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 compensation paid by Canada to the First Nation pursuant to the Settlement Agreement will be received by the First Nation on tax-exempt basis?
2. Whether subsection 75(2) will apply so as to deem the trust's income from the Settlement Funds to be income of the First Nation.
3. Whether the First Nation will be considered to be a public body performing a function of government in Canada within the meaning of 149(1)(c).
4. Whether distributions made pursuant to the trust agreement will result in the application of 105(1) to the beneficiaries.
Position:
1. Yes.
2. Yes.
3. Yes.
4. No.
Reasons:
1. On the basis of 149(1)(c), as per ruling 3.
2. The First Nation, which is entitled to the Settlement Proceeds, will settle a trust and direct Canada to pay the Settlement Proceeds into the trust. The trust is for the benefit of the members of the First Nation and the capital of the trust will eventually be paid out for purposes that are beneficial to the First Nation. Furthermore, since distributions from the trust will be governed by the Comprehensive Plan (a plan requiring the approval of the members of the First Nation), the property of the trust cannot be disposed of except in accordance with the First Nation's direction.
3. As per opinion of work section 023 (file 2000-003475).
4. The trust will not be providing benefits of the type contemplated by 105(1).
XXXXXXXXXX 2000-003328
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX as amended by your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the XXXXXXXXXX (the "First Nation") in respect of the income tax consequences arising out of the proposed transactions described below.
To the best of your knowledge and that of the First Nation, none of the issues involved in this letter is:
(a) in an earlier return of the First Nation or a related person,
(b) being considered by a tax services office or tax centre in connection with a previously filed tax return of the First Nation or a related person,
(c) under objection by the First Nation or a related person,
(d) before the courts, or
(e) the subject of a ruling previously issued by the Directorate in respect of the First Nation.
The First Nation's address is:
XXXXXXXXXX.
The relevant tax services office is XXXXXXXXXX Tax Services Office.
The First Nation has the following accounts with the Canada Customs and Revenue Agency (CCRA):
XXXXXXXXXX.
The following documents were submitted in support of your ruling request:
(a) a copy of the Settlement Agreement,
(b) a copy of the Trust Agreement, and
(c) a copy of various by-laws passed by the First Nation.
DEFINITIONS
"Act" means the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended;
"band" as defined in subsection 2(1) of the Indian Act "XXXXXXXXXX";
"Canada" means Her Majesty the Queen in Right of Canada;
"Compensation" means the sum of $XXXXXXXXXX to be paid by Canada to the First Nation as set out in the Settlement Agreement;
"Comprehensive Plan" is a plan to be approved by the Members by referendum providing for the utilization of the Trust property for such of the purposes as may be deemed beneficial to the First Nation, as more particularly described in the Settlement Agreement;
"Council" means the "council of the band" as defined by subsection 2(1) of the Indian Act;
"Income" for a taxation year means the income of the Trust for that year and capital gains realized from the disposition of assets of the Trust in that year, calculated in accordance with the Act without reference to subsection 104(6) of the Act;
"Indian Act" means the Indian Act, R.S.C. 1985, c. I-5, as amended, and the regulations made pursuant to that Act;
"Member" or "Members" means any person who is a member of the First Nation as the term "member" is defined in the Indian Act and the XXXXXXXXXX;
"Reserve" means "reserve" as defined in subsection 2(1) of the Indian Act;
"Settlement Agreement" means the agreement between the First Nation and Canada dated XXXXXXXXXX and approved on XXXXXXXXXX;
"Trust" means the inter vivos trust (as defined in subsection 108(1) of the Act) to be established by the First Nation pursuant to the terms of the Trust Agreement;
"Trust Account" means the bank account established by the Trustees in a Canadian Chartered Bank at a branch located on Reserve for the initial deposit of the Compensation;
"Trust Agreement" means the draft agreement among the First Nation and the Trustees dated XXXXXXXXXX, made in accordance with the Settlement Agreement; and
"Trustees" means the persons from time to time appointed as trustees under the Trust Agreement.
FACTS
1. XXXXXXXXXX submitted claims to Canada under Canada's Specific Claims Policy "Outstanding Business" alleging, amongst other issues, that Canada breached its fiduciary duty to the First Nation with respect to transactions on various First Nation reserves as outlined in XXXXXXXXXX the Settlement Agreement.
2. Canada and the First Nation agree that the Settlement Agreement is entered into in full and final settlement of the XXXXXXXXXX outlined in paragraph 1 above.
3. The First Nation has negotiated the Settlement Agreement with Canada and it will be involved in the administration and implementation of the settlement.
4. The First Nation (either itself or through its Council or otherwise) provides its Members with various community services such as education, social programs, recreation facilities and infrastructure. The First Nation has passed by-laws under sections 81 and 83 of the Indian Act.
