20 December 1996 External T.I. 9634785 - INTEREST INCOME OF INDIAN FROM ON-RESERVE BANK BRANCH

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

The tax treatment of interest income of status Indians. This is a follow-up letter to our letter in file 912516, which provided our "pre-Williams" views on the taxation of interest income.

Position TAKEN:

Based on Williams, the location of a bank account on a reserve would not, in itself, be sufficient to exempt the interest income earned thereon. There could be other factors that would connect the income to a location off reserve. In Recalma, the Tax Court noted that the income stream for bankers' acceptances and managed funds started with companies that were located off reserve, and it was held that the investment income of the taxpayer was not personal property situated on a reserve. Rather, the income was earned in the economic mainstream.

Reasons FOR POSITION TAKEN:

In determining whether the income earned by an Indian is situated on a reserve, and thus exempt from taxation, the approach taken by the Supreme Court of Canada in Williams must be followed. This approach requires the examination of all factors connecting income to a reserve to determine if the income is located on the reserve.

									7-963478
XXXXXXXXXX							M. Azzi

Attention: XXXXXXXXXX

December 20, 1996

Dear Sirs:

Re: Interest Income of Status Indians

It has recently come to our attention that, in a letter dated October 10, 1991 (copy attached), we provided you with our views on the tax treatment of interest income earned by status Indians on bank accounts located at the XXXXXXXXXX. The purpose of the present letter is to advise you that, in light of the decision of the Supreme Court of Canada in Williams v. Her Majesty the Queen (92 DTC 6320), the Department has had to review its interpretation of the scope of the exemption from income taxation provided under the Indian Act and that, consequently, the position in our 1991 letter is no longer valid.

In general terms, it is section 87 of the Indian Act, along with paragraph 81(1)(a) of the Income Tax Act, that establish the exemption from taxation for status Indians. Section 87 of the Indian Act exempts from taxation the personal property of an Indian situated on a reserve, and the courts have previously concluded that the reference to personal property in section 87 includes income.

However, in determining whether the income earned by an Indian is situated on a reserve, and thus exempt from taxation, the approach taken by the Supreme Court of Canada in Williams must be followed. This approach requires the examination of all factors connecting income to a reserve to determine if the income is located on the reserve. The Supreme Court also indicated that the ultimate question is to determine to what extent each connecting factor is relevant in determining whether taxing the particular kind of property in a particular manner would erode the entitlement of an Indian to personal property situated on a reserve. One general direction provided in Williams was that "an overly rigid test which identified one or two factors as having controlling force ... would be open to manipulation and abuse." The Supreme Court rejected the situs of the debtor test as the sole test for determining whether the personal property of an Indian or band was situated on a reserve.

Based on Williams, it is our view that the location of a savings account on a reserve would not, in itself, be sufficient to exempt the interest income earned thereon. Where a bank account is considered to be situated at a location on reserve, this is one factor to weigh in determining whether interest earned on deposits in that account is exempt from taxation. There could be other factors that would connect the income to a location off reserve.

In the recent case of Arnold Recalma v. Her Majesty the Queen (94-1971(IT)G), the Tax Court of Canada considered the taxability of income earned by an Indian living on reserve, from investments purchased from an on reserve branch of a bank. The securities were bankers' acceptances and managed funds. It was noted by the Court that the income stream for such financial instruments started with companies that were located off reserve, and it was held that the investment income of the taxpayer was not personal property situated on a reserve. Rather, the income was earned in the economic mainstream.

In conclusion, in our view, the fact that a status Indian's funds were deposited in a bank account at the XXXXXXXXXX branch (or in any other on reserve branch of a financial institution) is not sufficient to establish that the interest earned on the funds is exempt. This determination would require a review of all relevant connecting factors specific to each investor, such as the source of the funds invested, the investor's residence, the location of the bank branch, and the nature and location of the investment instrument(s). Individual investors can request confirmation from the Department of the taxability of income earned on their investments.

We trust that our comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch