2000 Ruling 1999-0013323 - INDIAN BAND - MUNICIPALITY

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. Is the XXXXXXXXXX a municipality in Canada for purposes of paragraph 149(1)(c) of the Act?

2. Will the Company a corporation owned by the First Nation be exempt from tax by virtue of paragraph 149(1)(d.5)?

3. Will subsection 56(4) apply to dividends paid by the Company and assigned to XXXXXXXXXX ?

Position:

1. Yes.

2. Yes.

3. Yes.

Reasons:

1. The First Nation has met tests laid out in Otineka as being a public body exercising powers of self-government and providing services municipalities typically provide and in any period in which they act as described they will be exempt.

2. All of the requirements of paragraph 149(1)(d.5) have been met. Not less that 90% of its capital is owned by the First Nation. Only the First Nation has the right to acquire shares or capital of the corporation. The First Nation has beneficial ownership and because of the bare trust arrangement controls at least 90% of the votes associated with the shares. No more that 10 per cent of its income is earned from activities carried on outside the geographical boundaries of the First Nation.

3. Subsection 56(4) applies because the First Nation has assigned its rights to dividends from the Company to XXXXXXXXXX (an organization to which the First Nation does not deal at arms length). Had the right to the dividends not been assigned the dividends would have been included in the income of the First Nation.

XXXXXXXXXX 1999-001332

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "First Nation")
XXXXXXXXXX (the "Company")

This is in reply to your letter of XXXXXXXXXX requesting an advance income tax ruling on behalf of the above named taxpayers. We also acknowledge receipt of a copy of the XXXXXXXXXX.

We understand that, to the best of your knowledge, none of the issues raised in this ruling is being considered by a Taxation Services Office or Taxation Centre in connection with an income tax return already filed, is the subject of any notice of objection or is under appeal.

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

Definitions

"Business" means the XXXXXXXXXX business to be carried on by the Company as described in paragraphs 54 and 66-71.

"Council" means the elected governing council of the First Nation.

"Manufacturing Co." means XXXXXXXXXX.

"Indian Act" means the Indian Act R.S.C. 1985, c. I-5, as amended.

XXXXXXXXXX.

XXXXXXXXXX.

"XXXXXXXXXX Agreement" means the Agreement between the Council and XXXXXXXXXX as described in paragraph 76.

"Plant" means the business premises of the Company described in paragraph 52.

"Resident members of the First Nation" means members of the First Nation who are Indians within the meaning of the Indian Act and who ordinarily reside in the XXXXXXXXXX.

"Reserve" means the lands of the First Nation with reserve status under the Indian Act.

"Self-Government Agreement" means the agreement in principle with respect to self-government described in paragraph 4.

"Territory" means the XXXXXXXXXX acres comprising the XXXXXXXXXX purchased by the First Nation in XXXXXXXXXX.

Facts

1. XXXXXXXXXX.

2. The First Nation is an Indian band for the purposes of the Indian Act.

3. The Territory is located adjacent to the XXXXXXXXXX. The Territory is comprised of a total land area of XXXXXXXXXX acres. XXXXXXXXXX acres have reserve status under the Indian Act. In XXXXXXXXXX, the First Nation purchased an additional XXXXXXXXXX acres of adjoining land. These XXXXXXXXXX acres are in the process of being given reserve status under the Indian Act, but do not yet have reserve status.

4. The First Nation has signed an agreement-in-principle with respect to self-government with the federal government in conjunction with the XXXXXXXXXX These First Nations are members of the XXXXXXXXXX Council. The Self-Government Agreement provides, among other things, that the XXXXXXXXXX (the "First Nations") which are parties to the agreement may make laws with respect to various matters including primary and secondary education of their members, development, conservation and use of First Nations' land, expropriation of First Nations' land for First Nations purposes, environmental assessment, public works and community infrastructure, traffic and transportation.

