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 income that is earned in and remains in a trust in which the beneficiary is an Indian band would be exempt from income tax?
Position: Generally no.
Reasons: Investment in the economic mainstream is taxable. The answer could differ if the income earned on the term deposits was generated exclusively on a reserve.
XXXXXXXXXX 963962
Attention: XXXXXXXXXX
June 24, 1998
Dear Sirs:
This is in reply to your request on behalf of XXXXXXXXXX for an advance income tax ruling, which request was delivered to the XXXXXXXXXX Tax Services Office in September 1996. We apologize for the delay in responding to your request. As you are aware, several factors prevented us from addressing your request earlier.
In a recent telephone conversation (Brooks/XXXXXXXXXX), we briefly explained the Department’s views on the taxation of income held in trust for the benefit of Indians. A trust is not an Indian and consequently is not itself exempt from taxation pursuant to section 87 of the Indian Act. In our view, it is irrelevant whether the funds settled in a trust are described in section 90 of the Indian Act. Paragraph 104(6)(b) of the Income Tax Act provides that a trust (other than an employee trust or a trust governed by an employee benefit plan) may deduct in computing its income for a taxation year an amount not exceeding the amount which would be its income for the year as became payable in the year to a beneficiary. However, income that remains in the trust is subject to taxation.
With respect to income paid out from a trust to an Indian band, one would have to consider whether the band qualified for exemption under paragraph 149(1)(c) of the Income Tax Act. It is a question of fact as to whether an Indian band may be considered to be a public body performing a function of government in Canada and thereby qualify for exemption from Part I tax pursuant to paragraph 149(1)(c) of the Income Tax Act. The Department considers that an Indian band that has passed by-laws under both sections 81 and 83 of the Indian Act is a public body performing a function of government. The Department also considers bands that had reached an advanced stage of development as was formerly required by section 83 of the Indian Act to be public bodies performing a function of government. Boards that do not meet these requirements can be considered on a case-by-case basis. The Department considers that boards that have been involved in negotiating and implementing Treaty Land Entitlements could qualify as such public bodies.
You have not indicated whether the taxability of the XXXXXXXXXX itself is of concern to you. On the basis of information you supplied, we do not have sufficient evidence indicating that the XXXXXXXXXX is a public body that performs a function of government in Canada and thus we are not able to confirm its exemption pursuant to paragraph 149(1)(c) of the Income Tax Act. If this is of concern to you, we would be pleased to consider the matter. In that case, it would be useful for you to submit relevant material or points you wish us to consider, such as a band profile and comments on community involvement or functions of government performed, such as involvement in a treaty land entitlement settlement.
Alternatively, one would have to consider the various connecting factors that could connect the band’s income from the trust to a reserve in order to determine whether the income would be exempt in the band’s hands. We would point out, though, that based on Williams, in our view, the purchase of term deposits or guaranteed investment certificates, for instance, from an institution on reserve would not, in itself, be sufficient to exempt the interest income earned thereon. While this is one factor to weigh in determining whether interest earned on term deposits is exempt from taxation there could be other factors that would connect the income to a location off reserve.
In the recent case of Arnold Recalma v. Her Majesty the Queen (96 DTC 1520), the Tax Court of Canada considered the taxability of income earned by an Indian living on reserve, from investments purchased from an on reserve branch of a bank. In the present case, whether the issuing company has its head office on reserve is not sufficient to establish that the interest earned on the funds is exempt. This determination would require a review of all relevant connecting factors and consideration as to how much weight should be given to each factor.
In Recalma the following were considered in determining the situs of the investment income:
(a) the residence of the taxpayer;
(b) the origin or location of the capital used to buy the securities;
(c) the location of the bank branch where the securities were bought;
(d) the location where the investment income is used;
(e) the location of the investment instruments;
(f) the location where the investment income payment is made; and
(g) the nature of the securities and in particular:
(i) the residence of the issuer;
(ii) the location of the issuer's income generating activity from which the investment is made, and
(iii) the location of the issuer's property in the event of a default that could be subject to potential seizure.
While some of these factors will support an argument in your case for exemption, we would like to point out that the court placed very much weight on (g)(ii), which would be the location of the income generating activity of the issuer of the term deposits. In Recalma, the income in question was interest from banker's acceptances and income from mutual fund units. Basically the court concluded that income from these investments started with companies off the reserve and was passed through a bank on reserve to the taxpayers. It was held that the investment income of the taxpayer was not personal property situated on a reserve. The court concluded that in making these investments the taxpayers chose to invest in the economic mainstream of normal business conducted off the reserve.
Since the issuer of the term deposits can use the funds received to make loans to Indians off the reserve or to non-Indians or to invest in off reserve activities, it may not be possible to trace the interest earned on these funds directly to the reserve. Based on this, unless the interest income on your term deposits can be identified as being generated exclusively on the reserve, in our view the income is not exempt from tax.
Since we are not able to provide a favourable ruling, you may wish to amend your request. We await your direction in this matter.
Yours truly,
Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
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