Under the terms of the Canadian Indian Act, many First Nations residents have a unique tax relationship with the Canada Revenue Agency. If you are a First Nations resident wondering how to report your business income, it’s important to know what is taxed and what is exempt.
Business Income Earned on Reserve
If you operate your business entirely on a reserve, it is considered exempt from income tax.
For example, if you own a shop on a reserve, your business income is exempt from tax. This is true regardless of whether your customers live on the reserve.
Business Income Earned Off the Reserve
If you earn business income off the reserve, it is considered taxable in most cases.
For example, if you own a plumbing company and all of your customers live off the reserve, your income is taxable.
Business Income Earned On and Off the Reserve
In many cases, businesses earn income both on and off the reserve. In these circumstances, only the portion of business income related to the reserve is tax exempt.
For example, imagine you are a First Nation resident and own a landscaping company. You earn 50 percent of your money on the reserve and 50 percent working with clients off the reserve. In this situation, half of your income is taxable and the other half is tax exempt.
If your business is a fishing business, you can generally follow the rules outlined above to determine if your income is taxable or tax exempt. However, there is a notable exception.
If you are a member of a cooperative or band that has an important role in your fishing business and an important role in the economic life of the reserve, your fishing income may be completely exempt from taxes regardless of where you sell the fish. However, you also must do all of your fishing on the reserve or in waters near the reserve that have an important historical connection to the reserve.
For example, imagine you own a fishing business but are not a member of a band that plays an important role in your reserve. You sell a third of your fish on the reserve and two-thirds of it at a market off the reserve. In this case, only one-third of your income is tax exempt.
By contrast, if you own a fishing business and also belong to a band or cooperative as described above, all of your income is exempt regardless of where you sell your fish.
It’s important to note that the rules and exceptions outlined above are just guidelines. In many cases, situations do not have an obvious answer, and the CRA may take other factors into account.
For example, the CRA may also consider whether you live on a reserve, where your office is located, where your records are kept, and where your administrative, clerical and accounting activities take place. The CRA invites tax filers to call the agency directly with questions on this issue.