CRA: factors for tax exemption of fisheries business related income

Date: May 8, 2014

CANADA REVENUE AGENCY (CRA) POLICY RE: CONNECTING FACTORS REQUIRED FOR TAX EXEMPTION UNDER S. 87 OF INDIAN ACT OF BUSINESS RELATED FISHING INCOME FOR REGISTERED STATUS INDIANS OR BANDS/ORGANIZATIONS See CRA Website Reference: http://www.cra-arc.gc.ca/brgnls/stts-eng.html#hdng5 FISHING [Revised 2014-01-13] If you carry on a commercial fishing business, your income from that business is generally treated the same as any other business income. Determining whether your business income is exempt from tax is based on the factors that connect income to a reserve.

In determining whether your commercial fishing business income is connected to a reserve, factors that may connect your business income to a reserve are: (i)

the location of your fishing activities – catching, preparing and transporting the fish; and

(ii)

the location of your selling activities - including the location of your customers, and the location of the sale of the fish. Your income from a commercial fishing business is generally exempt from tax if the actual fishing activities of your business take place within the geographic boundaries of a reserve. If your fishing activities take place mainly offreserve and your customers are located off-reserve, your fishing income may not qualify for the exemption under section 87 of the Indian Act. However, other connecting factors, described below, may apply to exempt your fishing income from tax.

On March 20, 2012, the Federal Court of Appeal (FCA) released its decisions in the cases of Ron Ballantyne v. Her Majesty the Queen and Her Majesty the Queen v. Ronald Robertson and Roger Saunders (leave to appeal to the Supreme Court of Canada denied October 25, 2012). In both cases, the FCA found that the fishing income earned by the taxpayers was situated on a reserve and exempt from tax.

The CRA will apply these decisions in similar situations, where the connections between the reserve and the fishing income are bona fide and there is no artificial manipulation of the connecting factors, to exempt all of your fishing income from tax for the 2012 and following tax years.

A similar situation means that ALL of the following conditions are met:

(1) Your fishing activities in waters near or abutting the reserve have a significant historical and continuing important economic connection to the reserve; and (2) You are a member of a cooperative of band members or a member of a band that owns and operates an organization located on the reserve that has a predominant role in your fishing and selling activities and an important role in the general economic life of the reserve.

Where the above conditions are not met and your fishing and selling activities take place off-reserve, your income from fishing will likely be taxable. Where these activities take place both on- and offreserve, the tax exemption provided for under section 87 of the Indian Act may be prorated. Some of the revenue-generating activities may include preparing the fish for market (e.g., filleting, shelling, icing, canning, freezing, smoking, salting, cooking, and pickling). If this type of processing takes place on a reserve, part of your business income may be exempt, depending on the extent and complexity of the processing done.

The allocation of income between off-reserve fishing activities and on-reserve fish-processing activities is determined on a case-by-case basis and should be reasonable in the circumstances.

Since your main revenue-generating activities are catching and selling the fish, the exemption, if any, would usually apply only to that portion of your fishing income that specifically relates to the valueadded processing activities that are conducted on a reserve. Your business expenses are generally allocated in the same proportion as your revenues, unless another allocation is more reasonable in the circumstances.

Example 1 Grant is a self-employed Indian who lives on a reserve. The fishing activities of the reserve’s Band members in ocean waters near the reserve have a significant historical role in the life of the reserve.

Grant is a member of a cooperative of Band members that has a predominant role in the fishing activities on the reserve. Although he sells his catch to off-reserve customers, it is through the cooperative, whose on-reserve activities play a predominant role in the fishing activities of the Band members of the reserve. He keeps his boat and equipment on the reserve. He earns his income from fishing in the ocean waters near the reserve. Therefore, Grant’s fishing income is exempt because he meets all of the above conditions.

Example 2 Mike is a self-employed Indian fisher who does not live on-reserve. Mike fishes in waters near a reserve. Each season Mike leases his fishing license from an Indian organization that has an office on a reserve. Mike catches and prepares his fish off-reserve and stores his boat, equipment and supplies at his home off-reserve. Mike also sells his catch directly to off-reserve customers.

Therefore, Mike’s fishing income is taxable because his fishing and selling activities take place offreserve and he does not meet all of the above conditions.

NOTE: We will treat the income of an employee of your commercial fishing business according to the Indian Act Exemption for Employment Income Guidelines (http://www.cra-arc.gc.ca/brgnls/gdlnseng.html). If you have any questions or require more information, contact CRA: (Individuals) 1-800959-8281 (Businesses/Self-employed) 1-800-959-5525

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