Skip Ribbon Commands
Skip to main content

Key Tips for Minimizing your Business Taxes: How to Get the Most Out of Section 87 of the Indian Act

01/08/2007


As a First Nations business owner, you operate under a unique set of tax guidelines: your income be subject to income tax unless you structure your business to minimize these taxes. That’s where Section 87 comes in.

Section 87 is a key provision of the Indian Act that exempts the personal property of an “Indian or Indian band” situated on a reserve from income tax. Since income you earn as a First Nations business owner is considered personal property, if possible, you should review your business arrangements to improve your position to make use of this exemption. To do this, you need to address the issue of whether your property is situated on a reserve.

The most significant factors connecting business income to a reserve are:

  • The location of your business activities;
  • The locations of your customers (debtors);
  • Where decisions affecting your business are made;
  • The type of business you have and the nature of your work;
  • The place where you make your payments;
  • The degree to which your business is in the commercial mainstream;
  • The location of your fixed place of business and the location of your books and records; and
  • Where you (the business owner) lie or reside.

To maximize your exemption, review each connecting factor to determine if there is a way you could strengthen your position, for example, by setting up an alternative business structure or arrangements.

In June of 1994, the Canada Revenue Agency (CRA) released guidelines that apply to employment arrangements. According to these guidelines, “Indians or Indian bands” are normally exempt from income taxes on employment income, including salaries, wages, bonuses, vacation pay, gratuities, honorariums, director’s fees, commissions and taxable allowances and benefits, providing you meet one or more of these conditions:

  • At least 90 per cent of your employment duties are performed on a reserve;
  • More than 50 per cent of your employment duties are performed on the reserve, and either you or your employer live on the reserve; and
  • When both your and your employer live on the reserve.

It is important to note that these guidelines are administrative in nature. The CRA may follow these guidelines in most cases, but they are not binding and do not have the force of law.

Always seek professional advice

Knowing how to properly structure your business to minimize taxes is a complex process that depends on the individual facts of each case. As guidelines are continually changing, it is important to note that the information contained in this article is general in nature and is based on information available when the article was written. Be sure to always seek advice from a professional business advisor.