2002 Ruling 2002-0127663 - TAXATION OF INDIAN TRUST

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

(1) Whether the Band is a public body performing a function of government; (2) Whether the receipt of the Settlement Funds is taxable; (3) Whether subsection 75(2) will apply to the Trusts' income; (4) Whether subsection 105(1) or subsection 107(4.1) will apply to certain distributions made by the Trust to the Band's members; (5) Whether paragraph (a) of the definition of "cost amount" in subsection 108(1) would apply to determine the adjusted cost base of the capital interest disposed of on such distribution; (6) Whether subsection 107(2) will apply to any distribution of property by the Trust to the Band; (7) Whether amounts held in trust for minors will be deemed payable in the year by virtue of subsection 104(18) of the Act.

Position:

(1) Yes; (2) No; (3) Yes; (4) Subsection 105(1) will not apply; Subsection 107(4.1) will however apply; (5) Yes; (6) Yes, subject to subsections 107(2.001), (2.002) and (4) to (5); (7) Yes.

Reasons:

(1) The Band is involved in negotiating a treaty settlement with Canada and will continue to be involved in its implementation and administration. The Band is actively involved in the community and provides extensive services and programs; (2) Compensation paid to the Band is in respect of the loss of their interest in traditional lands. Could be considered as non-taxable damages or, arguably, Indian property pursuant to paragraph 90(1)(b) of Indian Act as it appears to be paid in lieu of treaty rights. Alternatively, may be considered income to the Band, which is exempt under par.149(1)(c); (3) The Band will be considered to constructively received the Settlement Funds and contributed them in the Trust. The property of the Trust may revert to the Band and may be distributed in accordance with the Bands direction on consent; (4) Where subsection 107(2) or (2.1) applies to a distribution, there is no benefit for the purposes of subsection 105(1). Subsection 107(4.1) applies in respect of the per capita distribution to all Members. The distribution will be in satisfaction of their capital interests in the Trust and all other conditions of 107(4.1) are met; (5) The reference in 107(1)(a)(ii)(A) to the cost amount immediately before the disposition of the capital interest refers to the amount determined under paragraph (a) of the definition of "cost amount" in subsection 108(1) as there has been a distribution of property by the trust; (6) The trust is a personal trust and the distributions are made to beneficiaries of the Trust; (7) All of the requirements of subsection 104(18) have been met.

XXXXXXXXXX 2002-012766

XXXXXXXXXX , 2002

Dear Sirs:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX (the "First Nation") (XXXXXXXXXX)

This is in reply to your letter of XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge the additional information you provided in your correspondence of XXXXXXXXXX and during our various telephone conversations in connection with your request.

To the best of your knowledge, and that of the taxpayer involved, none of the issues contained herein is:

(i) dealt with in an earlier return of the taxpayer or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate; or

(v) before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired.

The following documents were submitted in conjunction with the ruling request:

a) a copy of the XXXXXXXXXX,

b) a copy of the XXXXXXXXXX,

c) copies of several by-laws which have been passed by the First Nation pursuant to section 83 of the Indian Act, and

d) a partial copy of the First Nation's zoning by-law pursuant to section 81 of the Indian Act.

In this letter, unless otherwise expressly stated:

(a) "Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, and unless otherwise stated, every reference herein to a section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) "Adjusted Taxable Income" is defined by the Trust Agreement as taxable income, as defined in the subsection 2(2) of the Act before the application of subsection 75(2) of the Act, less any income attributed to the settlor under subsection 75(2) of the Act. This definition applies in determining the order in which distributions to the First Nation for First Nation Programs and Services are to be made. Such distributions are to be made first out of Adjusted Taxable Income;

(c) XXXXXXXXXX;

(d) "Canada" means Her Majesty the Queen in right of Canada as represented by the Minister of Indian Affairs and Northern Development;

(e) "Chief" means the chief of the First Nation;

(f) "Compensation" means the cash payment(s) owing to the First Nation by Canada and deposited from time to time by Canada into the Trust Account pursuant to XXXXXXXXXX of the Settlement Agreement;

(g) "Council" means the council of the First Nation, which is a "council of the band" as defined in the Indian Act;

(h) "First Nation" means the XXXXXXXXXX;

(i) "First Nation Programs and Services" are defined in XXXXXXXXXX of the Trust Agreement as the programs and services for the benefit of the beneficiaries including, but not limited to, such matters as capital improvements and infrastructure, economic development, recreation, and the development of cultural and traditional programs, to be ultimately administered by the First Nation and may include per capita distributions to the Members;

(j) "Member" means a person whose name appears or is entitled to appear on the Band List, within the meaning assigned by section 8 of the Indian Act, of the First Nation;

(k) "Net Annual Income Available for Distribution" is defined in the Trust Agreement as all of the net annual income earned in respect of the Trust Property in each Fiscal Year computed in accordance with generally accepted accounting principles adjusted to exclude unrealized foreign exchange gains or losses; less, such further or other sums in each Fiscal Year as the trustee in the trustee's absolute discretion considers to be proper allowances, deductions, disbursements and/or outgoings in accordance with generally accepted accounting principles; and less, without limiting the generality of the foregoing, such sums in each fiscal year as the trustee in the trustee's absolute discretion determines to set aside to set up reserves for municipal, income and other taxes, assessments, insurance, repairs, depletion, depreciation, obsolescence and for such other purposes as the trustee determines";

(l) "Reserve" means reserve as defined in subsection 2(1) of the Indian Act;

(m) "Settlement Agreement" means the agreement between the First Nation and Canada dated for reference the XXXXXXXXXX;

(n) "Settlor" means the settlor of the Trust, being the First Nation;

(o) "Trust" means the trust established pursuant to the Trust Agreement;

(p) "Trustee" means a trust company duly incorporated and licensed to carry on the business of a trustee in XXXXXXXXXX, and which is a member institution of the Canadian Deposit Insurance Corporation, from time to time, appointed to act as trustee of the Trust, and shall include the initial trustees where the context requires it;

(q) "Trust Account" means the account into which Canada shall deposit the Compensation pursuant to the Settlement Agreement;

(r) "Trust Agreement" means the XXXXXXXXXX between the First Nation and the initial trustees, which is subject to ratification vote in accordance with XXXXXXXXXX of the Settlement Agreement; and

(s) "Trust Property" means the Compensation owing to the First Nation by Canada and settled upon the Trust at the direction of the First Nation pursuant to the Settlement Agreement and shall include, unless otherwise provided for, any and all assets of any kind in which those monies may be invested by the Trustee, or into which they may be converted by the Trustee, at any time or from time to time, as well as any additions or accruals thereto, including all revenue and income earned.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Facts:

1. The First Nation is an Indian band as that term is defined in subsection 2(1) of the Indian Act. XXXXXXXXXX.

2. The First Nation's reserve is located XXXXXXXXXX The First Nation has approximately XXXXXXXXXX Members, of which XXXXXXXXXX reside on the reserve.

3. The mailing address of the First Nation is XXXXXXXXXX. The First Nation files its returns at the XXXXXXXXXX Tax Centre and is located within the area serviced by the XXXXXXXXXX Tax Services Office.

4. The First Nation has exercised powers authorized under section 81 of the Indian Act and has passed and is presently enforcing by-laws relating to, inter alia: regulation of traffic; construction and repair of buildings; activities regarding children under the age of 16; disposal of garbage and waste; placement and maintenance of traffic signs on roads; observance of law and order and for the prevention of disorderly conduct and nuisance; and regulation of the use of public wells, cisterns, reservoirs and other water supplies. These by-laws have been in place for XXXXXXXXXX years.

5. The First Nation has exercised powers authorized under section 83 of the Indian Act and has passed a property tax by-law which has also been in effect for XXXXXXXXXX years and, under which, the First Nation is presently assessing taxes. The Minister of the Department of Indian Affairs and Northern Development approved this bylaw in XXXXXXXXXX.

6. The First Nation has received an Order-in-Council authorizing the First Nation to have an Indian Band Revenue Moneys Order, which authorizes the First Nation to control, manage and expend its revenue moneys in accordance with section 69 of the Indian Act.

7. The First Nation is governed by its Council which is made up of the Chief and XXXXXXXXXX councillors. The Council meets every XXXXXXXXXX to deal with First Nation matters. The Chief and the councillors are elected democratically under band custom by the membership for a XXXXXXXXXX-year term. A public meeting is held each year to review the finances of the First Nation.

8. The First Nation maintains control of its membership list in accordance with section 10 of the Indian Act.

9. The First Nation has undertaken responsibilities in the areas of, inter alia: administration; health services; social services; operations and maintenance; land management and forestry; and education.

10. In XXXXXXXXXX, the First Nation settled a treaty land entitlement claim with Canada and XXXXXXXXXX for proceeds of $XXXXXXXXXX.

11. XXXXXXXXXX.

Proposed Transactions

12. The Settlement Agreement represents an agreement between Canada and the First Nation in respect of the XXXXXXXXXX.

13. Under the Settlement Agreement, total Compensation will be $XXXXXXXXXX, from which $XXXXXXXXXX will be deducted to offset loans previously provided by Canada to the First Nation and to pay the First Nation's negotiating expenses. The net amount of $XXXXXXXXXX will be paid by Canada to the First Nation as follows:

XXXXXXXXXX.

Canada can accelerate the payment of the Compensation to the First Nation under certain circumstances.

14. Under the terms of the Trust Agreement, the First Nation as Settlor, will authorize and direct Canada to deposit its Compensation, net of $XXXXXXXXXX, in the Trust Account established by the Trustee for and on behalf of the First Nation and its present and future members. The net amount to be settled on the Trust by the First Nation is $XXXXXXXXXX. The difference of $XXXXXXXXXX will be paid directly to the First Nation to pay down its long-term debt.

15. The relevant terms of the Trust Agreement are as follows:

(a) The First Nation will establish the Trust to receive and administer the Compensation on behalf of the beneficiaries who are the First Nation and its present and future Members. The residency of a Member will not impact on whether or not the member will qualify as a beneficiary under the Trust.

(b) The Trust will commence on the date the Trust Agreement is executed and will terminate, unless at an earlier date, XXXXXXXXXX years after the death of the last surviving descendant of Her Majesty, Queen Elizabeth II, now living, on which date the Trust Property will be transferred to the First Nation.

(c) The underlying principles of the Trust are as follows: (i) after certain payments are made in the first XXXXXXXXXX years of the Trust, all capital is to be retained and invested for future generations; (ii) XXXXXXXXXX% of the income of the Trust is to be added to Trust capital to preserve capital for future generations; and (iii) the remaining XXXXXXXXXX% of the income of the Trust may be distributed to the First Nation to be spent on authorized programs (generally representing programs pertaining to First Nation governance). The approved programs may include per-capita distributions. After XXXXXXXXXX years, the restrictions on accessing capital are removed, but only for the purposes of approved First Nation Programs and Services.

(d) The initial trustees of the Trust are to be: XXXXXXXXXX. All of these individuals are the Council of the First Nation.

(e) Within XXXXXXXXXX months of the creation of the Trust, the initial trustees are to be replaced with a Trustee. The fiscal year of the Trust will be XXXXXXXXXX.

(f) XXXXXXXXXX of the Trust provides that the Trustee shall receive, hold, invest, and use the Trust Property for the benefit of the beneficiaries, and the Trust Property shall only be used for certain purposes. The purposes include, inter alias, the following:

(i) to pay authorized expenses first from Net Annual Income Available for Distribution and to the extent that the Net Annual Income Available for Distribution in any given year is insufficient to pay same, then from the capital of the Trust Property;

(ii) only after paying or arranging to pay the authorized expenses in accordance with above:

(A) to pay and/or make payable, as soon as reasonably practical following the creation of the Trust, the initial per capita distributions of $XXXXXXXXXX, as required under XXXXXXXXXX of the Trust Agreement, pursuant to and subject to (h) below.

(B) during the period XXXXXXXXXX, amounts are to be distributed to the First Nation to fund First Nation Programs and Services approved by a Members' vote. Specific rules apply for each of these periods. Subject to the per capita distributions, the Net Annual Income Available for Distribution that is not "used, applied, paid or made payable" is to be added to the capital of the Trust; and

(C) commencing XXXXXXXXXX, to distribute to the First Nation in each year, a specified spending income to fund First Nation Programs and Services for such year, pursuant to and subject to the provisions of XXXXXXXXXX of the Trust Agreement.

(iii) to invest in authorized investments in accordance with the investment policy statement and in accordance with the laws of XXXXXXXXXX and Canada, as applicable;

(iv) for greater certainty, and without in any way limiting the generality of the foregoing:

(A) subject to f(i) and f(ii) above, the Trustee shall accumulate the balance of the Net Annual Income Available for Distribution derived from the Trust Property not so used, applied, paid or made payable in accordance with f(i) and f(ii) above in any fiscal year and add it to the capital of the Trust Property; provided that the Trustee may pay directly to the First Nation any amount that would otherwise be Adjusted Taxable Income of the Trust in order to keep any taxes payable by the Trust to a minimum. Such payment of the Adjusted Taxable Income shall be evidenced by the Trustee issuing and delivering to the First Nation as soon as is reasonably practicable after the last day of each fiscal year, a non-interest bearing, unrestricted demand promissory note or notes equal to the amount of such Adjusted Taxable Income. Notwithstanding any other provision of this Trust, the ability of the First Nation to demand payment of such note or notes and the ability of the Trustee to honour such demand shall not be restricted in any way.

(g) XXXXXXXXXX of the Trust provides that distributions shall be made first out of the Adjusted Taxable Income and secondly out of the capital of the Trust.

(h) XXXXXXXXXX of the Trust provides that subject to (i) below, the Trustee shall distribute to each Member living as at the creation of the Trust the sum of $XXXXXXXXXX , as soon as reasonably practical following the initial deposit to the Trust Account by Canada of the Compensation owing to the First Nation by Canada pursuant to the Settlement Agreement.

(i) If, as a result of the distribution described above, a Member becomes entitled to any share of the Trust Property or Net Annual Income Available for Distribution before attaining the age of eighteen, the amount (referred to as "the part"), shall be held and invested by the Trustee until the Member attains the age of twenty-one. Interest shall accrue and be payable on such part, compounded annually, at a rate per annum equivalent to the prime commercial lending rate charged by the principal bankers of the First Nation to its most favoured commercial borrowers plus XXXXXXXXXX The Trustee shall accumulate all interest accrued and add same to the capital of the part. The Trustee shall not be entitled to distribute any amount(s) out of the Net Annual Income Available for Distribution and/or the capital of the part to or for the benefit of such Member prior to such Member attaining the age of twenty-one (21), save and except for a situation(s) deemed by the Council and the trustee as an emergency of or for such Member, in which case the trustee shall be entitled to encroach upon the Net Annual Income Available for Distribution and/or capital of the part for the benefit of such Member, all as the trustee in the exercise of its absolute discretion determines.

16. It is intended that the Trustee will make payments in the following order:

(a) the initial $XXXXXXXXXX per capita distribution described in 15(f)(ii)(A) above out of the capital of the Trust;

(b) payments to the First Nation for First Nation Programs and Services, excluding on going per capita distributions, as provided for under 15(f)(ii)(B) and 15(f)(ii)(C) above;

(c) payments to the First Nation as described in 15(f)(iv)(A) above, and

(d) per capita distributions to Members (other than the initial $XXXXXXXXXX per capita distributions as described in 15(h) above) and per capita distributions described in 15(i) above.

17. Where the aggregate of the amounts paid by the Trust to its beneficiaries in a taxation year, as described in 16(b) and (c) above, exceeds adjusted taxable income then any such excess together with the amount if any paid by the Trust under section 16(d) above, will be made from capital pursuant to XXXXXXXXXX of the Trust Agreement.

Purpose of the Proposed Transactions

18. The purpose of the proposed transactions is to allow for a resolution of the First Nation's claim in a manner that will ensure that benefits received will be directed principally towards the provision of First Nation Programs and Services to improve the conditions of the present and future Members of the First Nation.

Rulings Requested and Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, and purpose of the proposed transactions and provided further that the proposed transactions are carried out as described above, that the ratified trust agreement is substantially similar to the Trust Agreement submitted for our review, and provided that the terms of the Trust Agreement are not amended pursuant to XXXXXXXXXX of the Trust Agreement and that there are no other transactions which may be relevant to the rulings requested, our rulings are as follows:

A. During any period beginning after the date of this letter in which the First Nation continues to be involved in the implementation of the Settlement Agreement described in 12 above or continues to provide services of the type referred to in 9 above, the First Nation will be considered to be a public body performing a function of government in Canada within the meaning of paragraph 149(1)(c) of the Act and, accordingly, no tax will be payable under Part I of the Act by the First Nation on its taxable income for such a period.

B. The Compensation to be received by the First Nation from Canada under the Settlement Agreement in settlement of past grievances, as described in 12 and 13 above, will not be taxable to the First Nation.

C. The Trust will be a "personal trust" as defined in subsection 248(1) of the Act.

D. Any income or loss from the Compensation received by the Trust as described in 12 and 13 above or from property substituted therefor, and any taxable capital gain or allowable capital loss from the disposition of the Compensation or property substituted therefor, shall be deemed to be income or a loss, as the case may be, or a taxable capital gain or allowable capital loss, as the case may be, of the First Nation, pursuant to subsection 75(2) of the Act. Income deemed in this manner to be income of the First Nation will be excluded from the income of a beneficiary to whom it is paid or payable in the year and from the income of the Trust where such income was not paid or payable to a beneficiary of the Trust.

E. Where the initial $XXXXXXXXXX per capita distributions as described in 15(h) above, are made from the capital of the Trust, the provisions of subsection 105(1) of the Act will not apply. However, subsection 107(2.1) of the Act will apply (and subsection 107(2) of the Act will not apply) in respect of such distributions. To the extent that any per capita distributions are made from the Trust's Adjusted Taxable Income, the amount will be included in computing the income of the Member under paragraph 104(13)(a).

F. Paragraph (a) of the definition of "cost amount" in subsection 108(1) of the Act will apply for the purposes of determining the adjusted cost base of the capital interest disposed of by the Members as a consequence of the per capita distributions described in 15(h) above, as provided in paragraph 107(1)(a) of the Act.

G. Subject to subsections 107(2.001), (2.002) and (4) to (5) of the Act, where any capital property of the Trust is distributed by the Trust to the First Nation and there is a resulting disposition of all or any part of the First Nation's capital interest in the Trust, the provisions of subsection 107(2) of the Act will apply pursuant to subparagraph 107(4.1)(c)(i) of the Act.

H. In computing its income for a taxation year, the Trust will be entitled to deduct under paragraph 104(6)(b), the amount of Adjusted Taxable Income that was paid or payable by the Trust to a beneficiary pursuant to the Trust Agreement. The amount of Adjusted Taxable Income of the Trust that is paid or payable to a beneficiary in a taxation year will be included in computing the income of the beneficiary under paragraph 104(13)(a).

I. Notwithstanding subsection 104(24) of the Act, any of the Trust's Adjusted Taxable Income held in trust for minors pursuant to 15(i) above, will, as a consequence of the operation of subsection 104(18) of the Act, be deemed to have become payable to the individual minor beneficiaries in the year and will be included in computing the income of the individual minor beneficiary under paragraph 104(13)(a).

Comment

Nothing in this advance income tax ruling should be construed as implying that we have considered whether the First Nation is a Canadian municipality for purposes of the Act (we have not been asked to consider this nor have we attempted to make such a determination).

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Yours truly,

XXXXXXXXXX
Manager, Aboriginal Affairs Section
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch