Starting or Growing your Business? Don’t forget to protect your assets and plan your tax future on or off-reserve.
This brief overview can help you consider whether on-reserve incorporation is right for your business.
If you are a Status Indian and act as Director of a corporation, plan to set up a company, or have a board/planned board with others who are Status Indian Directors, choosing the location of your Registered Office may be an important tax planning decision. Depending on the nature of the corporation’s work, you may be able to take advantage of the tax exemption rights allotted under the Indian Act. Thorough consideration of a number of factors may reveal that locating your Registered Office on a reserve is advantageous for you and your corporation. This article is meant to inform you of some factors to consider, however is not a comprehensive examination of this topic. You should consult a lawyer before taking the next steps with your business
This area of law has room to expand as Aboriginal business in Canada continues to grow exponentially, and more on-reserve business people seek clarification of relevant tax laws.
Why incorporate a company?
A business-owner’s decision regarding incorporation is driven by a range of factors. Conducting business as an individual or partnership exposes business owners to personal liabilities. As business grows, and the company deals with more clients, contracts, operations, etc., and potential liabilities can increase. When you are not incorporated, your personal assets (home, car, money, etc.) are directly available to be seized by creditors to satisfy a debt. A debt can arise from simple daily transactions with suppliers, or can result from lawsuit settlements and regulatory fines. When you incorporate a company to manage your business affairs, you separate your business from your personal assets and income reporting, effectively increasing protection for yourself against creditors – in other words, limiting your personal liability. Knowing when to incorporate can be very important to your overall bottom line – you should talk to a lawyer about your specific situation and other considerations to know whether incorporation is right for you.
What does it mean to incorporate a company on-reserve?
The physical location of a company’s Registered Office is effectively the corporation’s location for the Registry of Joint Stock Companies. Often work will take place at other locations as well, however certain legal requirements apply to the Registered Office, and every corporation has one. A Registered Office is the place where company records are to be kept, made up to date, and be available for viewing by interested parties.
Incorporating on-reserve – some things you should consider:
First of all, incorporating a company on-reserve can be done through federal (CBCA) or provincial (NSCA) legislation. Deciding whether to incorporate federally or provincially requires an examination of your specific business needs. Secondly, on-reserve corporations are subject to some extra laws, including those under the Indian Act and its interpretations (including one which has decided that an on-reserve corporation does not have status as a legal person for the purposes of the Indian Act); and are also subject to any applicable bylaws created by the relevant band council. The band council of the relevant reserve has the ability to make some bylaws which affect business on-reserve, which can be a significant deterrent to incorporating on-reserve, as it leaves the regulatory landscape open to new rules which are not subject to the traditional legislative process – this could be detrimental or beneficial to an on-reserve corporation, depending on the band council’s attitude toward business on-reserve. If you ever choose to incorporate on a reserve, it is important to request copies of any/all relevant bylaws and keep abreast of new ones as they come into force. Other potential implications of on-reserve business should also be more deeply investigated should you decide to go this route. Don’t forget that band council decisions must be reasonable and you may be able apply to a court to get judicial review of a band council’s decision when it has affected you unfairly. Finally, the most attractive aspect of doing business on reserve is to benefit from the Indian Act tax exemption for Status Indians whose property is located on-reserve. For this, your corporation will deal with Canada Revenue Agency.
Is incorporation right for your business?
Does your corporation have a Status Indian Director(s)? Does its business take place on-reserve, and/or is it otherwise beneficial to First Nations/the relevant reserve? Does your business have a sufficient “nexus” in relation to First Nations? In order to answer these questions, you’ll need to have a close look at your business’ circumstances, along with legal definitions and Tax Court of Canada interpretations of on-reserve business scenarios. For this part of the decision, you should consult a lawyer.
The case law has decided that the on-reserve property tax exemptions granted by the Indian Act are essentially there to help preserve traditional living for on-reserve First Nations. The supporting principles have been interpreted so far as to allow First Nations businesses/individuals to arrange their affairs on-reserve so as to avoid tax – but the exemption is quickly limited by requiring a sufficient nexus between the work done by a business and the First Nation community. A nexus can be established if the corporation’s business benefits the community directly, and/or a significant amount of the organization’s work takes place on the reserve.
If you decide to incorporate on-reserve and claim the exemption, but engage in business without a sufficient nexus, you may end up in court trying to defend your relationship to the community and could be liable for fines or retroactive taxes.
There are options:
Incorporating on-reserve and claiming the property tax exemption might not be right for you right now – but can be other advantages to situating your business on reserve.
For example, you could incorporate on-reserve but not claim the exemption, or you could claim it just for “nexus” work if relevant. This option would require deeper investigation and careful accounting to support a structure in which corporate property subject to the exemption would be claimed separately from non-exempt corporate property (again it would only be the portion relevant to nexus work). This option could get very complicated, and should be carefully considered with the help of a lawyer and accountant.
Note that regardless of where you incorporate, you may be able to offer HST-exempt services to rightfully exempt on-reserve businesses paying you for your services. And keep in mind, a Registered Office can be changed periodically – to adapt to your business needs.
Personal property income tax exemption for income from the on-reserve corporation:
Whether a Status Indian Director or employee of an on-reserve corporation lives on or off-reserve will play a role in the availability of the property tax exemption to his/her personal income from the tax-exempt corporation. In a Tax Court case regarding an on-reserve corporation without a sufficient nexus, great efforts were made by the Status Indian Director to appear to be living and working on-reserve (she had a house with an office and claimed to be living there much of the time) – and she was found to be outside of the right to claim the exemption. Individuals should seek accounting and/or legal advice, specifically in relation to the relevant tax exemptions for personal income of Status Indians.
Find the solution that is right for your business
Your business has endless potential. It is up to you to strategically plan the future in order to maximize success. Two important aspects of this strategy include tax planning and protection against liabilities – among many others. While you dream big and do great things, take some time to cover these important bases for your business.
Contact Natalie at 902.240.4080 or by email at firstname.lastname@example.org.