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 Indian trust exempt from income tax.
2) Does Band qualify as public body under 149(1)(c).
3) Is trust taxable on revenue not paid to beneficiary.
4) Is trust taxable on income added to capital account to compensate for inflation.
5) Are band members taxable on one time per capita payments under settlement agreement.
Position: 1) No 2) Question of Fact 3) Not necessarily 4) Not Necessarily 5) No
Reasons:
1) Trust is not an Indian under s. 87 of Indian Act
2) Depends on functions performed by Band.
3) Trust may be entitled to deduction if Band can enforce payment pursuant to 104(6) and 104(24). Also, 75920 might apply to attribute trust revenue to band.
4) Trust is taxable unless 75(2) applies
5) Band members not taxable on payments because they are paid from trust capital.
XXXXXXXXXX 2000-003644
Wayne Antle
October 3, 2000
Dear Sir:
Re: XXXXXXXXXX (the "Trust")
This is in reply to your letter of July 4, 2000 requesting an advance ruling with respect to the administration of the above trust. The situation described in your letter appears to relate to a completed transaction. As noted in Information Circular 70-6R3, confirmation of the tax consequences flowing from completed transactions must be obtained from your local tax services office. However, we can provide the following comments which are general in nature and may be relevant to your situation but which are not binding on the Agency.
You have summarized the facts as follows:
On XXXXXXXXXX, the Federal Government entered into a Settlement Agreement with the XXXXXXXXXX (the "Band"). The Agreement dealt with compensation paid to the Band for loss of use and enjoyment of reserve lands due to the operation of the XXXXXXXXXX. Canada agreed to pay XXXXXXXXXX dollars into a "Settlement Fund" which was required to be administered by a Trust Agreement. Approximately XXXXXXXXXX dollars of the "Settlement Fund" was to be paid to present Band members on a per capita basis. The remainder is to stay in a capital account to generate a revenue stream for the future benefit of the Band. The Trust is administered by the Trustees pursuant to a Trust Agreement which is in the process of being amended. In your letter, you indicate that the Trust Agreement includes the following:
- Capital amount of the Trust is $XXXXXXXXXX.
- The Band is sole beneficiary of the Trust.
- The situs of the Trust is on the XXXXXXXXXX Reserve.
- Except for the initial distribution of the XXXXXXXXXX dollars, there is no direct distribution of Trust funds to a Band member.
- Only "Authorized Investments" are permitted.
- There is no encroachment of capital account except in extraordinary circumstances involving a "force of nature".
- Unexpended Trust revenue is payable to the Band upon demand.
- Sufficient revenues are to be retained as part of the capital account to cover yearly inflation.
There was insufficient money set aside to completely effect the one-time per capita distribution required under XXXXXXXXXX the Trust Agreement. The distribution was accomplished by accessing the Capital Account, which the Trustees intend to repay using the Revenue Account. Under the proposed amendments to the Trust Agreement, certain payments may be made from the Revenue Account where such payments are in the best interests of the Band Members.
You are asking for our consideration of the following five questions:
We will address each of your questions below:
Question 1
Is the Trust revenue taxable if it is derived from 1) a savings account located at a bank branch situated on the reserve, or 2) investments in certain authorized debt or equity instruments?
Response
Paragraph 81(1)(a) of the Income Tax Act (the ("Act") and section 87 of the Indian Act establish the Indian exemption from taxation. Section 87 of the Indian Act exempts from taxation the personal property of an Indian situated on a reserve. A trust is not an Indian and, consequently, is not itself exempt from taxation pursuant to section 87 of the Indian Act. In our view, it is irrelevant in determining the taxability of the Trust's revenue whether the funds settled in the Trust are described in section 90 of the Indian Act. Paragraph 104(6)(b) of the Act provides that a trust (other than an employee trust or a trust governed by an employee benefit plan) may deduct in computing its income for a taxation year an amount not exceeding the amount which would be its income for the year as became payable in the year to a beneficiary. Paragraph 104(13)(a) of the Act requires the beneficiary to include in income the amount that would be the trust's income, but for subsection 104(6), that became payable to the beneficiary. Finally, subsection 104(24) deems an amount to be payable for these purposes if it was paid or the beneficiary was entitled to enforce payment in the year. Accordingly, if the Trust distributes its revenue to the Band, or if the Band can enforce payment of the revenue, then the Trust would be entitled to deduct such an amount in computing its taxable income.
Question 2
Does the Band qualify to be exempt from tax pursuant to paragraph 149(1)(c) of the Income Tax Act (the "Act")?
Response
Whether the Band qualified for exemption from Part I Tax under paragraph 149(1)(c) of the Act is a question of fact. In particular, it must be determined whether an Indian band may be considered to be a public body performing a function of government in Canada. We consider an Indian band that has passed by-laws under both sections 81 and 83 of the Indian Act to be a public body performing a function of government. We also consider bands that had reached an advanced stage of development, as was formerly required by section 83 of the Indian Act, to be public bodies performing a function of government. Bands that do not meet these requirements must be considered on a case-by-case basis. We consider that bands that have been involved in negotiating and implementing Treaty Land Entitlements could qualify as such public bodies. In order to determine whether the Band falls within the purview of paragraph 149(1)(c) of the Act, we would need to examine all of the facts, including the nature and extent of services provided to band members by the Band, by-laws passed by the Band under sections 81 and 83 of the Indian Act, and the involvement of the Band in the negotiation and implementation of Treaty Land Entitlements..
Question 3
If there is a delay in distributing revenue to the Band, is the Trust liable for tax on the retained revenue?
Response
The Trust may not necessarily be taxed on the retained revenue. As noted above, paragraph 104(6)(b) of the Act allows a trust to deduct amounts which are payable to a beneficiary. Subsection 104(24) of the Act deems an amount to be payable to a beneficiary if it was actually paid, or if the beneficiary can enforce payment in the year. If the Band can enforce payment of the revenue in the year, then the Trust would be entitled to a deduction notwithstanding that the amount was not paid until the following year.
In addition, subsection 75(2) of the Act may apply to deem the income earned by the trust to be income of the Band. This provision essentially provides that any income or loss from property, as well as any taxable capital gain or allowable capital loss from the disposition of the property, is attributed to the person from whom the property was directly or indirectly received, while that person is alive and resident in Canada, if the terms of the trust are such that the property may revert to that person, may be distributed to beneficiaries determined by that person at a time after the trust was created or may only be disposed of with the consent of, or at the disposition of, that person. XXXXXXXXXX the Trust Agreement provide that the Trust property will revert to the Band upon termination of the Trust. The Settlement Agreement indicates that the Settlement Fund was deposited to the Trust Account "at the direction of the XXXXXXXXXX". Therefore, the Band may be considered to have constructively received the Settlement Fund, and to have deposited it in the Trust. In order to determine this, we would have to review all of the facts surrounding the negotiation of the Settlement Agreement. Accordingly, subsection 75(2) of the Act may deem the income earned on the Settlement Fund to be income of the Band, and not income of the Trust. It is important to note that this provision does not apply to any income or loss derived from the investment or other uses of the earnings from the property.
Question 4
Is the Trust taxable on amounts transferred from the Revenue Account to the Capital Account to compensate for yearly inflation?
Response
In our view, the Trust would be taxable on amounts required to be added to the capital account to compensate for yearly inflation, unless subsection 75(2) applies as discussed above. Section 87 of the Indian Act does not apply to exempt trust income from taxation.
Question 5
The Trustees may make certain per capita payments to Band members out of the Capital Account to accomplish the one time distribution allowed in the "Settlement Agreement". The Capital Account would be restored by transferring amount from the Revenue Account. Would these payments be taxable to the Band members?
Response
Paragraph 87(a) of the Indian Act exempts from taxation the interest of an Indian band in a reserve or surrendered lands. The compensation paid to the Band by the Crown is in respect of the Band's loss of the use and enjoyment of the reserve and, in our view, the amounts would not be taxable to the Band as they are paid in respect of their interest in a reserve or surrendered lands. The per capita payments made to the Band members pursuant to the terms of the Settlement Agreement would not be taxable to the recipients because these amounts are paid out of the capital of the trust. The revenues transferred to the Capital Account may be taxable to the Trust unless subsection 75(2) of the Act applies as discussed earlier.
In your letter, you indicate that per capita payments may be made to Band members out of the Trust's Revenue Account. In this situation, the income may be taxable to the recipients. In the case of Arnold Recalma v. Her Majesty the Queen (96 DTC 1520), the Tax Court of Canada considered the taxability of income earned by an Indian living on reserve, from investments purchased from an on reserve branch of a bank. While the court considered several factors, it placed considerable weight on the location of the income generating activity of the issuer of the securities. The court concluded that in making their investments the taxpayers chose to invest in the economic mainstream of normal business conducted off the reserve. This position was confirmed by the Federal Court of Appeal (98 DTC 6238). In our view, it is likely, given the nature of the investments contemplated in the Trust Agreement, that payments to Band members out of the Revenue Account would be taxable to them.
We trust that our comments will be of assistance.
Yours truly
John Oulton.
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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