For the first time, I have a client with SELF-employment income that might be exempt. She is a status Indian, and has an office on reserve. Where do I report the income? On a T2125? Or just a summary entry on the T90? When I enter values into the T2125, it shows up on line 13500 as taxable. When I enter the net income amount on the T90 (see below), it doesn’t “offset” the taxable amount - nothing changes. I’m wondering if the self-employment income should be reported at all. Any insight?
The way I’m reading this (https://www.canada.ca/en/revenue-agency/services/indigenous-peoples/information-indians.html#hdng4) it seems that you just don’t report it. That seem weird to me. If you have any other solution, I’d love to hear it!
I prepare a T2125 in the normal way, then deduct the net income at the bottom of the expenses as “Status Indian Exempt”. My client proposed the language.
In the past, they’ve used this for banking needs.
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That’s brilliant!
I have done this as well. Work for many indigenous individuals and
they need a complete business income for various reasons and the
banks/loan companies can add back the one line to get an accurate
picture of how well the business/rental is doing.
@Nezzer
#IndianExemptSelf-EmploymentIncome
Status Indians require income and expense general ledgers and financial statements for business grants, loans, subsidies, training programs, band support, banking and personal financial reasons.
CRA website
A great source of information from CRA is the following:
CRA call centre
When calling CRA Enquiries ask for the special Aboriginal specialty queue. They are trained in tax exempt documenting, recording, and reporting rules. The general queues are not.
Tax Exempt Tips
Any T4’s issued by such tax exempt businesses can also be tax exempt.
For tax review of such tax exempt indigenous income CRA requires the following:
- Identity Card
- Proof of location of business on valid tax exempt land. I have run into issues in the past were the treaty land boundaries were defined in terms geographic locations.
Comments…
When rivers and other features move over time this can be in dispute. A particular band near Fort McMurray, Alberta ending up building a new band building on historical land which was located a few yards outside of new but disputed band boundaries. This ended up in court. Many bands across Canada have disputes with both both Federal, Provincial, and Territorial governments of such boundaries and tax exempt status of specific locations. If in doubt, as for a ruling but do research into contested locations first. - Proof the sales transactions were conducted on tax exempt land and met all the tax exempt place of supply rules.
- Check the WCB / WSIB requirements and income reporting and make sure these match.
- Check the payroll requirements and eligibility.
- Check the tax exempt eligibility of off-reserve services provided.The terms of service and sale when tested against the CRA rules is king.
Comments…
Documentation is king.
Get documentation up front.
The ordeal of multi-year and multiple self-employed businesses CRA tax reviews and full audits can become a complete nightmare.
Check recent Tax Interpretations and other sources. This is an ever changing environment
Dr. Tax Reference.
https://support.drtax.ca/KB/faqs-windows-english/source/webpages/kpa310-20201130095214na.htm
Indian Act References
# 21 Things You Didn’t Know About the Indian Act Presentationhttps://www.youtube.com/watch?v=nnZGQ5qb_nw
#Indian Status
# About Indian status
# Information on the tax exemption under section 87 of the Indian Act
# Indian Act (R.S.C., 1985, c. I-5)
#CanLii Indian Act
https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-i-5/latest/rsc-1985-c-i-5.html
#Canadian Encyclopedia Indian Act
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Apparently not. This client has been in business for almost 2 years, and is funded through some government department I never knew before (NHIT? FNIH? Can’t remember the acronym). She has done no bookkeeping whatsoever, and gets paid for each patient/client she visits (mental health; counselling; etc). She reported nothing on her 2022 taxes, but wants to get everything done correctly and above-board.
After posting my question here and contacting a few other colleagues, I am getting mostly the same answer as @johanus or @neal - don’t report the exempt income (except on the T90) or make the T2125 net out to zero.
Before getting those answers, I suggested to my client that we simply not report the income and she disagreed. She has a colleague in another city doing the same type of work for the same government department, who says she reports it as “regular” income. Of course, when I asked my client what that meant, she had no idea, and suggested I was not a qualified accountant if I didn’t know. I suggested we could report the income as regular TAXABLE income rather than exempt income, and she got indignant - saying that would be disrespecting her First Nations heritage.
But the bigger question was whether the income could be considered Indian Exempt at all. Given that she meets clients mostly in their homes, or at restaurants and coffee shops, and mostly OFF-reserve, I said we needed more information, and asked her to ask her band office or the government funding agency if they could provide any insight. She did not like that idea. So, I did some research (very similar to what @dominique_dabolczi posted here), and provided the info to my client, highlighting the section re: “Connecting factors for business income.” Upon seeing that, she terminated my services and said she would find another accountant who knew more about this particular type of situation.
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Sounds like you were doing everything right, but she just didn’t like that some of her income is not exempt.
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