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: 1. Whether an Indian Band will be considered a public body performing a function of government in Canada and thus qualify for exemption under paragraph 149(1)(c) of the Income Tax Act.
2.. Whether 75(2) applies to attribute trust income to the First Nation.
Position: 1. Yes
2. Yes.
Reasons: 1.Reasons: (a) The Band has been involved in the negotiation of a settlement agreement with Canada and will continue to be involved in the administration and implementation of the settlement agreement.(b) The Band has entered into an arrangement with Canada to assume responsibility for the delivery of programs and services such as land management, social and economic development programs and capital infrastructure; and (c) The Band has passed bylaws under sections 81 and 83 of the Indian Act in XXXXXXXXXX.
2. The First Nation is entitled to receive funds from the government, and it will direct the government to place the funds into the trust. The First Nation will be the sole contributor, and the First Nation will be the sole beneficiary of the trust.
XXXXXXXXXX
XXXXXXXXXX 1999-000551
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sir:
Re: Request for Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX ("Ruling Request Letter") on behalf of the Applicants for an Advanced Income Tax Ruling in respect of the Proposed Transactions. We acknowledge your correspondence of XXXXXXXXXX revising your ruling request.
You advised us that to the best of your knowledge and the knowledge of the responsible officers of the Applicants:
(a) none of the issues involved in the requested rulings have been considered by a taxation services office or taxation centre in connection with a tax return already filed; and
(b) none of the issues involved in the requested rulings is under objection or appeal.
EXHIBITS
The following documents were submitted in conjunction with the ruling request:
(a) a copy of the XXXXXXXXXX and Settlement Agreement, initialled and recommended for approval by the negotiators for each party on XXXXXXXXXX;
(b) a copy of the most recent draft XXXXXXXXXX creating the Trust; and
(c) copies of two of the by-laws passed by the Band.
DEFINITIONS
In this letter:
(a) "Act" means the Income Tax Act (Canada), R.S.C. 1985, c. I (5th Supp.) as amended to the date of this letter;
(b) "Applicants" means the XXXXXXXXXX and the Trust;
(c) "Band" means the XXXXXXXXXX, a band as defined in subsection 2(l) of the Indian Act;
(d) "Canada" means Her Majesty the Queen in Right of Canada;
(e) "Indian Act" means the Indian Act, R.S.C. 1985, c. 1-5, as amended to the date of this letter, and the regulations made pursuant to that Act;
(f) "Province" means Her Majesty the Queen in Right of the Province of XXXXXXXXXX.
The following terms are defined in the Trust Agreement or the Settlement Agreement and are used herein:
Band Benefit
Band Development
Band Member
Band Project
Beneficiary
Council
Rectification Committee
Rectification Fund
Rectification Trust Fund = the name used in the Settlement Agreement for the Rectification Fund
Reserve
Settlement Agreement
Settlement Monies
Trust = XXXXXXXXXX
Trust Agreement
Trust Capital Account
Trust Revenue Account
Trustee
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
FACTS
1.
XXXXXXXXXX
2. The Band is an Indian band within the meaning of the Indian Act R.S.C. 1985, c.I-5 as amended (the "Indian Act"). Its reserve is located approximately XXXXXXXXXX. The present reserve comprises XXXXXXXXXX hectares and there are a total of XXXXXXXXXX Band Members, XXXXXXXXXX of which live on the reserve.
3.
XXXXXXXXXX
4. Following an agreement in principle entered into in XXXXXXXXXX, and after further detailed negotiations, the parties have negotiated and initialled an agreement (the "Settlement Agreement") relating to various of the outstanding claims. The agreement was initiated on XXXXXXXXXX by Canada, the Province and the Band. The signatures of each of the parties must be ratified by the Federal Cabinet, the Provincial Cabinet and the Band Members. A copy of the Settlement Agreement excluding schedules was attached to your ruling request letter
5. By way of summary, the Settlement Agreement provides inter alia for cash payments, transfer of lands, control of and receipt of income from forest resources and participation in revenue from mineral resources located on the reserve or future reserve properties.
6. The Settlement Agreement provides for the establishment of the Trust, which sets out arrangements for the receipt and distribution of various settlement-related monies (the "Settlement Monies"). A copy of the draft Trust Agreement which was Attachment "B" to the Settlement Agreement was attached to your ruling request letter. Unless one of the parties declines to ratify the Settlement Agreement, the Trust Agreement will be required to be executed in the form so attached. The Trust Agreement was ratified on XXXXXXXXXX by the majority of the Band Members.
7. The Band has been exercising active control over its community. This includes the following types of activities:
(a) the election of Band and councillors to perform those activities contemplated by the Indian Act. These elections are conducted under the XXXXXXXXXX and not Section 74 of the Indian Act. It has established its own procedures for election. The Minister of Indian and Northern Affairs has reviewed and recognized these procedures;
(b) the passage of bylaws regulating the various activities on the reserve including animal control bylaw, property taxation, etc;
(c) negotiations of agreements for the settlement of claims with the Federal and Provincial Governments;
(d) the Band has, with the agreement of the Federal Government, assumed responsibility for the following Federal Government programs affecting Band Members:
(i) education;
(ii) social development;
(iii) economic development;
(iv) employment and training;
(v) health;
(vi) capital infrastructure; and
(vii) Band governance;
(e) the Band has assumed responsibility for the recreational and community activities of the Band and has constructed, and maintains and manages, the following recreational facilities:
(i) community hall;
(ii) gymnasium;
(iii) hockey rink; and
(iv) baseball diamond;
The Band has also established recreational programs for the use of the various facilities;
(f) the Band now employs persons on a full time basis to perform the following services for its Band Members:
(i) Band manager and office staff;
(ii) educational minister;
(iii) social development office; and
(iv) drug and alcohol councillor; and
(g) the Band has also by order of the Minister under Section 69 of the Indian Act been authorized to manage its own revenue monies.
PURPOSE OF THE PROPOSED TRANSACTIONS
8. It is the wish of the Band and a provision of the Settlement Agreement that the substantial portion of the monies arising from the Settlement Agreement be invested so that they will benefit future as well as present Band Members. The purposes of the Trust Agreement are as follows:
(a) to provide a program for expenditure of funds that the Band will receive as a result of the settlement with the Federal and Provincial Governments in a manner to ensure that such monies will benefit the future as well as the present Band Members; and
(b) to provide a procedure whereby funds will enjoy the same income tax treatment that would occur if the Band were to receive and invest the settlement proceeds and resource revenues directly.
PROPOSED TRANSACTIONS
9. Pursuant to the Settlement Agreement, a Rectification Committee will be established to review forest practices on certain lands. The Band will, at its expense, rectify deficiencies identified by the Rectification Committee, such expenses to be paid out of the Rectification Fund (referred to as the Rectification Trust Fund in the Settlement Agreement).
10. The Band is responsible for contributing funds to the Rectification Fund and for that purpose it will establish a separate account (identified as the Rectification Fund) with a financial institution. The Band will administer the Rectification Fund and will contribute further monies to replace any monies paid out. The Band will be accountable to the Trustees of the Trust for the Rectification Fund.
11. The Trust will hold property for the benefit of the Band, which is the sole Beneficiary of the Trust. The Band will also be the sole contributor of property to the Trust.
12. There will be two accounts administered by the Trustees: the Trust Capital Account and the Trust Revenue Account.
13. Pursuant to the Settlement Agreement, Canada and the Province will each pay to the Band $XXXXXXXXXX to cover various specified costs incurred by the Band. Additionally, Canada will pay to the Band $XXXXXXXXXX. Since the Band currently owes Canada loans amounting to $XXXXXXXXXX and may become further indebted to Canada, it may repay Canada by way of set-off. The Band will direct Canada to deposit its payments into the Trust Capital Account. The Band will direct the Province to make its $XXXXXXXXXX payment into the Rectification Fund. These monies form part of the Settlement Monies.
14. Pursuant to the Settlement Agreement, the Band will share with the Province in revenues from the production of certain timber and mineral resources and forest royalties. The Province will pay to the Band approximately $XXXXXXXXXX, which funds will, at the direction of the Band, be placed into the Trust Capital Account. These monies also form part of the Settlement Monies.
15. The Trust Agreement specifies certain amounts to be paid directly out of the Settlement Monies upon receipt or to be paid out subsequently. Except for those specified amounts that are not immediately paid but are paid at a later date out of the Trust Capital Account, all monies placed in the Trust Capital Account are to be maintained for the future use of the Band, and the Trustees are not permitted to release any such monies therefrom prior to the termination of the Trust. The Trust Agreement does not specify how property in the Trust Capital Account will be distributed upon the termination of the Trust. Instead, the Trust Agreement provides that the Band, by a referendum of the Band Members 18 years of age or older, will decide on the distribution of the property.