5. Fiscal and implementation agreements pursuant to the Self-Government Agreement are currently under negotiation. A final agreement is slated to go to the members of the First Nation in a referendum vote in XXXXXXXXXX. The First Nation and the First Nations are also in negotiations with the Province of XXXXXXXXXX on a parallel agreement that addresses the jurisdictional relationship between the First Nation, First Nations and XXXXXXXXXX.

6. As contemplated by the Self-Government Agreement, the First Nation has developed, but not yet approved, a constitution that provides for how its self-government will operate.

7. The First Nation is a member nation in good standing of several associations including XXXXXXXXXX.

8. The First Nation is governed by a Council elected by the resident members of the First Nation. The Council is responsible for governance of the First Nation and represents the First Nation in political fora.

9. All of the members of the First Nation are Indians for the purposes of the Indian Act. The non-resident members of the First Nation generally live and work in a variety of locations outside the Territory. The non-resident members are not presently entitled to vote in the election of the Council. This may change such that non-resident members would be entitled to vote in the future.

10. Because of the ongoing self-government process, the First Nation has not passed any bylaws pursuant to section 81 or 83 of the Indian Act. However, land use and other activities on the Reserve are regulated by the Council.

11. The First Nation is drafting or developing bylaws dealing with the following subjects: building improvements, membership, residency, property assessment and taxation, utilities taxation, business licensing and financial administration. These bylaws when finalized will be passed by Council pursuant to the Indian Act if the self-government process is not complete. If the self-government process is complete, the bylaws will be passed by Council in its capacity as Council of the self-governing First Nation.

12. The First Nation has a Community Plan approved by Council which regulates land use and activities within the Reserve. All lands within the Reserve are held in a traditional manner and are owned in common by the membership. The First Nation government has agreements with individual members and businesses for their use of the lands and any improvements thereon. Development in the Reserve has been guided by the First Nation's Community Plan.

13. XXXXXXXXXX.

14. XXXXXXXXXX is the location of the XXXXXXXXXX, and the First Nation's Council Office, Community Centre and Fire Hall. The First Nation is in the process of developing and laying out a plan of subdivision for the XXXXXXXXXX area to be used for construction of additional residences.

15. The Council has adopted the XXXXXXXXXX Building Code by Council resolution. All buildings constructed on the Reserve must comply with this building code. The First Nation utilizes the services of the XXXXXXXXXX to inspect new buildings for compliance with the building code. The First Nation is presently developing its own building code which will be based on the XXXXXXXXXX Building Code but will require higher standards with respect to energy efficiency and other matters.

16. Most of the Reserve's housing units have been built by the First Nation for its resident members. Resident members may construct their own houses so long as the location and plans are approved by Council. No other approvals are required for construction on the Reserve.

17. The majority of First Nation's homes are supplied by the First Nation with lake intake systems, complete with water filtration units. Tile beds are used to handle sewage wastes from all residential and commercial buildings within the community. The First Nation has constructed water pumping facilities in XXXXXXXXXX to provide water to the residences in those areas.

18. The First Nation undertook a capital planning study in XXXXXXXXXX. As a result, a new water filtration plant and sewer system for the residential areas will be built by the First Nation.

19. The First Nation provides snow removal services to its residents in the winter.

20. The First Nation has an agreement with the XXXXXXXXXX regarding garbage collection. The Township provides regular garbage pick up at XXXXXXXXXX established stations within the Reserve. This service is provided partially for a fee and partially in exchange for the First Nation allowing the Township to situate waste collection bins on the Reserve which are used by Township residents during some months in the year. The First Nation operates a recycling program.

21. Some resident members of the First Nation operate businesses on the Reserve. Any member wishing to operate a business on the Reserve must first obtain approval from Council.

22. The First Nation has had its own Fire Department since XXXXXXXXXX. The Fire Department has XXXXXXXXXX fire trucks, complete bunker gear for all volunteers, a communication system, and other necessary equipment. The Fire Department consists of XXXXXXXXXX volunteers who receive upgraded training on a yearly basis. A separate Fire Department building was constructed in XXXXXXXXXX.

23. Training for members of the Fire Department includes First Response Training. In the event of an accident/injury/illness on the Reserve, the First Response Team members respond and provide medical assistance until an ambulance arrives on the scene. The First Response Team has a vehicle and medical equipment. This vehicle and equipment are housed in the Fire Department building.

24. The Territory is located on the XXXXXXXXXX. The Township performs road maintenance and upkeep to the portions of road located within the Territory. The First Nation pays for the cost of this maintenance and upkeep under an agreement with the Township.

25. All areas of the Reserve are serviced with electricity supplied by XXXXXXXXXX Hydro.

26. The First Nation constructed an administration and Council office building in XXXXXXXXXX. This office is the centre of program and service administration for the First Nation. In XXXXXXXXXX, additions were made to the original structure to accommodate the increasing number of administration staff.

27. The First Nation owns and operates a XXXXXXXXXX square feet Community Centre for its residents. A computer training centre has been established in the basement of the building. The basement also has meeting and resource room space available for use by residents.

28. Adjacent to the Community Centre are a children's playground and a baseball field, both constructed and maintained by the First Nation for its residents.

29. The First Nation employs a First Nation Manager who, under the direction of Council, is responsible for financial and administrative management of the First Nation.

30. In addition to the First Nation Manager, the staff employed by the First Nation (other than the First Nation Manager) include the following:

• Social Services Administrator
• Education Counsellor
• Economic Development Officer
• Community Health Representative
• Brighter Futures Coordinator
• Child Welfare Prevention Worker
• Community Health Promotion Worker
• Self-Government Community Consultation Worker
• Sustainable Community Worker
• NNADAP Worker

31. The First Nation provides social services and health services to its members through the following staff:

• Child Welfare Prevention Worker - This worker is responsible for providing cultural, recreational, educational and social programming for the ages of 0-15 years and their families.
• Brighter Futures Program Co-ordinator - The worker employed in this position is responsible for providing cultural activities, educational and recreational events, to all ages within the community.
• Social Services Administrator - The First Nation employs the services of a part-time worker in this position to provide the overall welfare programs for the First Nation as governed by the 1965 Welfare Act.
• NNADAP Worker - This employee is responsible for providing programming to deter the abuse of alcohol and substances.
• Community Health Representative - This position is part-time and the worker is responsible for providing advisory services in areas of health care.
• Community Health Promotion Worker - One individual is employed to promote the spiritual, mental, emotional and physical health and well being of First Nation members.

32. The duties of the other First Nation employees are described below:

• Economic Development Officer - The Economic Development Officer is responsible for promoting the economic growth and development of the First Nation. He or she assists the resident members of the First Nation and Council through advisory services, business plan and application preparation, securing of funding for community development projects, small business development, job creation and training.
• Self-Government Consultation Worker - The Self-Government Consultation Worker is the liaison between the Council and the membership and is responsible for providing the First Nation's membership with current and accurate information pertaining to the self-government process.
• Education Counsellor - The Education Counsellor negotiates and manages tuition agreements with school boards and acts as a liaison between the schools and the students and parents. The Education Counsellor also manages scholarship programs established by the First Nation and arranges adult education programs on the Reserve.
• Sustainable Community Worker - The Sustainable Community Worker is responsible for developing and coordinating the First Nation's environmental and energy conservation projects.

33. The First Nation receives its policing services from the XXXXXXXXXX detachment of the XXXXXXXXXX Provincial Police.

34. The elementary school children and secondary school students of the First Nation are bussed to a school in XXXXXXXXXX on a daily basis. The First Nation pays fees to the XXXXXXXXXX District School Board for the education provided to its children.

35. The number of students in the Nation has not justified the construction of a school on the Reserve until recently. An early education school for Kindergarten to Grade 3 is now under discussion.

36. The First Nation provides a number of educational programs and services to its resident members, such as computer training, academic skills upgrading, wellness and life skills programs and professional development.

37. At this time, the First Nation does not levy property or income taxes on its residents or members. Residents pay user fees for programs and services provided by the First Nation, including water and snow removal. Residents on the Reserve do not pay property taxes to the Township of XXXXXXXXXX.

38. Much of the employment for the First Nation residents is seasonal. The employment rate for residents of the First Nation is XXXXXXXXXX during the spring and summer months.

39. Due to seasonal employment, this percentage declines to XXXXXXXXXX over the fall and winter months. The First Nation Council office, the XXXXXXXXXX and construction work undertaken by the First Nation within the Reserve provide approximately XXXXXXXXXX jobs within the First Nation. Entrepreneurial development has also contributed to employment within the First Nation, but on a limited basis. There are currently XXXXXXXXXX private businesses operating within the First Nation. These businesses include XXXXXXXXXX etc. The majority of these businesses employ either the owner alone or possibly one to two others.

40. The Company is a corporation incorporated XXXXXXXXXX under the XXXXXXXXXX Business Corporations Act. The Company is a Canadian corporation within the meaning of the Act.

41. The only issued share of the Company, being one common share, is held by the Chief of the First Nation, XXXXXXXXXX, in trust for the Council in their capacity as the governing body of First Nation. The directors of the Company are currently XXXXXXXXXX.

42. XXXXXXXXXX and the Council have entered into a bare trust and agency agreement with respect to the one common share of the Company registered in the name of XXXXXXXXXX. Under the bare trust and agency agreement, XXXXXXXXXX, holds the one common share of the Company as nominee, agent and bare trustee for the Council in its capacity as the governing body of the First Nation. The Chief's only function as bare trustee is to hold legal title to the one issued common share of the Company. The Chief is required to act in his capacity as registered owner of the share as directed by Council and is required to pay any dividends and other distributions as directed by the Council. XXXXXXXXXX is required, as bare trustee, to vote the one common share of the Company with respect to the election of the board of directors of the Company and other matters requiring shareholder approval as directed by Council.

43. No person has a right under contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently to, or to acquire, share or capital of the Company.

44. The Company has not yet carried on any business.

45. Manufacturing Co. is a taxable Canadian corporation with its head office in XXXXXXXXXX. Manufacturing Co. is a public corporation within the meaning of subsection 89(1) of the Act.

46. Manufacturing Co. carries on a business of XXXXXXXXXX.

47. XXXXXXXXXX is the Chief Executive Officer and President of Manufacturing Co. He is also a director and the controlling shareholder of Manufacturing Co..

48. XXXXXXXXXX is a Canadian corporation incorporated under the XXXXXXXXXX Business Corporations Act, the shares of which are owned for the benefit of the First Nation. The purpose of XXXXXXXXXX is to oversee and monitor all First Nation enterprises that fall within the jurisdiction of the Council.

49. No other shares of the Company will be issued to any person other than to XXXXXXXXXX as bare trustee as described in paragraphs 41 and 42 or some similar arrangement under which the First Nation, or the Council on its behalf, is the beneficial owner of such shares. XXXXXXXXXX will not transfer the one common share of the Company held by him in trust for the Council, or any other share of the Company issued to him, except as directed by the Council and except to be held under an arrangement similar to that described in paragraph 42 under which the First Nation, or the Council on it behalf, is the beneficial owner of such shares.

50. The Company will have a board of XXXXXXXXXX directors as follows:

• one director nominated by the Council;
• one director nominated by the members of the First Nation through XXXXXXXXXX;
• one director nominated by Manufacturing Co.; and
• XXXXXXXXXX directors nominated jointly by the Council, Manufacturing Co. and the members of the First Nation through XXXXXXXXXX.

The composition of the Company's board of directors as described above will continue at least until the Company has repaid its indebtedness to Manufacturing Co., governments, government agencies and/or XXXXXXXXXX as described in paragraphs 61 and 62.

51. Meetings of the Company's board of directors will usually be held within the Reserve.

Proposed Transactions

52. The Company will enter into an agreement with the First Nation, the Council or The Queen in right of Canada on its behalf, whereby the Company is permitted to use approximately XXXXXXXXXX acres in the XXXXXXXXXX area of the Reserve for the Company's business premises. Beginning in XXXXXXXXXX, the Company or the First Nation will construct a factory and offices to be used by the Company in carrying on its business on these lands. All of this land is within the First Nation lands that now have reserve status under the Indian Act. It is expected that the First Nation will not charge rent to the Company for the use of this land and the buildings until the Company is profitable.

53. It is expected that as many resident members of the First Nation as reasonably possible will be employed in connection with building the Plant.

54. The Company will carry on a XXXXXXXXXX business from the Plant in the Reserve. The Company will operate in accordance with the highest possible environmental, health and safety standards. The Company expects to manufacture XXXXXXXXXX.

55. The Company expects to be operational in XXXXXXXXXX approximately and expects to have approximately XXXXXXXXXX full-time employees by the end of XXXXXXXXXX. By XXXXXXXXXX, the Company expects to have approximately XXXXXXXXXX full-time employees. Employment at the Company will be open to persons from outside the First Nation, however, it is expected that most employees will be resident members of the First Nation.

56. The First Nation will provide training in areas such as computer skills and will provide general educational programs to its resident members to prepare them for employment with the Company.

57. The Company employees will receive considerable training in technical areas such as computer skills and XXXXXXXXXX and in areas such as management, marketing, finance and sound environmental, health and safety practices.

58. Manufacturing Co. will provide the Company with advisory and training services to assist with the startup of the Company's business and for some period of time thereafter. It is expected that Manufacturing Co.'s services will decline over time as the Company's management gains experience. These services will be provided on an as needed basis and will be donated free of charge to the Company. Services provided on this basis by Manufacturing Co. will include training, sales and marketing and technical support.

59. The Company's initial capital expenditures to construct the factory, offices and related improvements and to purchase XXXXXXXXXX equipment, office equipment and other expenditures from XXXXXXXXXX are estimated to be approximately $XXXXXXXXXX. The Company will obtain the funds required for these expenditures from different sources described in the following paragraphs.

60. XXXXXXXXXX will donate or arrange for the donation of approximately $XXXXXXXXXX to the First Nation over a period of XXXXXXXXXX years. The First Nation will use these funds to invest in the Company and/or for training and infrastructure in relation to the Company.

61. Manufacturing Co. will:

(a) loan the Company XXXXXXXXXX machines for XXXXXXXXXX years without charge,

(b) grant the Company an option to purchase up to XXXXXXXXXX machines during XXXXXXXXXX for Manufacturing Co.'s factory price, but with the purchase price to be paid beginning in XXXXXXXXXX without interest, and

(c) grant the Company an option to purchase XXXXXXXXXX machines during XXXXXXXXXX at Manufacturing Co.'s factory price, with the purchase price to be paid on normal industry terms.

62. Various federal government departments and agencies will provide funds to the Company and/or XXXXXXXXXX for the purpose of funding the Company's startup and related expenses. These funds are expected to be provided as follows:

(a) Aboriginal Business Canada has conditionally agreed to provide a $XXXXXXXXXX grant and a loan of approximately $XXXXXXXXXX repayable without interest beginning in XXXXXXXXXX,

(b) the Department of Indian and Northern Affairs is expected to provide a loan and/or grant of approximately $XXXXXXXXXX , over XXXXXXXXXX years beginning in XXXXXXXXXX,

(c) Human Resources Development Canada has already provided approximately $XXXXXXXXXX to XXXXXXXXXX to assist in funding expenses relating to planning and training for the Company,

(d) Human Resources Development Canada has been asked to provide a loan and/or grant of approximately $XXXXXXXXXX for use as training funds to train resident members of the First Nation for employment with the Company, and

(e) the Province of XXXXXXXXXX is providing a grant of approximately $XXXXXXXXXX beginning in XXXXXXXXXX and has been asked for a grant and/or loan of an additional $XXXXXXXXXX.

63. It is expected that the loans and/or grants from the government departments and bodies described above will be made directly to the Company. In the alternative, some of such loans and/or grants may be made to XXXXXXXXXX. In this case, XXXXXXXXXX would make a corresponding loan or grant to the Company on the same, or substantially the same, terms.

64. XXXXXXXXXX will agree to lend or arrange to be loaned to the Company in respect of each of the Company's XXXXXXXXXX fiscal years inclusive the lesser of $XXXXXXXXXX and the amount, if any, by which the Company's operating cash flow for such fiscal year is less that the projected operating cash flow for that financial year as represented by the Company to Aboriginal Business Canada.

65. Approximately $XXXXXXXXXX will be provided to the Company by the First Nation by way of capital contribution and loan.

66. The Company will not have any offices outside of the Reserve.

67. Marketing and sales of the Company's manufactured products will be pursued outside the Territory. It is expected that all of the Company's customers will be located outside the Territory.

68. All the Company's inventories of finished products will be maintained at the Plant and raw materials used for manufacturing will be received and stored at the Plant.

69. It is expected that the Company sales employees will travel outside the Reserve from time to time to meet with customers and potential customers of the Company. However, sales activities will also be undertaken at the Plant by phone, fax, mail, e-mail, internet, etc. The Company may from time to time retain independent sales agents resident and normally carrying on business outside the Reserve.

70. None of the the Company employees and no independent sales agent dealing with customers or potential customers will have authority to conclude sales contracts on behalf of the Company outside the Reserve. All contracts for the sale of products by the Company to its customers will be concluded at the Plant. Customers will submit purchase orders to the Company by sending such purchase orders to the Plant. The purchase orders will be accepted or rejected at the Plant.

71. When the Company is fully operational:

a) Approximately XXXXXXXXXX% of the Company's employees will be involved in manufacturing operations, shipping and receiving or plant maintenance. The balance of the Company's employees will be involved in management and administration.

b) All but approximately three of the Company's employees will spend all or virtually all of their working time at the Plant. Three employees being, the sales and marketing employee, the general manager and the buyer, i.e. the employee responsible for buying raw materials, parts, equipment and other supplies, will each spend a portion of their working time outside the Reserve.

c) The working time spent outside the Reserve by the general manager, the buyer and the sales and marketing employee will not be material in comparison to the total working time of all of the Company's employees. It is expected that the working time of these three employees outside the Reserve will be less than five percent of the total working time of all employees.

d) The portion of the annual salaries of the general manager, the buyer and the sales and marketing employee attributable to the working time spent outside the Reserve by these employees will not be material in comparison to the total annual expenses of the Company, including costs of goods sold and depreciation. It is expected that the portion of the annual salaries of these employees attributable to their working time outside the Reserve will be less that five percent of the Company's total annual expenses.

72. The Company will not be subject to any property taxes, business licence fees or similar municipal taxes by the First Nation for the first XXXXXXXXXX years. The First Nation will charge user fees to The Company for water, snow removal and similar services provided to The Company by the First Nation in the same way as residents are charged for these things.

73. The members of the First Nation who are eligible to vote in the election of the Council or other government of the First Nation, will form an unincorporated non-profit association called the XXXXXXXXXX. All members of the First Nation will be eligible to join XXXXXXXXXX. No person who is not a member of the First Nation who are eligible to vote in the election of the Council or other government of the First Nation will be eligible to join XXXXXXXXXX. The objects of XXXXXXXXXX will be to undertake or fund community projects for the general benefit of the First Nation and to otherwise protect, develop and promote the culture, community and interests of the First Nation. It is expected that XXXXXXXXXX will engage in or fund activities such as health and education programs, water and energy systems and construction of community facilities. The constitution of XXXXXXXXXX will provide that no part of the income of XXXXXXXXXX may be paid to or be available for the personal benefit of any member of XXXXXXXXXX. On the dissolution of XXXXXXXXXX, any remaining assets will be transferred to the First Nation.

74. XXXXXXXXXX will be managed by approximately XXXXXXXXXX directors, one of whom will be appointed by the Council and XXXXXXXXXX of whom will be elected by the members of the First Nation who are members of XXXXXXXXXX.

75. The Company expects that it will be several years before it earns an annual profit. When earned, it is intended that the Company's profits will initially be used primarily to repay loans from financial institutions, if any, Manufacturing Co. and the government departments and bodies, as described in paragraphs 61 and 62 and to reinvest in the business. At some point in the future, when profits permit the Company may pay dividends.

76. The Council will enter into an agreement with XXXXXXXXXX whereby:

i) the Council assigns, and agrees to pay over, to XXXXXXXXXX, for so long as that Association continues, all dividends and other distributions paid by the Company on the share, or shares, beneficially owned by the Council on behalf of the First Nation;

ii) XXXXXXXXXX agrees to use any monies so received for community projects for the general benefit of the First Nation, including, without limitation, health and education programs, water and energy systems and construction of community facilities and agrees not to pay any such monies directly to individual members of the First Nation; and

iii) The Council will also pass a resolution authorizing the agreement with XXXXXXXXXX described above and directing that all dividends and other distributions paid by the Company on the share, or shares, beneficially owned by the First Nation be paid over to XXXXXXXXXX for so long as XXXXXXXXXX exists.

77. Any monies received by XXXXXXXXXX from the Company will be administered by the directors of XXXXXXXXXX in accordance with XXXXXXXXXX constitution for the general benefit of the First Nation.

Purpose of the Proposed Transactions

78. The purpose of the proposed transactions is to assist in developing a sustainable, economically self-sufficient community in the First Nation by establishing a business that will:

• be owned by the First Nation
• operate on the Reserve
• provide year round employment for resident members of the First Nation on the Reserve
• provide on and off the job training for resident members of the First Nation, and
• support projects and activities for the general benefit of the First Nation through XXXXXXXXXX.

Rulings Requested and Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, and the purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, and that there are no other transactions which may be relevant to the rulings requested, we confirm that:

A. Provided the issued share is owned as described in paragraphs 41 to 43 and paragraph 49 above, the Company will be exempt from taxation under Part I of the Act by virtue of paragraph 149(1)(d.5) for any taxation year in which not more than 10% of the Company's income is from activities carried on outside the geographical boundaries of the Reserve. For this purpose, not more than 10% of the Company's income for a taxation year will be from activities carried on outside the geographical boundaries of the Reserve where the Business of the Company is carried on in that taxation year substantially as described in paragraphs 66 to 71.

The ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 31, 1996 and is binding on the Canada Customs and Revenue Agency provided that the proposed transactions are commenced by XXXXXXXXXX.

The above ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Comments

With respect to above ruling, we note that the question of whether not more than 10% of the Company's income from activities carried on outside the geographical boundaries of the First Nation's Reserve is a question of fact, the determination of which can only be made retrospectively for each taxation year.

Whether or not the First Nation is a municipality in Canada for purposes of paragraph 149(1)(c) of the Act is also a question of fact, the determination of which can only be made for each taxation year. However, we have the following comments.

In our view, in any period during which the First Nation has the authority respecting the geographic area of the Reserve, has acted or previously acted on, the authority to regulate in the areas typical of a municipality and continues to provide community services of the type in paragraphs 17 to 37 above, the First Nation will be considered to be a municipality in Canada within the meaning of paragraph 149(1)(c) of the Act and, accordingly, no tax will be payable under Part I by the First Nation on any dividends paid by the Company to which subsection 56(4) of the Act applies.

At the present time, as discussed in paragraphs 75 and 76 above, there is no proposed payment of dividends by the Company so it is not possible to provide a binding advance income tax ruling with respect to such dividends. However, in our view the provisions of subsection 56(4) of the Act will apply to the First Nation to any dividends paid by the Company and assigned to XXXXXXXXXX pursuant to the XXXXXXXXXX agreement.

Yours truly,

XXXXXXXXXX
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch