, is exempt from income tax under paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act.

You have provided us with the following information:

* The Artist is resident on a reserve;

* The Artist has an office and studio on-reserve;

* The Artist earns revenue from:

o concert performances both on and off-reserves;

o sale of music recordings (CDs) at both on and off-reserves concerts;

o royalties from the Society of Composers, Authors and Music Publishers of Canada (SOCAN) and a U.S. based music streaming service;

o small amount of sales of artwork created on-reserve and sold to customers both on and off-reserves;

o grants from the Canada Council for the Arts; and

o public appearances both on and off-reserves as a First Nation representative.

It is your view that the income from the sale of artwork that is created on a reserve is exempt from income tax. It is also your view that the income from CD sales on-reserve and concert performances that take place on-reserves is also exempt from tax. However, you are uncertain about the tax treatment of the income earned from royalties, CD sales, and concert performances that take place off-reserve.

Our Comments:

This technical interpretation provides general comments about the provisions of the Income Tax 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. 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 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Paragraph 81(1)(a) of the Income Tax Act together with paragraph 87(1)(b) of the Indian Act exempts from income tax the personal property situated on a reserve of an individual who is registered or entitled to be registered under the Indian Act. 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 courts have stated that the determination of whether income is situated on a reserve requires identifying the various factors connecting the income to a reserve and weighing the significance of each such factor. This is referred to as the “connecting factors” test.

The connecting factors test is a two-step analysis. First, potentially relevant factors that connect the property to a location are identified and then each factor is given weight in light of three considerations: the purpose of the income tax exemption, the type of property and the taxation of that property.

Income Tax Folio S4-F14-C1, Artists and Writers, (footnote 1) discusses the taxation of income by artists and writers from artistic and literary endeavours and is helpful in determining the type of income earned by the Artist and the taxation of that income. Folio S4-F14-C1 lists criteria that distinguishes whether an artist is earning business income or employment income. Generally, an artist is considered to be operating a business and earning business income when the activity is undertaken in pursuit of profit and there is objective evidence of business-like behaviour which supports that intention. Based on information you provided, the activities of the Artist indicate that they are operating a business and earning business income.

When applying the connecting factors test to business income, the courts have indicated that the most significant connecting factors (footnote 2) are:

* where the income earning activities of the business take place

* the type of business and the nature of the business activities

* where the management and decision making activities of the business take place

* where the customers are located

Other connecting factors (footnote 3) that the courts have found to be less significant are:

* whether or not the business owner lives on a reserve

* whether the business maintains an office on a reserve or take business orders from a location on a reserve

* whether the books and records are kept on a reserve

* whether the administrative, clerical, or accounting activities take place on a reserve

The above connecting factors are not exhaustive, since there are other potential connecting factors that could apply depending on the fact situation. In addition, a connecting factor will have different relevance and weight depending upon the specific facts of each case. As a result, there is no standard test that can be used to determine if business income is situated on a reserve. This can only be determined by a review of all the relevant facts at the end of each year and is beyond the scope of a technical interpretation. However, we can offer the following general comments to assist you in making that determination.

Based on the information you provided, the Artist lives on a reserve and has a strong personal connection to the reserve, which are factors that could be accorded weight in situating the business income to a reserve. However, these factors are generally not sufficient on their own to situate the business income to a reserve.

The fact that the Artist creates Indigenous music and artwork, is not a factor that should be given significant weight. The courts have cautioned that the availability of the exemption does not depend on whether the property is integral to the life of the reserve or to the preservation of the traditional way of life. (footnote 4)

As noted above, the location where the management and business decisions are made is a factor that is given significant weight in applying the connecting factors test to business income. For example, if the management and business decisions for the Artist such as the negotiation of the contracts for the concerts, are made on the reserve or if the music recordings are produced on the reserve, these factors may indicate a strong connection to the reserve and could situate the Artist’s income on the reserve.

The most significant factor in determining whether business income is situated on a reserve, is where the income-earning activities of the business take place. In this case, the Artist’s earns income from concert performances, CD sales, and public appearances and a small amount from the sale of artwork, all of which take place at locations both on and off-reserves. The Artist also earns royalties from SOCAN and a music streaming service, both of which are located off-reserve. Where a business’s income-earning activities take place both on and off a reserve, the business will be allowed to claim the income tax exemption on the portion of the income that is situated on a reserve (proration of the exemption). This proration usually applies to a business that earns income through the completion of specific tasks, to which specific income and expenses can be allocated.

You have also asked whether the grants received from the Canada Council of the Arts would be exempt from income tax. In general, it is our view that grants received by an Artist who is operating a business are included in business income under the Income Tax Act. Generally, the grants would be exempt from income tax to the extent that the related business income is exempt from income tax. If only a portion of the business income is exempt from tax, then the same portion of the grants will be exempt from tax.

We trust that these comments will be of assistance.

Yours truly,

Ms. Nerill Thomas-Wilkinson, CPA, CA
Manager
Non-Profit Organizations and Indigenous Issues
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 https://www.canada.ca/en/reven...

2 https://www.canada.ca/en/reven...

3 Ibid.

4 Par. 59 Tax Court of Canada, Dickie v The Queen, (2012 TCC 242)

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