2003 Ruling 2002-0152353 - XXXXXXXXXX F/N Settlement-Trust

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 First Nation will be exempt under 149(1)(c).

2. Whether the Settlement Monies will be taxable on receipt.

3. Whether a specific per capita distribution from the First Nation to its Members will be taxable.

4. (a) Whether income or loss from property acquired with monies settled in the trust by the First Nation will be deemed to be income of the First Nation pursuant to 75(2).

(b) Whether 75(2) will similarly apply with respect to funds contributed in future years by the First Nation to the Trust.

5. Whether any income of the trust that is not subject to 75(2) will be considered payable to the First Nation and thus deductible pursuant to 104(6).

6. Whether any distribution by the trust to the First Nation will be governed by 107(2).

Position: 1. Yes (as determined by W/S 045: Aboriginal and Non-Profit Section).

2. No (as determined by W/S 045).

3. No (as determined by W/S 045).

4. (a) Yes.

(b) Yes, but only with respect to funds that are contributed voluntarily.

5. Yes, but only with respect to income that does not have to be recontributed to the Trust.

6. Yes.

Reasons:

1. 2002-015576 consultation; consistent with other rulings (2000-0033283; 1999-0005513).

2. 2002-015576 consultation; consistent with other rulings (2000-0033283).

3. 2002-015576 consultation. The per capita distribution from the First Nation to its Members out of funds obtained by way of a capital distribution from the Trust will not constitute income from a source to the Members within the meaning of paragraph 3(a) of the Income Tax Act. (Also, paragraph 3(b) is not applicable.)

4 (a) The First Nation will be the settlor of the Trust, directing Canada to make payments to the Trust on behalf of the First Nation. The First Nation is the sole beneficiary and on the termination of the Trust, all of the Trust's property will be transferred to the First Nation.

(b) Pursuant to the Trust Agreement, all Revenues Realized in the Trust will be distributed each year to the First Nation, but the First Nation is under obligation to return, in the next year, sufficient funds to ensure a certain amount of capital in the Trust. That amount will be the total of the previous amount of capital plus a specified percentage of the Revenues Realized in the immediately preceding year. To the extent that the amount that would, but for 104(6), be the Trust's income is distributed and not required to be recontributed, we will consider 104(6) and (13) to apply. To the extent it has to be repaid, we consider the amount was never paid and never recontributed (following our 1985 CTF position on EBPs) - i.e. no 104(6) deduction for the Trust, no 104(13) income for the beneficiary and no further contribution of capital for purposes of 75(2). In making the determination as to which source of income is being recontributed in a year, we will consider that the source will first be income that was subject to subsection 75(2) in the Trust since such income could have been left in the Trust (rather than being distributed and recontributed) without causing the Trust to have income tax payable.

From a First Nation perspective, the distribution and partial recontribution of funds appears to be a better solution (to the problem of trying to make income payable to a First Nation as sole beneficiary without necessarily reducing the cash in the trust) than arrangements we have previously confirmed wherein promissory notes will be issued (as payment for income payable) but perhaps not presented to the trust for payment. The only problem with this approach is if our position on EBPs would, based on the actual amounts involved in any particular year, result in a 104(6) denial for the trust.

5 See comments in point 4(b) above.

Another consideration is whether the issuance of promissory notes will constitute payment of income. Each year, the Trust will distribute its Revenues Realized to the First Nation and, normally, the income will be distributed by way of transfers to a bank account maintained by the First Nation. There is also provision for payment to be made by way of demand promissory notes which will be accepted by the First Nation as absolute payment. In other files, a concern has been whether the issuer of the notes has the ability to meet demands for payment and this has been accomplished by enabling the trustees to borrow funds if needed. In this file, the Trust is restricted as to the types of investments it can make and thus, although the Trust is not authorized to borrow funds, it will be able to meet any demands for payment of a promissory note by cashing in liquid investments or by distributing investments (e.g. Government of Canada bonds). Thus, the promissory notes will be truly payable on demand.

6 The trust will qualify as a personal trust since the First Nation will be the settlor of the trust and the interest will not be acquired for consideration.

XXXXXXXXXX 2002-015235

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

RE: Advance Income Tax Ruling
XXXXXXXXXX (the First Nation)

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the First Nation. We also acknowledge your subsequent letters and our related telephone conversations.

