23 April 1999 External T.I. 9902775 - EXEMPT INDIAN BAND CORPORATIONS

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 Department.

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

Principal Issues:

Whether a corporation owned by an Indian band qualifies for the exemption under paragraph 149(1)(d.5).

Position:

For the corporation to qualify for the exemption under paragraph 149(1)(d.5), the Indian band must qualify as a municipality in Canada and the income of the corporation for a particular period from activities carried on outside the geographical boundaries of the municipality cannot exceed 10% of its income for the period. Since this is a factual determination, we have provided only general comments due to insufficient information.

Reasons:

Based on the Otineka decision, only Indian bands that can demonstrate that they are in exactly the same position as The Pas Indian Band in Otineka will be considered to be municipalities in Canada.

XXXXXXXXXX 									990277
J. Leigh
Attention:  XXXXXXXXXX 

April 23, 1999

Dear Sirs:

Re: XXXXXXXXXX

This is in reply to your facsimile letter dated December 10, 1998 which was forwarded to us for reply by the Edmonton Tax Services Office. You have requested our views as to whether the XXXXXXXXXX (the “Corporation”) is exempt from income tax. You advise that the Corporation is owned by the XXXXXXXXXX First Nation and it operates the above-noted business located on the XXXXXXXXXX.

As discussed in a recent telephone conversation (XXXXXXXXXX/Leigh), you have not provided sufficient information in order for us to determine whether the Corporation is exempt from income tax. However, we can offer the following general comments which are not binding on the Department.

Paragraph 81(1)(a) of the Income Tax Act (the “Act”) and section 87 of the Indian Act provide a tax exemption for the personal property of an Indian or band situated on a reserve. Since a corporation is not an “Indian” or “band”, as defined in the Indian Act, it does not qualify for this exemption. Therefore, a corporation will be taxable on its income unless otherwise exempt from taxation under another provision of the Act.

For taxation years and fiscal periods that begin after 1998, a corporation may be exempt from Part I tax on its taxable income for a particular period under paragraph 149(1)(d.5) of the Act if not less than 90% of its capital is owned by one or more municipalities in Canada and the income of the corporation from activities carried on outside the geographical boundaries of the municipalities does not exceed 10% of its income for the period.

We note that paragraph 149(1)(d.5) of the Act is subject to subsections 149(1.2) and (1.3) of the Act. Subsection 149(1.2) of the Act excludes certain income from the determination of whether more than 10% of the income of a corporation is derived from activities carried on outside the geographical boundaries of the municipality or municipalities that own the corporation. Specifically, income derived from activities carried on pursuant to an agreement in writing with Canada, a province, or a municipality, within its geographical boundaries, is not included in the determination. Subsection 149(1.3) of the Act provides that 90% of the capital of a corporation that has issued share capital is to be considered to be owned by one or more municipalities only if the municipalities are entitled to at least 90% of the votes associated with the shares of the corporation.

As indicated above, in order for a corporation owned by an Indian band to qualify for the exemption under paragraph 149(1)(d.5) of the Act, the Indian band would have to qualify as a municipality in Canada. In our view, having passed bylaws under sections 81 and 83 of the Indian Act would not be sufficient to have the Indian band considered to be a municipality for purposes of paragraph 149(1)(d.5) of the Act.

In the 1994 case of Otineka Development Corporation Limited and 72902 Manitoba Limited v. Her Majesty the Queen (94 DTC 1234), the Tax Court of Canada concluded that, since there is no definition of a “Canadian municipality” in the Act, the term must be given its ordinary meaning and is not to be solely determined by the provincial legislation governing municipalities. In the Court’s views, the powers conferred under the Indian Act and their exercise by The Pas Indian Band created a form of self-government that is an essential attribute of a municipality. In that case, the band had passed by-laws to regulate water, garbage disposal, weed control, domestic animal control, law and order, the provision of housing and other by-laws. It also provided services to band members in areas such as education, health care, social services, employment and training services, counselling and economic development. In the end, the Court concluded that the band was a municipality for the purposes of former paragraph 149(1)(d) of the Act (the relevant section prior to the enactment of paragraph 149(1)(d.5) of the Act) and that corporations owned by the band were exempt from taxation as municipally-owned corporations.

It is our view that for an Indian band to be considered a municipality in Canada, it would have to demonstrate that it fits within the facts of the Otineka case.

Finally, since you have indicated that you would like confirmation as to the status of the Corporation for purposes of the Goods and Services Tax (“GST”), we suggest that you direct your GST related queries to:

Mr. Pierre Bertrand

Director
Public Service Bodies and Governments Division
10th Floor, Tower C
25 McArthur Avenue
Vanier ON K1A 0L5

We trust that these comments will be of assistance.

Yours truly,

Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate

cc Carol Sayre
Edmonton Tax Services Office