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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: (1) Whether the Band is a public body performing a function of government; (2) Whether the receipt of the Settlement Funds is taxable; (3) Whether subsection 75(2) will apply to the Trusts' income; (4) Whether subsection 105(1) or subsection 107(4.1) will apply to certain distributions made by the Trust to the Band's members; (5) Whether paragraph (a) of the definition of "cost amount" in subsection 108(1) would apply to determine the adjusted cost base of the capital interest disposed of on such distribution; (6) Whether subsection 107(2) will apply to any distribution of property by the Trust to the Band; (7) Whether income on income from property of the Trust will be taxable to the Trust.
Position: (1) Yes; (2) No; (3) Yes; (4) Subsection 105(1) will not apply; Subsection 107(4.1) will however apply; (5) Yes; (6) Yes, subject to subsections 107(2.001), (2.002) and (4) to (5); (7) Yes, but may be deducted under 104(6).
Reasons: (1) The Band is involved in negotiating a treaty settlement with Canada and will continue to be involved in its implementation and administration. The Band is actively involved in the community and provides extensive services and programs such as public works, social services (health and education), capital infrastructure (water distribution, sanitation), etc; (2) Compensation paid to the Band is in respect of the loss of livelihood of the community or loss of their interest in traditional lands. Could be considered as non-taxable damages or, arguably, Indian property pursuant to paragraph 90(1)(b) of Indian Act as it appears to be paid in lieu of treaty rights. Alternatively, may be considered income to the Band, which is exempt under par.149(1)(c); (3) The Band may be considered to have indirectly or constructively received the Settlement Funds and contributed them in the Trust. The property of the Trust may revert to the Band and may be distributed in accordance with the Bands direction on consent; (4) Where subsection 107(2) or (2.1) applies to a distribution, their is no benefit for the purposes of subsection 105(1). Subsection 107(4.1) applies in respect of the distribution to the Elders and per capita to all Members as made in satisfaction of their capital interests in the Trust and all other conditions of 107(4.1) are met; (5) The reference in 107(1)(a)(ii)(A) to the cost amount immediately before the disposition of the capital interest refers to the amount determined under paragraph (a) of the definition of "cost amount" in subsection 108(1) as there has been a distribution of property by the trust; (6) The trust is a personal trust and the distributions are made to beneficiaries of the Trust; (7) Income on income from property held by the Trust is not subject to subsection 75(2). However, provisions of the Trust Agreement provide that all the income derived on Trust Property is payable to the Band and therefore a deduction may be claimed by the Trust under 104(6).
XXXXXXXXXX 2001-010663
XXXXXXXXXX, 2001
Dear Sir:
Re: Advance income tax ruling request
XXXXXXXXXX ("First Nation")
This is in reply to your letters of XXXXXXXXXX in which you request an advance income tax ruling on behalf of the above named taxpayer. We also acknowledge the additional information you provided in your correspondence of XXXXXXXXXX and during our various telephone conversations in connection with your request (XXXXXXXXXX).
We understand that, to the best of your knowledge and that of the taxpayer involved, none of the issues involved in the ruling request
(i) is in an earlier return of the taxpayer or a related person,
(ii) is being considered by a tax services office or taxation center in connection with a previously filed tax return of the taxpayer or a related person,
(iii) is under objection by the taxpayer or a related person,
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and
(v) is the subject of a ruling previously issued by the Directorate.
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
XXXXXXXXXX
XXXXXXXXXX
The following documents were submitted in support of your ruling request:
(a) a copy of a XXXXXXXXXX,
(b) a copy of a XXXXXXXXXX,
(c) a copy of the First Nation's XXXXXXXXXX Financial Statements for the year ended XXXXXXXXXX,
(d) a copy of the XXXXXXXXXX Arrangement between the First Nation and XXXXXXXXXX, and
(e) a copy of XXXXXXXXXX Agreements between the First Nation and XXXXXXXXXX, along with selected schedules describing XXXXXXXXXX services transferred under the control of First Nation as well as the associated resources.
Unless otherwise stated, all references to a statute are to the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
DEFINITIONS
In this letter
XXXXXXXXXX
"Canada" means Her Majesty the Queen in Right of Canada;
XXXXXXXXXX
"Council" or "Chief and Council" means the "council of the band" as defined by subsection 2(1) of the Indian 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 whose name appears on the First Nation's "Band List" as defined in the Indian Act and maintained by Indian and Northern Affairs Canada, or a person who is entitled to be on the "Band List" pursuant to the provisions of the Indian Act;
"Reserve" means "reserve" as defined in subsection 2(1) of the Indian Act;
XXXXXXXXXX
"Settlement Agreement" means the XXXXXXXXXX agreement between the First Nation and Canada dated XXXXXXXXXX;
"Settlement Funds" means the sum of $XXXXXXXXXX to be paid by Canada pursuant to the Settlement Agreement and deposited on behalf of the First Nation in a trust account or accounts established to hold the assets of the Trust;
"Trust" means the "XXXXXXXXXX" which is 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; and
"Trust Agreement" means the draft agreement between the First Nation and the Trustees dated XXXXXXXXXX, made in accordance with the Settlement Agreement.
The following terms are defined in the Settlement Agreement or the Trust Agreement and are used herein:
Authorized Investments
Band Purposes
Beneficiaries
XXXXXXXXXX
Grievances
Trust Account
Trust Fund
Trust Property
Trustees
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
FACTS
1. XXXXXXXXXX, the First Nation is recognized as a Band as defined under subsection 2(1) of the Indian Act.
2. XXXXXXXXXX.
3. As at XXXXXXXXXX, the First Nation had assets of $XXXXXXXXXX, liabilities of $XXXXXXXXXX, and equity of $XXXXXXXXXX.
4. XXXXXXXXXX.
5. There are approximately XXXXXXXXXX Members on-reserve and XXXXXXXXXX Members off-reserve.
6. Council elections are held pursuant to band custom. The term of office is three years.
7. Chief and Council are the government of the First Nation. They exercise control over the administration and development of reserve lands, represent the Members in dealings with third parties including the federal and provincial governments, resource development corporations, and others.
8. The First Nation provides and administers an extensive list of public works, social services and infrastructure programs for on-reserve Members including but not limited to:
? band administration
? XXXXXXXXXX
? water delivery
? legal services
? operations and maintenance (XXXXXXXXXX)
? infrastructure
? XXXXXXXXXX
? medical services (XXXXXXXXXX)
? social services (counseling, family and community support services)
? education XXXXXXXXXX
? human resources development (employment and training)
? economic development
? XXXXXXXXXX
? land use
9. Assets and facilities maintained by the First Nation include:
? buildings
? housing units
? mobile homes
? furniture, fixtures and equipment
? XXXXXXXXXX
? XXXXXXXXXX
? XXXXXXXXXX
? XXXXXXXXXX
? XXXXXXXXXX
? XXXXXXXXXX
10. XXXXXXXXXX.
11. XXXXXXXXXX.
12. XXXXXXXXXX.
13. XXXXXXXXXX .
14. XXXXXXXXXX .
PROPOSED TRANSACTIONS
15. Canada will enter into the Settlement Agreement for the purpose of obtaining a full and final settlement of the defined grievances of the First Nation XXXXXXXXXX.
16. XXXXXXXXXX.
17. Under the terms of the Settlement Agreement, which will become effective when ratified by the parties, Canada has agreed to pay to the First Nation the Settlement Funds together with other valuable consideration as provided therein, in full and final settlement of the grievances of the First Nation.
18. Canada has agreed to deposit the Settlement Funds for and on behalf of the First Nation in a trust account established by the trustees under the Trust Agreement.
19. Subject to certain distributions to Members (as explained in paragraphs 24 and 25 below) and other terms and conditions of the Trust Agreement, the Settlement Funds are to be administered by the trustees pursuant to the Trust Agreement as a long-term asset for the future benefit of the First Nation.
20. Under the terms of the Trust Agreement, the First Nation will establish the Trust to receive and administer the Settlement Funds on behalf of the beneficiaries who are the First Nation and its Members from time to time.
21. The Trust comes into effect when the trustees have signed the Trust Agreement and the trustees have received the Settlement Funds or a portion thereof. All beneficial right, title and interest in the trust property vests in the beneficiaries of the Trust.
22. Five trustees are to be appointed by Chief and Council: Three from Members resident on-reserve (only two of whom can be from Chief and Council) and two independent trustees.
23. XXXXXXXXXX. When the Trust is terminated, the trust property is to be transferred by the trustees to the First Nation absolutely.
24. The Trust has been established for the purpose of making cash distributions to XXXXXXXXXX Members as provided in the Trust Agreement, prudently investing and preserving the remaining trust property so that it will be available to benefit future generations, and paying the income thereof and, if necessary, a portion of the capital, to the First Nation for band purposes (as defined in the Trust Agreement). The Trust Agreement also provides for limited transfers or loans of capital to the First Nation for investment in real property.
25. XXXXXXXXXX.
26. Paragraph 11 of the Trust Agreement provides, inter alia, that the Trustees shall pay to the First Nation all of the net income derived from the trust property (as defined in the Trust Agreement) on a quarterly basis, or at such other intervals as agreed with Chief and Council. However, the Trustees may accumulate and reinvest such income, or a portion thereof, if Chief and Council give their consent in writing.
PURPOSE OF THE PROPOSED TRANSACTIONS
The purpose of the proposed transactions is to allow a final resolution of the past grievances of the First Nation related to XXXXXXXXXX.
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions and provided that the proposed transactions are carried out as 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. During any period beginning after the date of this letter in which the First Nation continues to be involved in the implementation of the settlement described in paragraph 15 above or continues to provide services of the type and magnitude referred to in paragraph 8 above, 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 by the First Nation on its taxable income for such a period.
B. The Settlement Funds to be received from Canada and the XXXXXXXXXX in settlement of past grievances, as described in paragraphs 16 and 17 above, will not be taxable to the First Nation.
C. Subject to paragraph (ii) of the Caveat below, any income or loss from the Settlement Funds received by the Trust as described in paragraphs 17 and 18 above or from property substituted therefor, and any taxable capital gain or allowable capital loss from the disposition of the Settlement Funds or property substituted therefor, 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, pursuant to subsection 75(2) of the Act.
D. The provisions of subsection 105(1) of the Act will not apply to the proposed distributions made by the Trust to the XXXXXXXXXX Members as described in paragraph 25 above. However, subsection 107(2.1) of the Act will apply (and subsection 107(2) of the Act will not apply) in respect of the distribution by the Trust of any of its property to the XXXXXXXXXX Members as described in paragraph 25 above.
E. Paragraph (a) of the definition of "cost amount" in subsection 108(1) of the Act will apply for the purposes of determining the adjusted cost base of the capital interest disposed of by the XXXXXXXXXX Members as a consequence of the distributions described in paragraph 25 above, as provided in paragraph 107(1)(a) of the Act.
F. Subject to subsections 107(2.001), (2.002) and (4) to (5) of the Act, where any property of the Trust is distributed by the Trust to the First Nation and there is a resulting disposition of all or any part of the First Nation's capital interest in the Trust, the provisions of subsection 107(2) of the Act will apply.
G. Subject to paragraph (ii) of the Caveat below, any income from the property of the Trust in a taxation year in respect of which subsection 75(2) of the Act does not apply, including in particular income on reinvested income from property of the Trust, will be considered to have become payable in the taxation year to the First Nation pursuant to paragraph 11 of the Trust Agreement and, as such, may be deducted in computing the income of the Trust for the taxation year to the extent provided in paragraph 104(6)(b) of the Act.
CAVEATS
Nothing in this advance income tax ruling should be construed as implying that we have considered:
(i) whether the First Nation is a Canadian municipality (we have not been asked to consider this nor have we attempted to make such a determination), and
(ii) the tax consequences of holding property pursuant to subparagraph 8(b) of the Trust Agreement, or property substituted therefor, XXXXXXXXXX.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.
The above rulings are also based on the draft versions of the agreements described above. Any substantive difference between these versions and the final versions could invalidate the rulings.
Yours truly,
XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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© Her Majesty the Queen in Right of Canada, 2001
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© Sa Majesté la Reine du Chef du Canada, 2001
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