2002 Ruling 2002-0170903 - INDIAN BAND TRUST INCOME

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 subsection 75(2) will apply to the Trusts' income; and
3. Whether subsection 105(1) will apply to the distributions made by the Trust to the Band.

Position:

1. Yes.

2. Yes.

3. No.

Reasons:

1. The Band is involved in negotiating a claim 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;

2. The Band will be considered to constructively receive and contribute the Settlement Amounts to the Trust. The property of the Trust may revert to the Band and may be distributed in accordance with the Bands direction on consent; and
3. Where subsection 107(2) or (2.1) applies to a distribution, there is no benefit for the purposes of subsection 105(1).

XXXXXXXXXX 							2002-017090	

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Band") (XXXXXXXXXX)

This is in reply to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

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

Facts

1. The Band is an Indian band within the meaning of subsection 2(1) of the Indian Act. Its major reserve is located at XXXXXXXXXX.

The Band's address is XXXXXXXXXX. The Band files its tax returns with the XXXXXXXXXX Tax Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.

2. The Band has been exercising active control over its community. Through elections conducted under section 74 of the Indian Act, the members of the Band elect a chief and councillors (hereinafter collectively referred to as the "Council"). The Council represents the government of the Band.

3. The Band is authorized pursuant to section 69 of the Indian Act to control the spending of its Indian monies deposited to the revenue account established by the Department of Indian Affairs and Northern Development under the Indian Act.

4. The Band has, with the agreement of the Federal Government, assumed responsibility for the following programs affecting its members:

(a) education;

(b) social development;

(c) economic development;

(d) employment and training;

(e) community and public health;

(f) capital infrastructure; and

(g) governance.

5. XXXXXXXXXX.

6. The Band has passed several bylaws.

7. XXXXXXXXXX.

8. As a result of negotiations, the parties have negotiated and initialled an agreement (the "Settlement Agreement") relating to the Claim. The Settlement Agreement was initialled on XXXXXXXXXX by the negotiator for Canada and the Band's solicitor. The signatures of each of the parties must be ratified by Canada and the members of the Band. The terms of the Settlement Agreement calls for the following payments:

XXXXXXXXXX.

Proposed Transactions

9. Canada and the members of the Band will ratify the Settlement Agreement. The Band will establish a trust (the "Trust") pursuant to the terms of the Settlement Agreement. The terms of the trust agreement (the "Trust Agreement") establishing the Trust will set out arrangements for the receipt and distribution of amounts received by the Band under the Settlement Agreement.

10. The trustees of the Trust will consist of XXXXXXXXXX persons, XXXXXXXXXX members of the Band and a corporate trustee. XXXXXXXXXX of the XXXXXXXXXX members of the Band will have to be members that do not live on the Band's reserves. The corporate trustee will be an independent corporate trustee licensed to operate a trust company in Canada. Discussions are under way with a major trust company to provide these services. The corporate trustee will only have one vote in any circumstances where the trustees are required to vote but it will also have a tie-breaking vote in the event of a tie. As a measure to prevent unauthorized withdrawals, the corporate trustee will be a required signatory on all cheques and all other documents permitting the withdrawal of funds from the Trust.

11. The Trust will hold property for the benefit of the Band and the present and future members of the Band, who are the sole beneficiaries of the Trust. The Band will be the sole contributor of property to the Trust. Upon the termination of the Trust, the property of the Trust will revert to the Band as settlor of the Trust.

12. There will be two accounts administered by the trustees of the Trust, the Trust Capital Account and the Trust Revenue Account. The Band will direct Canada to deposit, on its behalf, the cash payments described in 8(a) above as required under the Settlement Agreement.

13. Under the Trust Agreement, certain payments will have to be paid directly out of the Trust immediately upon receipt of the cash payment described in 12 above or at a specific time subsequent to such receipt. These immediate payments will include a payment to the Band for its outstanding professional fees and disbursements owing in respect of the negotiation, settlement and implementation of the Settlement Agreement, a payment to the Band to cover its estimated costs to implement the Settlement Agreement and the Trust Agreement and a payment to the Band of $XXXXXXXXXX for the purpose of completing a one time per capita distribution to the members of the Band. Except for the payments described herein, the remainder of the cash payments received under the Settlement Agreement will be placed in the Trust Capital Account. Under the Trust Agreement, the remainder of the cash payments cannot be used for per capita distributions to members, cannot be mortgaged, pledged, hypothecated or encumbered in any way and can only be invested in investments authorized under the Trust Agreement. The Trust Capital Account will be maintained for the future use of the Band and the trustees are not permitted to release any such monies therefrom prior to the termination of the Trust, except for the Net Income on such monies which will be paid to the Band each year on the terms set out in 14 below. "Net Income" is defined in the Trust Agreement as the taxable income for income tax purposes, except that it includes 100% of any capital gain, excludes any gross-up of any dividend and is calculated without reference to subsection 75(2) or 104(6) of the Income Tax Act (the "Act").

