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

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 take 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

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

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

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.

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 dealt 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

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.

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.

If you earn 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.