To the best of your knowledge, and that of the First Nation, none of the issues involved in the ruling request is:

(a) in an earlier return of the First Nation or a related person,

(b) being considered by a tax services office or taxation center 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, if a judgment has been issued, the time limit for appeal to a higher court has not expired, or

(e) the subject of a ruling previously considered by the Directorate.

You provided us with the following documents:

(a) a copy of the First Nation's Financial Statements for the year ended XXXXXXXXXX;

(b) a draft copy of the Settlement Agreement; and

(c) a draft copy of the Trust Agreement.

All terms used herein that are defined in the Income Tax Act have the meaning given in such definition unless otherwise indicated.

DEFINITIONS

In this letter:

"Income Tax Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended;

"Canada" means Her Majesty the Queen in right of Canada;

"CCRA" means the Canada Customs and Revenue Agency;

"Chief" means the Chief of the First Nation;

"Council" means the duly elected council of the First Nation, which consists of the Chief and Councillors;

"First Nation" means the XXXXXXXXXX;

"Indian Act" means the Indian Act, R.S.C. 1985, c. I-5, as amended, and the regulations made pursuant to that Act;

"Institution" means the bank or trust company which becomes a party to the Trust Agreement;

"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 the First Nation in accordance with section 10 of the Indian Act;

"Reserve" means Indian Reserve XXXXXXXXX , a tract of land, the legal title to which is vested in Canada, which has been set aside by Canada for the use and benefit of the First Nation and includes any additional tracts of land which may be so vested and so set aside in the future;

"Settlement Agreement" means the XXXXXXXXXX Settlement Agreement between the First Nation and Her Majesty the Queen in right of Canada;

"Settlement Monies" means the sum of $XXXXXXXXXX to be paid by Canada pursuant to the Settlement Agreement, all of which (except for $XXXXXXXXXX which will be applied as a repayment of monies previously loaned to the First Nation by Canada) is to be deposited by Canada on behalf of the First Nation in the Trust Account established pursuant to the Trust Agreement to hold the assets of the Trust;

"Trust" means the XXXXXXXXXX Trust which is the inter vivos trust (as defined in subsection 108(1) of the Income Tax Act) to be established by the First Nation pursuant to the terms of the Trust Agreement; and

"Trust Agreement" means the XXXXXXXXXX Trust Agreement among the First Nation, certain trustees and a financial institution (the form of which is attached to the Settlement Agreement as Schedule "XXXXXXXXXX").

The following definition is contained in the Settlement Agreement and is used herein:

"Claim" means any and all the facts, matters and issues arising or resulting, directly or indirectly, from, or set forth in, the specific claim submitted by the First Nation to Canada in XXXXXXXXXX, including all supplemental submissions XXXXXXXXXX.

The following definitions are contained in the Trust Agreement and are used herein:

"Authorized Expense Account" means the account established by the Chief and Council on behalf of the First Nation at any Bank, Trust Company or Credit Union for the specific purposes required under this [Trust] Agreement;

"Authorized Investments" means any of those instruments, notes, bonds or other securities which the Trustees, in accordance with the terms of this [Trust] Agreement, are authorized to purchase, with the Trust Property, and which authorized forms of investment are more particularly set forth in Schedule "XXXXXXXXXX" [of the Trust Agreement];

"Band Account" means the account of the First Nation to be established by the Chief and Council on behalf of the First Nation at the Institution for the specific purposes required under this [Trust] Agreement;

"Band Development" means the investment and/or utilization of Trust Property for the following purposes:

(a) Business;

(b) Acquisition of Land or Improvements; or

(c) Any socio-economic benefit, or any other program, service or project which is for the use, development, advantage or benefit of the First Nation or a Member, excluding, however, per capita distributions to the Members and payments to the First Nation to cover any shortfall in operating funding of the First Nation;

"Beneficiary" means, for the purposes of this [Trust] Agreement, the First Nation, including all Members of the First Nation on a collective and undivided basis;

"Revenues Earned" means the income of the XXXXXXXXXX Trust for a Fiscal Year as such income is computed in accordance with the Income Tax Act, but without reference to subsections 75(2), 82(1)(b) and 104(6) of the Income Tax Act;

"Revenues Realized" means the net amount of revenue or income that is actually realized for a Fiscal Year from the Trust Property, including any capital gains and losses realized;

"Trust Account" means the account to be established by the Trustees at the Institution pursuant to Article XXXXXXXXXX and to which Canada, pursuant to the Settlement Agreement, is to deposit the Settlement Monies;

"Trust Property" means all monies now or hereafter on deposit in the Trust Account and all Authorized Investments, including all Investment Instruments, in which the monies in the Trust Account may from time to time be invested as well as any additions or accruals thereto and also includes, without limitation, all revenue and other income realized thereon; and

"Trustees" means collectively those individuals appointed to act as Trustees on behalf of the First Nation pursuant to this [Trust] Agreement, and any individuals from time to time thereafter appointed or substituted therefore, and "Trustee" means any one of such Trustees.

The term "Minimum Amount" is defined in the Trust Agreement and is summarized in paragraph 27 below.

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

FACTS

1. The First Nation is a "band" as defined in subsection 2(1) of the Indian Act.

2. The First Nation's postal address is:

XXXXXXXXXX.

3. The relevant tax services office is XXXXXXXXXX Tax Services Office.

4. The First Nation has the following accounts with the CCRA:

(a) XXXXXXXXXX, and

(b) XXXXXXXXXX.

5. The Council is a "council of the band" as defined in subsection 2(1) of the Indian Act.

6. The Reserve is a "reserve" as defined in subsection 2(1) of the Indian Act.

7. As at XXXXXXXXXX, the First Nation had assets of $XXXXXXXXXX, liabilities of $XXXXXXXXXX, and equity of $XXXXXXXXXX.

8. There are approximately XXXXXXXXXX Members of the First Nation, with approximately XXXXXXXXXX Members residing on the Reserve and approximately XXXXXXXXXX Members residing off the Reserve.

9. Council elections are held pursuant to the provisions of the Indian Act. The term of office is XXXXXXXXXX years.

10. The Council is 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, and have the power to make by-laws in accordance with the Indian Act.

11. XXXXXXXXXX.

12. The First Nation is authorized pursuant to section 69 of the Indian Act to control the spending of its Indian moneys deposited to the revenue account established by the Department of Indian Affairs and Northern Development under the Indian Act.

13. The First Nation provides and administers an extensive list of public works, social services and infrastructure programs for Members including but not limited to:

? band administration

? water treatment and delivery system

? legal services

? housing programs

? operations and maintenance

? infrastructure (including roads, sanitation and landfill)

? fire protection

? medical services

? social services (counseling, family and community support services)

? education (see paragraph 14 below)

? human resources development (employment and training)

? recreation

? economic development

? land use

14. The Education Committee was set up by the Council to manage the XXXXXXXXXX Education Department. The Education Committee reports to the Council. The Education Department administers a primary education program consisting of a full-time nursery and kindergarten program along with grades one, two and three.

The total enrolment for the XXXXXXXXXX school year is XXXXXXXXXX students. The Education Department employs XXXXXXXXXX teachers, XXXXXXXXXX teacher assistants and an administration staff of XXXXXXXXXX.

15. Assets and facilities maintained by the First Nation include:

? buildings (including school, band office, health clinic and maintenance sheds)

? housing units

? mobile homes

? maintenance machinery, school buses and other vehicles

? furniture, fixtures and equipment

? recreational facilities

? fire hall and fire engine

? roads

? water treatment plant

? commercial land and building in XXXXXXXXXX.

16. The First Nation has passed a number of bylaws.

17. The First Nation is currently undertaking a constitution and self-government process.

18. Apart from:

(a) hiring professionals and paying for other services to advance its Claim against Canada;

(b) hiring professional and paying for other services to assist in negotiating the settlement, described in this letter, of the Claim; and

(c) borrowing monies from Canada in order to pay the costs incurred for research and preparation of the Claim and for negotiation of the settlement;

the First Nation has not completed any significant transactions prior to the submission of this letter and will not undertake any significant transactions after the completion of the proposed transactions which may be part of the same series of transactions as the proposed transactions.

19. Following negotiations between the First Nation and Canada, the First Nation and Canada entered into the Settlement Agreement to settle the Claim of the First Nation (XXXXXXXXXX). The Settlement Agreement was ratified by the voting Members of the First Nation and will soon be signed by the Minister of Indian Affairs and Northern Development on behalf of Canada. The Trust Agreement has also been signed but no property has been settled and thus the Trust has not yet come into existence.

PROPOSED TRANSACTIONS

20. Under the terms of the Settlement Agreement, Canada will pay to the First Nation the Settlement Monies in full and final settlement of the Claim. Canada will pay the Settlement Monies in instalments, as follows:

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

Note: the first instalment includes $XXXXXXXXXX, which will be applied as a repayment of monies previously loaned to the First Nation by Canada.

Canada will make every reasonable effort to pay the Settlement Monies to the First Nation as soon as possible, rather than at the above dates.

21. Under the terms of the Settlement Agreement, the First Nation directs Canada to deposit the Settlement Monies into the Trust Account.

22. The First Nation will establish the Trust to receive and administer the Settlement Monies on behalf of the Beneficiary.

23. Canada will deposit the Settlement Monies for and on behalf of the First Nation into the Trust Account.

24. Subject to certain distributions to the First Nation (as explained in paragraph 0 below) and other terms and conditions of the Trust Agreement, the Settlement Monies deposited into the Trust Account will be invested by the Trustees in Authorized Investments.

25. The Trust will come into effect when the Trust Agreement is signed and Canada deposits the first instalment of the Settlement Monies into the Trust Account. All beneficial right, title and interest in the Trust Property shall vest in the Beneficiary.

26. The Chief and Councillors will act as interim Trustees. Thereafter, XXXXXXXXXX Trustees will be selected by the First Nation from time to time, generally for XXXXXXXXXX terms; XXXXXXXXXX from Members resident on the Reserve and XXXXXXXXXX from Members resident off the Reserve.

27. The Trust Agreement requires that, during the existence of the Trust, the value of the Trust Property be maintained at no less than the Minimum Amount which is as follows:

(a)
After Canada makes the first instalment

XXXXXXXXX % of the amount deposited to the Trust Account;

(b)
After Canada makes the second instalment

the amount determined under paragraph (a) plus XXXXXXXXXX% of the second instalment;

(c)
After Canada makes the third instalment

the amount determined under paragraph (b) plus XXXXXXXXXX% of the third instalment;

(d)
After Canada makes the fourth instalment

the amount determined under paragraph (c) plus XXXXXXXXXX% of the fourth instalment;

(e)
After Canada makes the last instalment
$XXXXXXXXXX

(f) Thereafter, the Minimum Amount will increase in each fiscal year, until the Trust terminates or the Trust Agreement is amended, by an amount set by the Council which amount shall at least be equal to the following percentages of the Revenues Realized from the previous fiscal year:

(i) XXXXXXXXXX

(ii) XXXXXXXXXX

(iii) XXXXXXXXXX and

(iv) Thereafter, in each fiscal year by a percentage approved by Member Resolution, but in the absence of a resolution being passed, the percentage will be XXXXXXXXXX%.

28. Subject to maintaining such Minimum Amount, the Trust Property will be utilized for the following purposes:

(a) For the transfer to the First Nation of up to $XXXXXXXXXX from the initial payment of Settlement Monies to pay the costs incurred by it in researching, preparing, negotiating and settling the Claim and ratifying the Settlement Agreement and the Trust Agreement;

(b) For the purchase by the First Nation of XXXXXXXXXX land to be added to the Reserve;

(c) For the transfer to the First Nation of up to $XXXXXXXXXX from the initial payment of Settlement Monies to be used by it for identified community development projects;

(d) For the transfer to the First Nation of up to $XXXXXXXXXX (or such greater amount as is determined in accordance with the Trust Agreement or as is approved by a vote of the Members) in each fiscal year to be used by it for Band Development purposes;

(e) For the investment of the Trust Property in Authorized Investments;

(f) For the transfer of Revenues Realized to the First Nation in the manner described in paragraph 30 below;

(g) For the transfer to the First Nation of up to $XXXXXXXXXX from the initial payment of Settlement Monies by XXXXXXXXXX for the purpose of paying administration expenses of the Trust; and

(h) For the transfer to the First Nation of up to $XXXXXXXXXX from the initial payment of Settlement Monies for the purpose of a per capita distribution by the First Nation to the Members.

29. The per capita distribution described in subparagraph 28(h) above will be made on the following basis:

		Age Group		Amount of Distribution
		XXXXXXXXXX 	$  XXXXXXXXXX
		XXXXXXXXXX 	$  XXXXXXXXXX
		XXXXXXXXXX 	$  XXXXXXXXXX
		XXXXXXXXXX 	$XXXXXXXXXX 

Payments for Members under XXXXXXXXXX years of age will be made to a trust for the benefit of such Members and payment of the per capita amount plus accrued interest will be payable to each Member upon attaining XXXXXXXXXX years of age.

30. The Trust Agreement provides the following procedure by which Revenues Earned and Revenues Realized will be paid to the First Nation:

(a) On an on-going basis (but no later than the last day of each fiscal year) the Trustees will estimate the Revenues Realized and will distribute such amount (without regard to the Minimum Amount) to the Band by transferring it to the Band Account unless, because of the nature of the Authorized Investments held by the Trust, it is not possible or it is not in the best interests of the First Nation to transfer the full amount, in which case the Trustees will transfer a smaller amount to the Band Account and will pay the difference to the First Nation by issuing a demand promissory note, dated no later than the last day of the fiscal year, to the First Nation as absolute payment;

(b) To the extent, if any, that Revenues Earned in a fiscal year exceed Revenues Realized in the fiscal year, the Trustees will pay the excess to the First Nation by issuing a demand promissory note, dated no later than the last day of the fiscal year, to the First Nation as absolute payment; and

(c) If the auditor of the Trust determines that the amount of Revenues Realized or Revenues Earned is different from the amount estimated by the Trustees, the amount transferred to the Band Account or the amount of the appropriate promissory note will be adjusted.

The ability of the First Nation to demand payment of such note and the ability of the Trustees to honour such demand are not restricted in any way.

31. As stated in the Trust Agreement, the First Nation will use the amounts transferred to the Band Account in a particular fiscal year as follows:

(a) At the beginning of the subsequent fiscal year, the First Nation will make a contribution to the Trust by way of a deposit to the Trust Account of the amount required to increase the value of the Trust Property to the Minimum Amount applicable in that subsequent fiscal year;

(b) The First Nation will transfer to the Authorized Expense Account, in monthly instalments, the budgeted amount of administration expenses of the Trust for payment of authorized expenses by the First Nation; and

(c) Unless the Members decide otherwise, the First Nation will contribute any funds remaining in the Band Account to the Trust by way of a deposit to the Trust Account before the end of the subsequent fiscal year.

32. When the Trust terminates, the Trust Property will be transferred by the Trustees to the First Nation absolutely.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to achieve a final resolution of the Claim of the First Nation against Canada and to ensure that funds are available for the future benefit of the First Nation.

The proposed transactions will have no impact on any outstanding tax liabilities of the First Nation.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. During any period beginning after the date of this letter in which the First Nation continues to provide services of the type referred to in paragraphs 13 and 14 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 Income Tax Act and, accordingly, no tax will be payable under Part I of the Income Tax Act by the First Nation on its taxable income for such a period.

B. The Settlement Monies to be received from Canada in settlement of the Claim, as described in paragraph 20 above, will not be taxable to the First Nation but will be exempt according to paragraph 81(1)(a) of the Income Tax Act pursuant to paragraph 87(1)(a) of the Indian Act.

C. The per capita distribution to be made by the First Nation to its Members, as described in subparagraph 28(h) and paragraph 29 above, will not be income from a source to the Members within the meaning of paragraph 3(a) of the Income Tax Act.

D. Any income or loss from the Settlement Monies received by the Trust as described in paragraphs 21 and 23 above, from funds transferred without obligation by the First Nation to the Trust Account (such as pursuant to subparagraph 31(c) above) or from property substituted for either of those, and any taxable capital gain or allowable capital loss from the actual or deemed disposition of the Settlement Monies, those transferred funds or property substituted for either of those, 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 Income Tax Act.

E. Any income from the property of the Trust in a taxation year in respect of which subsection 75(2) of the Income Tax Act does not apply, including, in particular, income on reinvested income from property of the Trust, will be considered, except to the extent that the First Nation is obligated to recontribute such income to the Trust (such as pursuant to subparagraph 31(a) above for the years prior to the years referred to in subparagraph 27(f)(iv) above), to have become payable in the taxation year to the First Nation and may be deducted in computing the income of the Trust for the taxation year pursuant to paragraph 104(6)(b) of the Income Tax Act. Funds recontributed to the Trust pursuant to subparagraph 31(a) above will be considered to be sourced first from distributed Revenues Realized that were subject to subsection 75(2) of the Income Tax Act.

F. Subject to subsections 107(2.001), (2.002) and (4) to (5) of the Income Tax 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 Income Tax Act will apply.

COMMENTS

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CCRA provided that Canada pays the first instalment of the Settlement Monies into the Trust by XXXXXXXXXX. These rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Income Tax Act.

Yours truly,

XXXXXXXXXX
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch