How are business and investment income exempted under the federal Indian Act?

by TurboTax•1• Updated 1 week ago

If you are First Nations, Inuit, or Métis person residing in Canada, you are subject to the same tax rules as any resident of Canada unless your income is tax-exempt* under section 87 of the federal Indian Act. To continue receiving your benefit and credit payments, you need to file a tax return, even if your income is tax-exempt or you had no income at all.

The CRA has guidelines and detailed background information, based on court decisions, for applying the tax exemption for status Indians under the Indian Act.* Here's a summary of the tax exemption rules for status Indians regarding on-reserve business (self-employment) and investment income. For more information about Indian status, see Are you entitled to Indian status. For examples from the CRA on applying these guidelines, see Business income and Interest and investment income.

*The term Indian is used here because of its legal applicability under the federal Indian Act.

Business income

When is business income of a status Indian exempt?

Your business income is exempt from tax if it’s situated on a reserve. Determining that involves reviewing the various factors connecting the income to a reserve, (the connecting factors test). The most significant connecting factors are:

Where the business takes place
The type of business and its activities
Where the management and decision-making occurs
Where the customers are located

Other minor connecting factors are:

Whether you live on a reserve
Whether there's an office or office work, or order-taking occuring on a reserve
Whether your books and records are kept on a reserve
Whether your administrative, clerical, or accounting activities take place on a reserve

How is partnership income reported?

If you are a member of a partnership, your partnership income will be taxed in the same way as any other business income. Under the Income Tax Act, partnership income is calculated first, and then your share of the partnership income is allocated to your self-employment income.

How is fishing income reported?

Your fishing income is generally treated the same as any other business income. It is generally exempt from tax if the actual fishing activities of your business take place within a reserve. Again, tax exemption is based on the factors that connect the income to a reserve:

The location of your catching, preparing, and transporting the fish
The location of your selling activities, including the location of your customers, and the location of the sale of the fish

How is farming income reported?

Similar to any other business income, if your farming activities take place:

On a reserve, your farming income is generally tax-exempt
Mainly off reserve, your farming income isn't exempt.

Some connecting factors are, the location of:

The land where your crops are grown or harvested - if you are a grain, vegetable, or fruit farmer
Your rangeland - if you are a cattle rancher
Your farmland - if you are involved in other types of farming, depending on the nature of your business and the facts of your case

If some of your farming activities take place off reserve, the exemption may be prorated.

Investment income

How is investment income reported?

The CRA considers interest income to be tax-exempt if all these conditions apply:

The interest income is from a savings or chequing account, or a term deposit or guaranteed investment certificate (GIC).
You deal with a financial institution (including a bank branch) located on a reserve.
The financial institution is required to pay the interest income to you at their location on a reserve; and
For a term deposit or GIC, the interest rate is known when you obtain the investment product

How is investment income earned from mutual funds reported?

In general, mutual fund managers are located at the bank’s head office or other locations that aren't on a reserve and the investment income earned isn't at a fixed rate. Thus the investment income generated from a mutual fund usually isn't exempt from tax.

How is dividend income reported?

If you are a shareholder of a corporation that operates only on a reserve, any dividends you receive from the corporation will be tax exempt.

How is rental income reported?

If you earn rental income on a reserve from your on-reserve property, your income will be exempt. However, rental income from movable property that you store on a reserve but rent out off the reserve, for use off the reserve, is taxable.