26 May 2003 GST/HST Interpretation 45186 - Eligibility of a Band-empowered Entity to Claim GST/HST Rebates

This is in response to a letter XXXXX, from XXXXX, wherein we were asked to review an earlier position taken by the CCRA regarding the eligibility of the XXXXX to claim GST/HST rebates as a band-empowered entity (BEE). XXXXX.

As you know, following consultation with this office, XXXXX advised XXXXX that it did not qualify as a BEE under Technical Information Bulletin B-039R GST Administrative Policy - Application of GST to Indians (B-039R). This position was based on the fact that there was no evidence in the documentation to support the position that Indian bands own or control XXXXX.

In XXXXX letter, XXXXX questioned why XXXXX has to meet the conditions of control, as described in B-039R, when it clearly meets the first condition of ownership. Under B-039R, an entity will be considered to be owned by a band, a tribal council or a group of bands other than a tribal council if the band, tribal council or group of bands owns all or substantially all of the memberships of the entity. Membership in XXXXX is restricted to Indian bands XXXXX.

In response XXXXX, we offer the following comments. For ease of reference, we have restated the facts as presented XXXXX.

Statement of Facts

1. XXXXX is incorporated XXXXX XXXXX and is registered for GST/HST purposes XXXXX.

2. For GST/HST purposes, XXXXX is engaged in the course of making exempt supplies of financial services pursuant to section 1 of Part VII of Schedule V to the Excise Tax Act ("ETA"). As a result, it is generally not entitled to claim input tax credits ("ITCs") under section 169 of the ETA.

3. XXXXX meets the definition of a "listed financial institution" under subsection 123(1) of the ETA, therefore, was eligible to voluntarily register for GST/HST purposes pursuant to paragraph 240(1)(c) of the ETA.

4. XXXXX provides a capital loans program, an operating loans program, and a bridge financing program to status Indians or groups, or organizations or corporations owned and controlled by status Indians resident and carrying on business within XXXXX.

5. XXXXX has only one class of membership, which is restricted to the Indian bands XXXXX, each of which holds one membership interest. This restriction of membership is evidenced within XXXXX.

6. XXXXX Board of Directors consists of a maximum of XXXXX directors. These directors are to be appointed or elected as follows:

•   XXXXX

•   XXXXX

•   XXXXX

•   XXXXX

•   XXXXX

•   XXXXX

•   XXXXX

•   XXXXX

7. XXXXX current Board of Directors includes XXXXX Directors comprised as follows:

•   XXXXX

•   XXXXX

•   XXXXX

8. XXXXX Board of Directors is required, at least once annually, to report on its activities to its members. It holds quarterly meetings on the XXXXX Reserve XXXXX

9. XXXXX annual operating budget is developed by senior management, which consists of the general manager, the finance manager and the loans manager. The budget is then presented to the Board of Directors for approval.

In addition to the above facts, it is noted from the documents provided that the activities associated with the operation of XXXXX are managed by its Board of Directors. Further, under the current structure, the majority of XXXXX Board of Directors is appointed by Indian bands XXXXX and in accordance with the XXXXX, these bands have the authority to replace those directors (e.g., not performing the duties of director in a manner that reflects the interests of the bands and their members).

Review of Policy Intent

Under B-039R, an entity is "considered" to be owned by a band, a tribal council or a group of bands other than a tribal council (hereinafter referred to collectively as "bands") if:

-    the bands own all or substantially all (90 per cent) of the shares or hold all or substantially all of the memberships of the entity; or

-    the bands hold title to the assets of the entity or control its disposition, such that in the event of wind up or liquidation, these assets are vested in the bands.

An entity is considered to be controlled by bands if:

-    the bands appoint or elect a majority of the members of the governing body of the entity (e.g., directors); and

-    the entity is required by legislation, by-laws, or an operating agreement, to submit to the bands its operating budget and where applicable, its capital budget for review and approval.

B-039R states that an entity will be "considered" to be owned by bands when bands hold all or substantially all of the memberships of an entity. From a legal perspective, the holding of all or substantially all of the memberships of an entity by a person does not necessarily mean that that person owns the entity. To illustrate, for example, a person holding a membership interest in a recreational facility does not automatically mean that the person has ownership rights. Rather, the membership interest may provide nothing more than the right to access and use the facility during certain hours.

Because of the wording used in B-039R to describe the first condition of ownership, it is clear that an argument could be made that the holding of all or substantially all of the memberships of an entity by bands should be sufficient to consider that entity to be owned by bands under B-039R. However, to rely solely on the wording used in B-039R ignores the underlying basis of the administrative policy. B-039R was never intended to simply be a checklist of conditions that must be met for tax relief to apply. Consequently, as a membership interest in an entity is comprised of certain membership rights, it is necessary to examine those rights to establish whether the members may be considered as owners.

The wording used in B-039R to describe ownership and control mirrors to a large extent that found in Technical Information Bulletin B-046 Administrative Guidelines for Municipalities. For purposes of that bulletin, an organization must be created by a municipality or by a province on behalf of a municipality and must be owned or controlled by a municipality in order to qualify for municipal determination as a para-municipal organization pursuant to subsection 123(1) of the ETA. Where a municipality owns at least 90 % of the shares or capital of an organization or the assets of an organization are vested in the municipality in the event of the organization's dissolution, the organization will be considered to be owned by the municipality.

Under B-039R, an entity must be owned or controlled by bands in order to qualify as a BEE. It does not have to be created by bands nor does it have to be an entity with shares or capital. Under B-039R, tax relief is extended to entities where bands hold all or substantially all of their memberships.

As 90% or more of the shares or capital establishes ownership of an organization for purposes of B-046, the same approach is taken for purposes of B-039R. That is, one way the ownership of an entity by bands is determined is by reference to who owns the entity's shares. Where an entity is a non-share organization, such as a membership entity, ownership may be determined by reference to who holds the entity's memberships. Because membership interests are comprised of rights that differ from those associated with shares or capital in an entity, the membership interest in an entity must be examined. This is done on a case-by-case basis to ensure the policy intent is achieved. That is, do the members have rights normally associated with ownership that are similar to those held by shareholders? For example, the ownership of the majority of voting shares of a corporation carries with it the right to a majority of the votes in the election of the corporation's Board of Directors.

Review of Prior Decision

In arriving at the prior decision that XXXXX was not owned or controlled by bands we relied on the two conditions of "control", as described in B-039R, to establish whether ownership rights existed. The idea was that by meeting the control criteria, the members would have demonstrated that they have the rights associated with ownership.

Although the first condition of control was met, there was nothing in the information provided to indicate that the second condition was met (i.e., that the budget of XXXXX was reviewed and approved by bands). Both XXXXX confirmed that the responsibility to review and approve budgets of XXXXX rests with its Board of Directors. For this reason, we found that XXXXX did not qualify as a BEE.

XXXXX states that if an entity that meets one of the conditions of ownership under B-039R it should not have to also meet the control test to qualify as a BEE. If this were the case, then a membership entity would have to meet both the ownership and control criteria in order to qualify as a BEE. This position is contrary to what is stated in B-039R.

Given the existing wording of B-039R, it is agreed that the requirement to meet the control test described in B-039R should only apply where an entity does not meet one of the two conditions of ownership. However, to ensure that bands holding all or substantially all of the memberships in an entity can be considered to own that entity for purposes of B-039R, CCRA requires evidence that they have ownership rights similar (but not necessarily identical) to those of shareholders.

Having reviewed the facts of this case and the provisions set out in B-039R, an entity will be considered to be owned by bands where, by virtue of owning all or substantially all of the shares in the entity or holding all or substantially all of the memberships in the entity, bands have the ability to direct the entity through the appointment and replacement of the majority of the Board of Directors. Where this condition is met, as in the case of XXXXX, an entity will be considered to be owned by bands. Once ownership is established, there is no need to look further. The requirement to determine whether the two conditions of control are met is only needed where bands own less than all or substantially all of the shares or hold less than all of substantially all of the memberships of an entity.

As the programs of XXXXX relate to the promotion of economic development, through businesses owned and controlled by status Indians, XXXXX, the activities of XXXXX qualify as band management activities for purposes of B-039R.

Should you require clarification on the above or wish to discuss this further, please call me at (613) 954-7957.