By Heather Exner-Pirot
This month we interview Keith Fonstad CPA, CA, the Provincial Director for MNP Saskatchewan’s Indigenous Services and a board member with the Saskatchewan First Nations Economic Development Network.
HEP: What is a First Nations-owned business?
KF: Saying your business is First Nations-owned has different implications for different contexts. For procurement purposes, for example at a mining company or for a government purchaser, the standard definition is usually 50%+ First Nations ownership, which implies majority voting rights.
But for taxation purposes, there is really no set standard as the ownership itself is only a small part of the story. The Indian Act provides an exemption from taxation for an ‘Indian’ or an ‘Indian Band’. Therefore, the exemption doesn’t typically apply to a business that is incorporated, which many will be to protect against liabilities. If an incorporated business is owned directly by a First Nation community which operates similar to a municipality, and the income generating activities occur within their reserve boundaries, for example the local gas station and store, the corporation can be tax exempt as a result of a provision in the Income Tax Act. The Indian Act taxation exemption may apply to sole proprietorships or unincorporated businesses which are resident on-reserve, and for employees of businesses which are First Nations-owned and connected to a reserve.
HEP: What are the income tax and other financial implications of being First Nations?
KF: Income tax implication don’t apply to all First Nation individuals and businesses, but rather only individuals or ‘Bands’ who are registered status as defined in the Indian Act.
As an employee, your employment income needs to be ‘situated on a reserve’ to be tax exempt. To know if your employment income may qualify there are general guidelines that the Canada Revenue Agency issued in 1994 that you can refer to. However, in general you must meet two of the following three criteria: 1) live on reserve as an individual; 2) work on-reserve; and/or 3) have your employer ‘resident’ on-reserve. These employment income factors can occur on different reserves and you do not have to be a member of those particular reserves, but in all cases you do have to have Indian status.
Whether a proprietorship or your employer meets the threshold of resident on-reserve is tied to many factors. This is often referred to as “mind and management”: where decision-making takes place, such as owner or Board of Directors meetings; accounting functions; office location; where employees are hired and payroll processed; where you have your mail box and telephone number; and where you store equipment. The more of those factors you can tie to being on-reserve, the stronger your position. The CRA assesses this on a case by case basis.
As an example, if a business owner works in Fort MacMurray and has a mobile truck with their welding unit, they primarily perform work duties off-reserve. But if they drive back and forth to the reserve; store their equipment when not in use on-reserve; and have their mailing address, banking, books and receipts done from an office located on-reserve, then they could qualify as tax exempt.
That said, it is not enough to just have a mailing address, or even rent an office, for example in a co-working space on an urban reserve.
For an employee or a proprietor, income exemption is not all or nothing. You can pro-rate your income based on the time spent and or income earned being physically on-reserve as it applies to paying tax. So if you are a lawyer that works for a non-First Nations firm off-reserve but you spend significant hours working for a client on-reserve, those hours can become tax exempt.
HEP: Are there any tax considerations other than income tax?
KF: As a for-profit business, you are required to collect and pay GST and PST. But delivery of goods or services on-reserve may be exempt, and would be exempt for status individuals and the First Nation itself. That’s why you often see delivery of vehicles on urban reserve land, for example. The GST/PST exemption applies to services too, not just goods.
Businesses on-reserve can also apply to get embedded taxes back if they can prove they sold product to a status Indian. The business will take off the appropriate taxes for status Indians at the point of purchase, and then apply to get a rebate from Saskatchewan Finance. This is most common with tobacco and gasoline. The business will usually charge a fee for this process. So a $0.15 gasoline tax might result in an $0.11 discount to the customer and $0.04 to the business for the administration. The wholesalers deliver the good with the tax already embedded. We are waiting to see what happens with the carbon tax – under the legislation it is called a fee, not a tax, so there is currently no mechanism to exempt First Nations.
HEP: What do First Nations entrepreneurs need to do to ensure they maximize tax benefits?
KF: Start with a self-assessment tool or talk to a professional accountant. It’s not a clear-cut answer – there are many factors that may go into making that decision.
For sole proprietors or any other individual, even if you live and work on-reserve, we recommend you file an annual tax return to get particular benefits like EI, CPP, child tax benefits, and the new carbon credits. There is no financial downside to doing it, though I understand it’s a personal and political decision for some to not do it.
As a business owner, you are responsible for knowing the effects of taxation policies on your employees. You need to provide this information to your employees to ensure you remit the right amount of taxes on their behalf. You need to protect yourself by making sure your employees are given the right options.
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The SFNEDN does not endorse any particular businesses, however for information purposes, we are sharing the MNP taxation self-assessment tool available for free online HERE.