5. Approximately XXXXXXXXXX% of the First Nation's members live outside of Canada.
PROPOSED TRANSACTIONS
6. Canada agrees to pay to the First Nation, and the First Nation agrees to accept, subject to the terms and conditions set out in the Settlement Agreement, the Compensation in full and final settlement of the actions and claims outlined in paragraph 1 above.
7. Canada's commitment to performing the terms of the Settlement Agreement is conditional upon the Members' approval of a surrender, made pursuant to section 38 of the Indian Act, of certain of the lands, which are the subject matter of the actions and claims.
8. As outlined inXXXXXXXXXX of the Settlement Agreement, the First Nation authorizes and directs Canada to pay the Compensation into the Trust Account set out in the Trust Agreement.
9. The First Nation will be obligated to perform a variety of functions with respect to the implementation of the Settlement Agreement including the provision of assistance to the Members of the First Nation, all as more particularly set out in the Trust Agreement.
10. The First Nation is contingently liable under the Settlement Agreement to indemnify Canada from any loss or damage resulting from any proceedings against Canada by any parties with respect to the actions, claims, settlements or activities in connection with the Settlement Agreement and the Trust Agreement. Such liability will not exceed the amount of the Compensation.
11. The Trust Agreement will restrict the use of the Trust Account to satisfying applications for the purposes as outlined in XXXXXXXXXX of the Trust Agreement. Although the Trustees will have discretion in determining the distribution of capital from the Trust Account, all distributions of capital from the Trust Account must be in accordance with the criteria set out in the Trust Agreement and the Comprehensive Plan. The Comprehensive Plan requires that the Trust property is to be used only for those purposes that are beneficial to the First Nation, and thus all distributions of capital must be to or for the benefit of the First Nation.
12. Administrative charges for the operation of the Trust Account will be paid out of Income or capital of the Trust Account. The balance, if any, of any Income remaining in the Trust Account in any year will be distributed to the First Nation in accordance with paragraph 4.2(c) of the Trust Agreement. No amount of Income will be payable to any individual Member.
13. Under the terms of the Trust Agreement, the Income of the Trust that will be paid annually to the First Nation will be immediately loaned back to the Trust.
14. The Trust will issue a promissory note each year to the First Nation, equal to the amount loaned by the First Nation to the Trust. As outlined in XXXXXXXXXX of the Trust Agreement, each loan will result in a separate loan receivable, without interest, payable no sooner than XXXXXXXXXX years from issuance, with any future repayment not to exceed an amount equal to XXXXXXXXXX% of the Income of the Trust in that year.
15. The Trustees will be empowered to manage the property of the Trust and, specifically, will have the power and responsibility to invest the capital of the Trust within the parameters set forth in the Trust Agreement and to borrow funds, make distributions or pay the amount owing under promissory notes to the First Nation against the security of the property of the Trust. The Trustees will also be empowered to select the financial institutions to be used by the Trust.
PURPOSES OF THE PROPOSED TRANSACTIONS
16. The purposes of the proposed transactions are:
(a) generally, to provide for the settlement of certain claims XXXXXXXXXX, as set out in the Settlement Agreement;
(b) specifically, to establish a Trust to administer the settlement proceeds and to facilitate the objectives set out in the Trust Agreement; and
(c) to provide a Trust for the benefit of the First Nation as a condition of the settlement of the above claims, the purpose of which (the Trust) is to provide funds to the First Nation to enable it to provide for the development of the First Nation in the manner determined by the Trust Agreement.
RULINGS
17. Provided that the above statements of facts and proposed transactions are accurate and constitute complete disclosure of all the relevant facts and proposed transactions and purposes thereof, and provided that that proposed transactions are carried out as described above, our rulings are as follows:
A. During any period in which the First Nation continues to be involved in the implementation of the settlement described in paragraph 1 above, continues to provide community services of the type referred to in paragraph 4 above, or administers and enforces at least one by-law under each of sections 81 and 83 of the Indian Act, the First Nation 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 of the Act by the First Nation;
B. Pursuant to subsection 75(2) of the Act, any income or loss of the Trust from the Compensation settled on the Trust as described in paragraphs 6 and 8 above, or from property substituted therefor, and any taxable capital gain or allowable capital loss from the disposition of property substituted for the Compensation 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 First Nation; and
C. The provisions of subsection 105(1) of the Act will not apply to the proposed transactions, in and by themselves.
These rulings are based on the Act as it currently reads and do not take into consideration any proposed amendments thereto. These rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on the Canada Customs and Revenue Agency provided that Canada pays the Compensation by XXXXXXXXXX.
Yours truly,
for Director
Resources, Partnerships and Trusts 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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