16. Notwithstanding that monies contributed to the Trust Capital Account are to remain in that account, the terms of the Trust Agreement require that all amounts which constitute taxable income for income tax purposes each year be distributable to the Band. Thus, funds equal to the amount of the Trust's taxable income will be transferred annually to the Trust Revenue Account. The Trustees do not have any discretion on the release of funds from the Trust Revenue Account; rather, the Band may at any time require the Trustees to distribute funds from the Trust Revenue Account for a purpose which qualifies as a Band Project. Band Projects are defined by the Trust Agreement to include Band Benefits (non-business type purposes) and Band Developments (business type purposes).
17. The Trustees do not have authority to refuse a use of funds that are in the Trust Revenue Account if the Band's requested use comes within the definition of either Band Benefit or Band Development. Most requisitions for funds from the Revenue Trust Account may be made by the Band Council. However certain requisitions in excess of $XXXXXXXXXX may require approval by a ratification vote of the Band Members. Thus, whether or not the funds in the Trust Revenue Account are used and how they are used is solely within the control of the Band Council or in special circumstances the Band as a whole. The purpose of requiring the Band or Band Council to identify the use of the funds is to provide protection against the misuse of such monies and to prohibit expenditures which do not provide a benefit to the Band.
18. The Band will receive income from certain forest and mineral resources as well as certain right-of-way revenues annually and it will contribute the funds received from these sources to the Trust Revenue Account.
19. Because the Trust is intended to remain in effect for an extended period of time, there is a concern that merely preserving the initial capital in the Trust may not result in sufficient funds being available to provide similar benefits to future generations since the value of the capital will be reduced by the consequences of inflation. As a result, the Trust also provides that the Trust Capital Account is to be supplemented annually by way of loans from the Band to the Trust so that it will at minimum increase with increases in the cost of living. The loan proceeds are to form part of the Trust Capital Account.
20. The loan requirement does not restrict the right of the Band to access the Trust Revenue Account. While the Band may use income from the Trust Revenue Account to fund its loan, it may also use funds from other unrelated sources outside the Trust. There is no provision for the Trustee to withhold funds from the Revenue Trust Account except in circumstances where the Band defaults in providing the loan amounts.
21. The Trustees are restricted as to the investment of the Trust's monies.
22. The Trustees consist of XXXXXXXXXX persons: XXXXXXXXXX Band Members and the XXXXXXXXXX is an independent corporate trustee licenced to operate a trust company in Canada. Negotiations are under way with several major trust companies to provide these services. The corporate trustee will only have one vote in any circumstances where Trustee votes are required but it will also have a tie-breaking vote in the event of a tie. It will however be required to be a signatory on all cheques and other documents which permit the withdrawal of funds from the Trust Capital Account or Trust Revenue Account. This is intended as a procedure to prevent unauthorized withdrawals.
RULINGS
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, and further provided that there are no other transactions which may be relevant to the rulings requested, our rulings are as follows:
A. Pursuant to subsection 75(2) of the Act, any income or loss of the Trust from monies settled on the Trust and placed into the Trust Capital Account as described in paragraphs 13, 14 and 19 above, or into the Trust Revenue Account as described in paragraph 18 above, or from property substituted therefor and any taxable capital gain or allowable capital loss from the disposition of property substituted for such monies 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 Band.
B. During any period in which the Band continues to be involved in the implementation of the settlement described in paragraph 4 above, continues to provide services of the type and magnitude referred to in paragraph 7 above, or administers and enforces at least one bylaw under each of sections 81 and 83 of the Indian Act, the Band 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 by that Band on any income of the Trust that is included in that Band's income by virtue of paragraph 12(1)(m) of the Act or on any taxable capital gain that is deemed to be the Band's taxable capital gain pursuant to subsection 75(2) of the Act.
Our rulings should not be construed as implying that we have considered whether the Band is a Canadian municipality. We have not been asked to consider this nor have we attempted to make this determination.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 issued by the Canada Customs and Revenue Agency on December 30, 1996, and are binding provided that the Settlement Agreement is executed by the First Nation, the Province and Canada on or before XXXXXXXXXX.
These rulings are based on the Act in it present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling provided herein.
The above Rulings are also based on the versions of the agreements described above under the caption "Exhibits." Any substantive difference between these versions and the final versions could invalidate the Rulings.
Yours truly,
XXXXXXXXXX
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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© Her Majesty the Queen in Right of Canada, 2000
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© Sa Majesté la Reine du Chef du Canada, 2000
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