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 a corporation owned by a Tribal Council qualifies for the exemption of 149 (1) (d.5) or (d.6) of the ITA.
2. whether would qualify under 149 (1) (l).
3. Whether Guideline 4 applies to its employees.
Position:
1. Not sufficient information
2. Could be exempt - question of fact
3. Question of fact
Reasons:
1. not provided with enough information to address most of the issues regarding the exemption under 149(1)(d.5) or (d.6) of the ITA.
2. Appears could qualify but since not given all information, T.S.O. will have to ascertain.
3. Not enough information provided.
(613) 957-2058
XXXXXXXXXX M. Shea-DesRosiers
2000-000944
Attention: XXXXXXXXXX
April 19, 2000
Dear Sir:
Re: XXXXXXXXXX
This is in reply to your letter of February 15, 2000, addressed to the XXXXXXXXXX Tax Services Office which was forwarded to us for reply. You requested our views as to whether the income earned by XXXXXXXXXX, and its employees is tax exempt.
We understand the facts to be as follows:
XXXXXXXXXX..
In your view, the Corporation qualifies as a tax exempt entity under Part I of the Income Tax Act (the "Act") and the Indian employees' employment income is also tax exempt pursuant to Guideline 4 of the Indian Act Exemption for Employment Income Guidelines (the "Guidelines").
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request. The procedure for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996. However, we are prepared to provide the following general comments which may be of assistance to you.
i) Whether the Corporation is tax exempt under paragraph 149(1)(d.5) or (d.6) of the Act.
Paragraph 81(1)(a) of 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" nor a "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.
Generally, an Indian band will qualify for exemption under paragraph 149(1)(c) of the Act as a "public body performing a function of government in Canada" if it has passed bylaws under both sections 81 and 83 of the Indian Act. The Canada Customs and Revenue Agency (the "Agency") also considers First Nations that had reached an advanced stage of development as was formerly required by section 83 of the Indian Act to be performing a function of government. First Nations that do not meet these requirements can be considered on a case-by-case basis. To date, we have favourably considered situations where First Nations have been involved in negotiating Treaty Land Entitlements and where a First Nation provided elementary and secondary education in band operated schools.
Although paragraph 149(1)(c) of the Act exempts from taxation both a public body performing a function of government as well as a Canadian municipality, a corporation owned by a public body performing a function of government is taxable whereas a corporation owned by a Canadian municipality may be exempt by virtue of paragraph 149(1)(d.5) of the Act.
In order for an Indian band to be considered a municipality, it would have to fit within the facts of the Pas Band in the Otineka case (94 DTC 1234). In the Court's view, 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. There, the band had passed bylaws under both sections 81 and 83 of the Indian Act 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. 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. In Otineka, the band held shares in a corporation that owned and operated a shopping mall on the reserve, and the band also held shares in a second corporation that owned and operated a building supply business located on the reserve.
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. In our view, the geographical boundaries of an Indian band that is a municipality would be its reserve boundaries.
Paragraph 149(1)(d.6) of the Act provides that the exemption may be available through a chain of municipal-owned entities such that if an entity is exempt under the new rules, its wholly-owned subsidiaries may also be exempt from tax. This exemption continues to apply all the way down a chain of subsidiaries as long as each is wholly-owned and each meets the 10% geographical boundary income test.
Paragraphs 149(1)(d.5) and 149(1)(d.6) of the Act are 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.
We have not been provided with sufficient information concerning XXXXXXXXXX, the First Nations involved, nor the share ownership arrangements and business activities of the corporations involved to address most of the issues regarding exemption under paragraph 149(1)(d.5) or 149(1)(d.6) of the Act. However, we can comment that, in our view, the Corporation would not likely satisfy the 10% income test since the activities of the Corporation are carried on in XXXXXXXXXX which is outside the geographical boundaries of any reserve-based municipality which may own the Corporation.
The Corporation may, however, based on the facts, qualify under paragraph 149(1)(l) of the Act.
ii) Whether the Corporation is tax exempt under paragraph 149(1)(l) of the Act
The Agency's position on non-profit organizations is outlined in Interpretation Bulletin IT-496 ("IT-496"). As mentioned in paragraph 2 of IT-496, in order to qualify for the exemption under paragraph 149 (1) (l) of the Act, a corporation must be both organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or a combination of these or for any other purpose except profit and no part of its income may be payable to or otherwise available for the personal benefit of any proprietor, member or shareholder thereof. Although the word "exclusively " is used in paragraph 149(1)(l) of the Act, the Agency has taken the position a corporation may carry on income generating activities and earn income and still qualify for exempt status provided that there is a causal relationship between the profit making activity and the exempt purpose of the corporation. That is, the income generating activity cannot be the principal activity of the corporation and must be carried on, and the resulting income must be used, by the corporation to achieve its declared exempt objectives. It is a question of fact whether such a relationship exists. For instance, in the Gull Bay Development Corporation v. Her Majesty the Queen 84 D.T.C. 6040, the Court held that the corporation was organized and operated exclusively for social welfare purposes, although the corporation also carried on a logging operation. In that case, the corporation was incorporated to promote the economic and social welfare of persons of native origin; it was not set up to carry on commercial activities even though it was engaged in a commercial activity. The profits from the logging operations were used by the corporation in social welfare activities carried on by the corporation. In addition, the social welfare activities were not a cloak to avoid payment of taxes on a commercial enterprise but were the real objectives of the corporation.
As mentioned in paragraph 5 of IT-496, to establish the purpose for which a corporation was organized, the Agency will normally look to the instruments by which it was created such as letters patent, articles of incorporation, memorandums of agreement, by-laws, articles. If a review of these documents reveals that the corporation was created for other than one of or more of the purposes described above, the corporation would not qualify for exemption. Paragraphs 7 and 8 of IT-496 provide examples of situations where business activities which are carried on are indicative of operations which are not exclusively for non-profit purposes.
As mentioned in paragraph 10 of IT-496, a determination of whether a corporation was operated exclusively for, and in accordance with, its non-profit purposes in a particular taxation year is based on the facts of each case which can be obtained only by reviewing all of its activities for that year. Such a determination cannot be made in advance of or during a particular year but only after the end of the year.
As mentioned in the Facts at no. 5, the objectives of the Corporation is "fostering the social, economical and political well-being and development of member bands ...." Although it would appear on this basis that the Corporation could qualify for the exemption under paragraph 149(1)(l) of the Act, it will be for the Tax Services Office to make the final determination after having considered the Corporation's articles of incorporation, by-laws and any other pertinent document and having reviewed the Corporation's activities for the particular year in question.
The employees of the Corporation
Guideline 4 of the Indian Act Exemption for Employment Income Guidelines (the "Guidelines") requires a) that the employer be resident on a reserve; b) that the employer be an Indian band which has a reserve, or a tribal council representing one or more Indian bands which have reserves, or an Indian organization controlled by one or more such bands or tribal councils, if the organization is dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves; and c) that the duties of the employment are in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on reserves. These elements must all be satisfied in order for Guideline 4 to apply.
The term "employer is resident on a reserve" means that the reserve is the place where the central management and control over the employer organization is actually located. The central management and control of an organization is usually considered to be exercised by the group that performs the function of a board of directors of the organization. However, it may be that the real management and control of an organization is exercised by some other person or group. Generally, management and control is exercised at the principal place of business, but it is recognized that this function may be legitimately exercised in a place other than the principal administrative office of the organization. Where an organization, which would otherwise not be considered to be resident, is asserting that it satisfies the definition because it holds its board of directors meetings on reserve, it should generally be considered to satisfy the definition where management and control over the organization is legitimately exercised during those meetings.
In our view, if, as indicated in no. 4 of the Facts, the Board of Directors meets on reserve and, at such meetings decisions are made which direct the operations of the Corporation, the employer would be resident on a reserve.
The employer must be an Indian band which has a reserve or a tribal council representing one or more Indian bands which have reserves or an Indian organization controlled by one or more such bands or tribal councils if the organization is dedicated exclusively to the social, cultural, educational, or economic development of Indians. Although the information given at no. 2, 3 and 5 of the Facts indicate that the Corporation may well be an Indian organization as described above, it is unclear to us exactly what is meant by the comments "provide accommodations, meals and services" in no. 6. The concept of control in Guideline 4 is the kind that exists where there is power to command and direct. Where a band or tribal council can replace the directors of an organization, the band or tribal council could be said to control the organization. This appears to be the situation from no. 3 of the Facts.
Guideline 4 indicates that the activities of the employer must be for the benefit of the Indians who for the most part live on reserve. This is part of the previous condition requiring the organization to be exclusively dedicated to the social, cultural, educational, or economic development of Indians. The information given in no. 7 of the Facts mentions that for purposes of receiving funding, the XXXXXXXXXX must be resident on reserves. If this is, in fact, the case, this element would be met.
In addition, to determine whether Guideline 4 applies to a particular Indian employee, the employment duties of the Indian employee have to be considered, in order to establish whether they are in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on reserves. While the employer may have a non-profit mandate, this does not necessarily mean that all of its activities are non-commercial. As a general rule, a commercial activity entails the provision of services or the creation of a product to be provided to others for compensation. On the other hand, an example of a non-commercial activity would be a governmental or quasi-governmental activity. We have not been provided with any information regarding employment duties upon which to provide substantive comments.
We trust that these comments will be of assistance.
Yours truly,
Roberta Albert
for Director
Business and Publications Division
Income Tax rulings Directorate
Policy and Legislation Branch
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