14. Notwithstanding that monies contributed to the Trust Capital Account are to remain in that account, the terms of the Trust Agreement will require that all of the Net Income for a taxation year be distributed to the Band. Therefore, funds equal to the amount of the Trust's Net Income will be transferred annually from the Trust Capital Account to the Band's bank account.

Because the Trust is intended to remain in effect for an extended period of time, there is a concern that merely preserving the initial capital in the Trust may not result in sufficient funds being available to provide similar benefits to future generations since the buying power of the capital will be reduced as a result of inflation. As a result, the Trust Agreement also provides that the Trust Capital Account is to be supplemented annually by way of loans from the Band to the Trust so that it will, at a minimum, increase with increases in the cost of living. The Band will make loans to the Trust at least equal to the income distributed to the Band by the Trust as described herein. Half of the loan proceeds determined with reference to the Net Income distributed to the Band by the Trust will form part of the Trust Capital Account and the other half will form part of the Trust Revenue Account.

15. The trustees do not have any discretion regarding the release of funds from the Trust Revenue Account if conditions of disbursement are satisfied. The Council may request withdrawals at any time from the Trust Revenue Account where the amounts will be used for a Band Project. Band Projects are defined in the Trust Agreement to include Band Benefit (non-business type purposes) and Band Development (business type purposes). Band Development will be defined in the Trust Agreement to mean a business activity in which the Band has a financial interest pursuant to a resolution of the Council. Band Benefit will be defined to mean a non-business activity or undertaking which is intended to provide benefit to the Band or members of the Band and which comes within one of the following categories:

(a) education and vocational training;

(b) housing on and off the reserve;

(c) health including dental benefits and drug and alcohol counselling or rehabilitation;

(d) Band governance and administration including construction of related facilities;

(e) social, cultural and recreational programs including the construction of related facilities;

(f) purchase of lands, buildings, equipment and related assets for the benefit of the Band;

(g) loans, mortgages and grants to members of the Band for education, housing or health; and

(h) loans to the Trust pursuant to section 9 of the Trust Agreement.

16. Subject to certain payment limits, the trustees do not have authority to refuse a use of funds that are in the Trust Revenue Account if the Band's request for funds comes within the definition of either Band Benefit or Band Development. The Council will request funds from the Trust Revenue Account on behalf of the Band. However, requisitions for amounts that exceed the payment limits for Band Benefits and Band Developments will require approval by a referendum vote of the members of the Band. Consequently, depending on the amount requested and the purpose for which the funds are to be used, the use of the funds in the Trust Revenue Account will be within the control of the Council. Where the amount requested exceeds the payment limits of the Council, the use of the excess funds will be within the control of the Band as a whole through the referendum vote. The purpose for requiring the Band or the Council to identify the use of the funds is to provide protection against the misuse of such monies and to prohibit expenditures which do not benefit the Band.

17. The loan requirement does not restrict the right of the Band to access the Trust Revenue Account. The Band may use funds from other unrelated sources outside of the Trust to fund the loans described in 14 above. If the conditions of the Trust are satisfied, there is no provision for the trustees to withhold funds from the Trust Revenue Account except in circumstances where the Band defaults in providing the required loan amounts.

18. The Trust Agreement will restrict the investments that may be acquired by the Trust.

Purpose of the Proposed Transactions

19. The purpose of the proposed transactions is to ensure that the funds received under the Settlement Agreement will be expended in a manner that benefits the Band and the present and future members of the Band and to ensure that the income earned in respect of the funds received under the Settlement Agreement retains its tax-exempt status as though the funds were received directly by the Band and the income were earned directly by the Band.

Additional Information

20. To the best of your knowledge and the knowledge of the Band, none of the issues involved in this request for an advance income tax ruling:

(a) is in an earlier return of the Band or a member of the Band or of a person related to the Band;

(b) is being considered by a tax services office or tax centre in connection with a previously filed return of the Band or of a member of the Band or of a person related to the Band;

(c) is under objection by the Band or of a member of the Band or by a person related to the Band;

(d) is before the courts; or

(e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate to the Band or a member of the Band or to a person related to the Band.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are as described above, we rule as follows:

A. Pursuant to subsection 75(2) of the Act, any income or loss of the Trust from monies settled on the Trust as described in 13 and 14 above or from property substituted therefor, and any taxable capital gain or allowable capital loss from the disposition of property held by the Trust 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 Band.

B. During any period beginning after the date of this letter in which the Band continues to be involved in the implementation of the Settlement Agreement described in 8 above or continues to provide services of the type referred to in 4 above, the Band 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 Band on its taxable income for such a period.

C. The provisions of subsection 105(1) of the Act will not apply to the proposed transactions, in and by themselves.

The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate