2004 Ruling 2004-0060201R3 - XXXXXXXXXX First Nation Ruling

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.

Principal Issues: 1. Whether the First Nation will be exempt under 149(1)(c).

2. Whether the trust will qualify as a personal trust within the meaning of 248(1).

3. Will the Trust be liable for tax under Part XII.2 of the Act?

4. Whether income or loss from property acquired with monies settled in the trust or funds contributed in future years by the First Nation will be deemed to be income of the First Nation pursuant to 75(2).

5. Whether any income of the trust that is not subject to 75(2) will be considered payable to the First Nation and thus deductible pursuant to 104(6).

Position: 1. Yes.

2. Yes.

3. No

4. Yes.

5. Yes.

Reasons: 1. 2002-015576 consultation; consistent with other rulings (2000-0033283; 1999-0005513).

2. The trust will qualify as a personal trust since the First Nation will be the settlor of the trust and the interest will not be acquired for consideration.

3. Pursuant to subsection 210.3(1), no Part XII.2 tax is payable by a trust if the trustees certify in the trust's return that there are no "designated beneficiaries" thereof, as that term is defined in section 210. While the First Nation is exempt from tax pursuant to subsection 149(1), the First Nation will not acquire its interest in the Trust directly or indirectly from a beneficiary under the Trust. As a result, the Trust will have no designated beneficiaries.

4. The First Nation will be the settlor of the Trust, directing Canada to make payments to the Trust on behalf of the First Nation. The First Nation is the sole beneficiary and on the termination of the Trust, all of the Trust's property will be transferred to the First Nation.

5. The Trust Deed confirms that second generation income will be payable to the First Nation.

Another consideration is whether the issuance of promissory notes will constitute payment of income.

XXXXXXXXXX 					2004-006020

Attention: XXXXXXXXXX

XXXXXXXXXX, 2004

Dear Sirs:

Re: XXXXXXXXXX First Nation Advanced Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX, in which you request an advance income tax ruling in respect of the above-noted taxpayer. We also acknowledge your correspondence of XXXXXXXXXX.

To the best of your knowledge and that of the First Nation, none of the issues involved in the ruling request is:

? in an earlier return of the First Nation or a related person,

? being considered by a tax services office or taxation center in connection with a previously filed tax return of the First Nation or a related person,

? under objection by the First Nation or a related person,

? before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, or

? the subject of a ruling previously considered by the Directorate in respect of the First Nation or a related person.

You provided us with a copy of the following documents:

XXXXXXXXXX.

In this letter, unless otherwise indicated, all statutory references are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act"), and the following terms have the meanings specified:

"Constitution" means the Constitution of First Nation in effect on XXXXXXXXXX, as amended from time to time;

XXXXXXXXXX;

"Financial Transfer Agreement" means Self-Government Financial Transfer Agreement between the Government of Canada and First Nation, dated XXXXXXXXXX;

"First Nation" means XXXXXXXXXX First Nation;

"Investment Assets" means the property currently held by the First Nation for investment purposes, including stocks, bonds, trust interests and other such financial instruments other than its shares of the capital stock of XXXXXXXXXX;

"Settlement Act" means the XXXXXXXXXX;

"Settlement Lands" means the XXXXXXXXXX settlement land of the First Nation;

"SGA" means the Self-Government Agreement among First Nation, the Government of Canada, and the Government of XXXXXXXXXX;

"Special Act" means the XXXXXXXXXX;

"Trust Agreement" means the deed of settlement between the First Nation and the trustees of the Trust under which the trustees agree to hold and invest the property acquired from the First Nation for the sole benefit of the First Nation;

"Trust" means the XXXXXXXXXX Trust, an inter vivos trust as defined in subsection 108(1), to be established by the First Nation pursuant to the terms of the Trust Agreement and to be administered by the trustees for the benefit of the First Nation in accordance with the terms of the Trust Agreement; and

XXXXXXXXXX.

The relevant Taxation Services Office for the First Nation is the XXXXXXXXXX Tax Services Office and the relevant Taxation Centre is the XXXXXXXXXX Taxation Centre. The relevant Taxation Services Office for the Trust is the XXXXXXXXXX Tax Services Office and the relevant Taxation Centre is the XXXXXXXXXX.

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

Facts

1. The First Nation is recognized by the Government of Canada as one of the XXXXXXXXXX First Nations. The affairs of the First Nation are governed by its own recently enacted Constitution.

2. XXXXXXXXXX.

3. On XXXXXXXXXX, the Special Act and the Settlement Act came into force.

4. On XXXXXXXXXX, the First Nation concluded the Financial Transfer Agreement with the Government of Canada.

5. The First Nation has successfully negotiated with the Government of XXXXXXXXXX and the Government of Canada the implementation of legislation pertaining to income tax and a goods and services tax in the First Nation. Legislation pertaining to income tax and a goods and services tax has been enacted.

6. Under the Special Act, the First Nation is authorized to enact its own laws regarding, inter alia:

? Provision of programs and services for citizens of the First Nation in relation to their spiritual and cultural beliefs and practices and their aboriginal languages;
? Provision of health care and services, and social and welfare services to citizens of the First Nation, excluding regulation and licensing of facility-based services outside the Settlement Lands;
? Provision of training programs for citizens of the First Nation, subject to applicable certification requirements of Canada or the XXXXXXXXXX;
? Adoption of and by citizens of the First Nation;
? Guardianship, custody, care and placement of children of citizens of the First Nation, excluding regulation and licensing of facility-based services outside the Settlement Lands;
? Provision of education programs and services for citizens of the First Nation who choose to participate in them, excluding regulation and licensing of facility-based services outside the Settlement Lands;
? Inheritance, wills, intestacy and administration of estates of citizens of the First Nation, including rights and interests in Settlement Lands;
? Solemnization of marriage of citizens of the First Nation;
? Licences in respect of certain enumerated matters in order to raise revenue for the purposes of the First Nation;
? Use, management, administration and protection of natural resources under the ownership, control or jurisdiction of the First Nation;
? Licensing and regulation of persons and entities carrying on any business, trade, profession or other occupation;
? Control of the sanitary condition of buildings and property;
? Planning, zoning and land development;
? Establishment, maintenance, provision, operation and regulation of local services and facilities;
? Administration of justice after the expiry of an interim period;
? Control or prohibition of actions, activities and undertakings that constitute or may constitute, a threat to public order, peace, safety or health; and
? Control or prevention of pollution and protection of the environment.

7. In addition to the enactment of its own Constitution, the First Nation has XXXXXXXXXX.

8. XXXXXXXXXX.

9. XXXXXXXXXX.

10. XXXXXXXXXX.

11. XXXXXXXXXX.

12. XXXXXXXXXX.

13. XXXXXXXXXX.

14. XXXXXXXXXX.

15. The First Nation currently owns the Investment Assets and a building on the Settlement Lands, which serves as an administrative complex.

Proposed Transactions

16. On or about XXXXXXXXXX, the First Nation will settle the Trust with $XXXXXXXXXX. Initially, XXXXXXXXXX will be appointed as the trustees of the Trust. Under the terms of the Trust, the trustees will invest the trust property for the sole benefit of the First Nation. The Trust Agreement provides for a protector, who has a limited power of appointment over the property of the Trust which can be exercised in favour of one or more trusts that may be created for the sole benefit of the First Nation, and has the power to appoint or remove trustees.

17. The terms of the Trust provide that the income of the Trust for each taxation year of the Trust shall be determined not later than sixty days after the end of the taxation year. Any income earned by the Trust in a particular taxation year (other than the income attributed to the First Nation pursuant to subsection 75(2)) shall be payable to the First Nation no later than the last day of that particular taxation year unless the trustees pass a unanimous resolution to the contrary. The First Nation will be entitled to enforce payment of such non-attributed income in the year and until the payment thereof. Such non-attributed income shall be paid within XXXXXXXXXX days after the end of each taxation year in cash, in kind, or by issuing a non-interest bearing demand promissory note or notes, which note or notes will be accepted by the First Nation in satisfaction of its entitlement to that income, in an aggregate amount equal to the amount of such income. XXXXXXXXXX.

18. The Trust will maintain proper books of account with a December 31 fiscal year-end.

19. The Trust will be resident on Settlement Lands at all relevant times. In this regard, the First Nation will strive to ensure that the majority of the trustees are resident on Settlement Lands, and that the majority of meetings of the trustees shall take place on Settlement Lands.

20. The Trust will file a T3 Trust Income Tax and Information Return within XXXXXXXXXX days of each XXXXXXXXXX.

21. On or about XXXXXXXXXX, the First Nation will transfer all or substantially all of its Investment Assets to the Trust.

22. Subsequent to the transfer of the Investment Assets to the Trust, the First Nation will

i) devote all its activities to the exercise of its powers of government; and

ii) not carry on any business activities other than activities in respect of the businesses carried on by the First Nation on Settlement Lands, the primary purpose of which is to provide goods and services to citizens of the First Nation as determined by the Constitution or residents of Settlement Lands.

23. XXXXXXXXXX.

Purpose of the Proposed Transaction

24. XXXXXXXXXX the purpose of the proposed transaction is to:

i) XXXXXXXXXX;

ii) XXXXXXXXXX;

iii) XXXXXXXXXX;

iv) to ensure prudent management of the Investment Assets; and

v) to provide independent administration, investment and custody of the Investment Assets, consistent with the duties and responsibilities of the First Nation.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. The First Nation will be considered a public body performing a function of government in Canada within the meaning of paragraph 149(1)(c). No tax will be payable under Part I of the Act by the First Nation on the Trust income attributed to the First Nation under subsection 75(2) or payable to the First Nation by the Trust as described in paragraph 17 above or on any gain arising from the transfer of property to the Trust as described in paragraph 21 above.

B. The Trust will be a "personal trust" as defined in subsection 248(1).

C. Pursuant to subsection 75(2), any income or loss of the Trust from property transferred to the Trust by the First Nation as described in paragraphs 16 and 21 above or from property substituted therefore, and any taxable capital gain or allowable capital loss from the disposition of such transferred property or property substituted therefore 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. Income deemed in this manner to be income of the First Nation will be excluded from the income of the Trust.

D. Provided that the trustees have not passed a resolution to the contrary for a particular taxation year, that portion of the Trust's income to which subsection 75(2) does not apply, including, in particular, the income on the reinvested income from the Trust's property, will be considered to be payable to the First Nation in that taxation year pursuant to the Trust Agreement and may be deducted in computing the income of the Trust for that taxation year pursuant to paragraph 104(6)(b).

E. The First Nation will not be a designated beneficiary of the Trust as defined in section 210. Accordingly, the Trust will not be required to pay tax under Part XII.2 provided that the Trust complies with subsection 210.3(1) and no designated beneficiary as defined in section 210 is appointed as a beneficiary of the Trust.

Comments

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CRA provided that proposed transactions are completed XXXXXXXXXX. These rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act.

On February 27, 2004, the Department of Finance Canada released legislative proposals to amend certain provisions of the Act, including paragraph 110.1(1)(a) and subsection 118.1(1). Section 110.1 permits a deduction in computing taxable income in respect of gifts made by corporations to registered charities and to certain other entities. The proposed amendments would expand the list of the recipient entities referred to in section 110.1 to include a public body performing a function of government in Canada. Section 118.1 provides for a charitable donations tax credit to individuals in respect of gifts made to registered charities and to certain other entities. The proposed amendments would also amend section 118.1 to expand the recipient entities referred to therein to include public bodies performing a function of government.

As stated in paragraph 20 of Information Circular 70-6R5, the CRA does not provide advance income tax rulings on proposed legislation. Provided the Legislative Proposals pertaining to paragraph 110.1(1)(a) and subsection 118.1(1) are passed as released on February 27, 2004, it is our opinion that the First Nation would be entitled to issue donation receipts pursuant to subparagraph 110.1(1)(a)(iv) and paragraph 118.1(1)(d).

As stated in paragraph 2 of Information Circular 70-6R5, our rulings are limited to interpretations of the existing provisions of the Canadian income tax law as applied to proposed transactions described in the request. As a result, we cannot provide a ruling in respect of the SGA. In addition, since the proposed transactions do not involve the application of any of the tax conventions Canada has with other countries, we cannot provide a ruling on the application of the tax conventions generally. A ruling on the general anti-avoidance rule of section 245 will not be provided since no specific tax avoidance concern has been brought to our attention.

XXXXXXXXXX
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch