2003 Ruling 2003-0035443 - TAXATION OF INDIAN 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:

(A) Whether the Band is a public body performing a function of government.

(B) Whether the receipt of the Settlement Capital is taxable.

(C) Are per capita distributions income from a source within the meaning of paragraph 3(a) of the Act.

(D) Whether subsection 75(2) will apply to the Trusts' income.

(E) 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).

(F) Whether any distribution by the trust to the First Nation will be governed by 107(2). (G) Whether subsections 104(4), 104(5) and 104(5.2) will apply to Trust Property.

Position:

(A) Yes. (B) No. (C) No. (D) Yes. (E) Yes. (F) Yes, subject to subsections 107(2.001), (2.002) and (4) to (5). (G) No.

Reasons:

(A) The First Nation is actively involved in the community and provides extensive services and programs.

(B) Compensation is being paid in respect of the interest of a Band in surrendered lands and should therefore be exempt from taxation by virtue of paragraph 81(1)(a) of the Act and 87(1)(a) of the Indian Act.

(C) The amounts would not be considered income from a source within the meaning of paragraph 3(a) of the Act.

(D) 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.

(E) Section XXXXXXXXXX provides that if income earned exceeds income realized the excess shall become payable to the First Nation and will be evidenced by a demand promissory note.

(F) 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.

(G) All interests in the trust have vested indefeasibly. No provisions in the Trust Agreement which would divest the First Nation of its interest in the income and capital of the trust. Consequently the provisions of subsection 104(4), 104(5) and (104(5.2) by virtue of paragraph (g) of the definition of "trust" in subsection 108(1) of the Act.

XXXXXXXXXX 2003-003544

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

RE: Advance Income Tax Ruling
XXXXXXXXXX ("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 the information provided in our various 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 expired, or

(e) the subject of a ruling previously considered by the Directorate in respect of the First Nation or a related person.

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 (the "Act") have the meaning given in such definition unless otherwise indicated.

DEFINITIONS

In this letter:

"Advancement of Education Trust Account" means the Trust Account referred to in Article XXXXXXXXXX of the Trust Agreement and to which certain monies shall be transferred from the General Trust Account, in accordance with Article XXXXXXXXXX of the Trust Agreement, whose use shall be regulated in accordance with the terms and conditions set out in Schedule "XXXXXXXXXX" and Schedule "XXXXXXXXXX" of the Trust Agreement;

"Annual Distribution" means income arising from the investment of Trust Property, that according to the Trust Agreement is to be distributed by the Trustees to the Band Income Account and/or the Band Advancement of Education Account, as the case may be, during each Fiscal Year subject to Articles XXXXXXXXXX of the Trust Agreement;

"Authorized Investments" means any form of investment of the Trust Property which is authorized by the terms of the Trust Agreement, the range of which is more particularly set forth in Schedule "XXXXXXXXXX" of the Trust Agreement;

"Band" means the XXXXXXXXXX;

"Band Account" means an account listed in Article XXXXXXXXXX of the Trust Agreement and that is opened by the Band at an Institution situated on a Reserve;

"Band Account Management Regulations" means regulations for the effective regulation and control of the Band Accounts to be developed by the Council, approved by a majority of the Trustees and then implemented by the Council;

"Band Advancement of Education Account" means the Band Account to which certain monies shall be transferred from the Advancement of Education Trust Account, in accordance with Article XXXXXXXXXX and whose use shall be regulated in accordance with the terms and conditions set out in Schedule "XXXXXXXXXX" of the Trust Agreement, Article XXXXXXXXXX of the Trust Agreement and the Band Account Management Regulations;

"Band Authorized Expense Account" means the Band Account to which certain monies shall be transferred from the General Trust Account and the Band Income Account, in accordance with Article XXXXXXXXXX and Schedule "G"of the Trust Agreement, whose use shall be regulated in accordance with the terms and conditions set out in Schedule "XXXXXXXXXX" of the Trust Agreement, Article XXXXXXXXXX of the Trust Agreement and the Band Account Management Regulations;

"Band Capital Account" means the Band Account to which certain monies shall be transferred from the General Trust Account, in accordance with Articles XXXXXXXXXX of the Trust Agreement, whose use shall be regulated in accordance with the terms and conditions set out in Schedule "XXXXXXXXXX" of the Trust Agreement, Article XXXXXXXXXX of the Trust Agreement and the Band Account Management Regulations;

"Band Debt Reduction Account" means the Band Account to which certain monies shall be transferred from the General Trust Account, in accordance with Article XXXXXXXXXX of the Trust Agreement, whose use shall be regulated in accordance with the terms and conditions set out in Schedule "XXXXXXXXXX" of the Trust Agreement, Article XXXXXXXXXX of the Trust Agreement and the Band Account Management Regulations;

"Band Development" means one or more of the following:

(i) Programs and services of the Band provided for the benefit of its Members of the type and magnitude provided by a public body performing a function of government in Canada. Without limiting the generality of the foregoing, such Band programs and services may include programs and services relating to:

(A) social services and development;

(B) housing;

(C) the elderly;

(D) youth;

(E) health;

(F) education;

(G) justice and police;

(H) fire control;

(I) cultural awareness, maintenance and development;

(J) recreation;

(K) the purchase of XXXXXXXXXX land, including provision for the price and acquisition costs therefore;

(L) improvements to Reserve lands including but not necessarily limited to residential and non-residential buildings, recreational and cultural grounds, pipelines and infrastructure such as roads and utilities;

(M) disaster relief;

(N) band administration;

(O) band equipment and inventory ancillary to the foregoing programs and services; and

(P) the Band's costs of conducting a meeting or referendum pursuant to sections 39(1) or 39(2) of the Indian Act or such future legislation as may amend or replace these provisions from time to time hereafter.

(ii) Economic development including:

(A) business or commercial property or interests for which the Band has a direct or indirect beneficial interest either alone or together with one or more third party(s), the object of which is to make a profit for the benefit of the Band and any other person who has a beneficial interest;

(B) business or commercial property or interests owned by one or more Members, the object of which is to make a profit.

(iii) Contributions to the Trust.

"Band Income Account" means the Band Account to which certain monies shall be transferred in accordance with Article XXXXXXXXXX and Article XXXXXXXXXX of the Trust Agreement, whose use shall be regulated in accordance with the terms and conditions set out in Schedule "XXXXXXXXXX" of the Trust Agreement, Article XXXXXXXXXX of the Trust Agreement and the Band Account Management Regulations;

"Band Per Capita Distribution Account" means the Band Account to which certain monies shall be transferred from the General Trust Account, in accordance with Article XXXXXXXXXX of the Trust Agreement, whose use shall be regulated in accordance with the terms and conditions set out in Schedule "XXXXXXXXXX" of the Trust Agreement, Article XXXXXXXXXX of the Trust Agreement and the Band Account Management Regulations;

"Beneficiary" means the Band, being the body of Indians for whose use and benefit in common the Trust Property is settled by the terms and conditions of the Trust Agreement;

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

"CRA" means the Canada Revenue Agency;

"Claim" means all facts, matters and issues arising or resulting from one or more of the following allegations:

XXXXXXXXXX;

"Compensation" means the sum of $XXXXXXXXXX to be paid by Canada pursuant to the Settlement Agreement;

"Council" means the duly elected council of the First Nation, which includes the Chief of the First Nation;

"XXXXXXXXXX Land" means land in XXXXXXXXXX that is intended to be set apart as a Reserve pursuant to the XXXXXXXXXX Agreement and related agreements;

"General Trust Account" means the Trust Account referred to in Article XXXXXXXXXX of the Trust Agreement and to which all Trust Property, other than the amounts described in Article XXXXXXXXXX of the Trust Agreement, shall remain deposited subject to the terms and conditions for its maintenance, use, transfer and release, as set out in Articles XXXXXXXXXX and Schedule "XXXXXXXXXX" of the Trust Agreement;

"Income Earned" means the income from the investment of Trust Property for a fiscal year, computed in accordance with the Act but without reference to sections 75(2), 82(1)(b) and 104(6) thereof;

"Income Realized" means Income Earned that has actually been received from the investment of Trust Property in the same fiscal year, as it was earned;

"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 any bank or trust company that is a member institution of the Canada Deposit Insurance Corporation established pursuant to the Canada Deposit Insurance Corporation Act, R.S.C. 1985, c.C-3, and means any credit union incorporated, continued or registered pursuant to the Credit Union Act, 1998, S.S. 1998, c. C-45.2;

"Long Term Trust Capital" means all Trust Property other than Trust Property which is Short Term Trust Capital, Income Earned, Income Realized and any other income arising from the investment of Trust Property that is included in the Annual Distribution;

"Loss of Use Payments" means amounts paid by Canada to the First Nation, calculated at the rate of XXXXXXXXXX% per annum on the portions of the Compensation which remain unpaid after the effective date of the Settlement Agreement (other than the initial instalment of $XXXXXXXXXX);

"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 under XXXXXXXXXX, as amended or replaced from time to time;

"Negotiation Costs" means the sum of $XXXXXXXXXX incurred by the First Nation before the effective date of the Settlement Agreement for research, preparation, negotiation, and settlement of the Claim;

"Qualified Person" means a person who is living on the effective date of the Settlement Agreement and whose name appears on the effective date of the Settlement Agreement, or within six months following the effective date of the Settlement Agreement, in the Indian Registry System for the XXXXXXXXXX maintained by the Department of Indian Affairs and Northern Development under family groupings;

"Reserve" means Indian Reserves No. XXXXXXXXXX. These are tracts of land, the legal title to which is vested in Canada, which have been set aside by Canada for the use and benefit of the First Nation (as well as, in the case of Indian Reserve XXXXXXXXXX). "Reserve" includes other tracts of land which have been so vested and so set aside as well as any additional tracts of land which may be so vested and so set aside in the future;

"Settlement Agreement" means the XXXXXXXXXX between the First Nation and Canada which was ratified by the First Nation Members in a vote held on XXXXXXXXXX;

"Settlement Capital" means the Compensation together with the Loss of Use Payments;

"Short Term Trust Capital" means those portions of the Compensation that are designated as such (as described in paragraph 14 and 26 below) together with investments made therefrom but not including income arising from such investments except for the capital gains that are retained to offset prior capital losses (as described in paragraph 33 below);

"XXXXXXXXXX Agreement" means the XXXXXXXXXX;

"XXXXXXXXXX Trustees" means those individuals appointed to act collectively as trustees from time to time under the XXXXXXXXXX Agreement;

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

"Trust Agreement" means the XXXXXXXXXX between the First Nation and the Trustees;

"Trust Capital" means all Trust Property other than Income Earned, Income Realized and any other income arising from the investment of Trust Property and that is included in the Annual Distribution;

"Trust Property" includes the Settlement Capital paid into the General Trust Account, such other amounts as may be paid to the Trustees pursuant to the Trust Agreement, the investments made from Trust Property and income arising from the investment of Trust Property but does not include:

i) amounts transferred to the Band Accounts pursuant to the Trust Agreement; and

ii) amounts paid as described in subparagraphs 15(g), 27(a) and 27(b) below;

"Trustees" means the trustees of the Trust selected by the Council in accordance with the provisions of the Trust Agreement;

"Voting Members" means Members who are 18 years of age or older at the time of a vote and who have not been declared to be of unsound mind by a court of competent jurisdiction.

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

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

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

5. 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. Every Member is a Qualified Person. Every Qualified Person is an "Indian" as defined in subsection 2(1) of the Indian Act. Qualified Persons include individuals who became entitled to be registered as Indians by virtue of Bill C-31 even though XXXXXXXXXX has not yet been amended to entitle such persons to be added to the First Nation's Band List as Members.

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

7. 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.

8. 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.

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

(a) band administration;
(b) water treatment and delivery system;
(c) legal services;
(d) housing programs;
(e) operations and maintenance;
(f) infrastructure (including roads, sanitation and landfill);
(g) fire protection;
(h) medical services;
(i) social services including counselling, family and community support services;
(j) education;
(k) recreation;
(l) economic development; and
(m) land use.

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

(a) buildings (including a school, a band office, a health clinic and maintenance sheds);
(b) housing units;
(c) mobile homes;
(d) maintenance machinery, school buses and other vehicles;
(e) furniture, fixtures and equipment;
(f) recreational facilities;
(g) fire hall and fire engine;
(h) roads; and
(i) water treatment plant.

11. The First Nation employs XXXXXXXXXX teachers and XXXXXXXXXX teacher aides who teach approximately XXXXXXXXXX children in XXXXXXXXXX, inclusive, at the school on the Reserve.

12. The First Nation has passed a bylaw pursuant to section 81 of the Indian Act.

13. Subject to paragraphs 14, 15, 16, 17, 18, 19 and 20 below and apart from:

(a) Hiring professional and other services to advance its Claim against Canada;

(b) Hiring professional and other services to assist in negotiating the Settlement Agreement, described in this letter, in respect of the Claim; and

(c) Borrowing monies from Canada and from a financial institution in order to pay the costs incurred for research and preparation of the Claim and for the negotiation of the Settlement Agreement;

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.

14. Following negotiations between the First Nation and Canada, the First Nation and Canada entered into the Settlement Agreement to settle the First Nation's Claim. The Settlement Agreement was ratified by the Voting Members of the First Nation. The Trust Agreement has also been signed effective XXXXXXXXXX. Under the terms of the Trust Agreement, the First Nation has established the Trust to receive and administer the Settlement Capital on behalf of the Beneficiary. The first instalment of $XXXXXXXXXX of the Compensation has been deposited into the General Trust Account by Canada for and on behalf of the First Nation under the terms of the Settlement Agreement. Of that $XXXXXXXXXX, $XXXXXXXXXX has been designated as Short Term Trust Capital and the remainder has been designated as Long Term Capital.

15. The following transfers of Short Term Trust Capital have been made from the General Trust Account:

(a) $XXXXXXXXXX has been paid to a financial institution in respect of loans borrowed for the purpose of completing the settlement of the Claim and the ratification of the Settlement Agreement and the Trust Agreement;

(b) $XXXXXXXXXX has been transferred to the Advancement of Education Trust Account, to be used in the manner described in paragraph 30 below;

(c) $XXXXXXXXXX has been distributed to the First Nation by transfer to the Band Per Capita Distribution Account for the purpose of a per capita distribution described in paragraph 28 below;

(d) $XXXXXXXXXX has been distributed to the First Nation by transfer to the Band Debt Reduction Account for the purpose of repaying the First Nation's debts as described in paragraph 20 below;

(e) $XXXXXXXXXX has been distributed to the First Nation by transfer to the Band Capital Account to be used for Band Development as described in paragraph 31 below;

(f) $XXXXXXXXXX has been distributed to the First Nation by transfer to the Band Authorized Expense Account; and

(g) $XXXXXXXXXX has been paid to the First Nation's lawyers on account of their legal fees and disbursements.

16. Funds in both the General Trust Account and the Advancement of Education Trust Account have been invested for the short term in Canada Treasury Bills in order to maximize interest pending a more structured investment program.

17. All beneficial right, title and interest in the Trust Property has vested in the Beneficiary.

18. Under the terms of the Settlement Agreement and in addition to the first instalment of Compensation, Canada has paid $XXXXXXXXXX to the First Nation as a reimbursement of its Negotiation Costs by applying that amount as a repayment of a loan owed by the First Nation to Canada.

19. Under the terms of the Settlement Agreement, the First Nation absolutely surrendered to Canada, pursuant to the provisions of sections 38 and 39 of the Indian Act, all of the rights and interests the First Nation and its Members had in the Reserve lands that are the subject of the Claim.

20. In accordance with Schedule "XXXXXXXXXX" to the Trust Agreement, the First Nation has used the monies transferred to the Band Debt Reduction Account to repay term loans and operating facilities it owed to the XXXXXXXXXX for housing, equipment and deficit financing. The Band Debt Reduction Account has been closed.

PROPOSED TRANSACTIONS

21. Under the terms of the Settlement Agreement, Canada has agreed to pay the Settlement Capital (including the Compensation of $XXXXXXXXXX) to the First Nation in full and final settlement of Canada's obligations to the First Nation with respect to the Claim. In addition to the $XXXXXXXXXX payment of Compensation described in paragraph 14 above, Canada will pay the balance of the Settlement Capital in instalments, as follows:

Payment Dates
Compensation
Loss of Use of Payments
First anniversary of the effective date of the Settlement Agreement
XXXXXXXXXX
XXXXXXXXXX
Second anniversary of the effective date
XXXXXXXXXX
XXXXXXXXXX
Third anniversary of the effective date
XXXXXXXXXX
XXXXXXXXXX
Fourth anniversary of the effective date
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

Canada has the right to pay the Compensation earlier than the above payment dates. If such rights are exercised, the Loss of Use of Payments will be less.

22. Under the terms of the Settlement Agreement, the First Nation will ensure that the future instalments of the Settlement Capital described in paragraph 21 above will be deposited into the General Trust Account.

23. Canada will deposit the instalment payments of the Settlement Capital, described in paragraph 21 above, for and on behalf of the First Nation in the General Trust Account established by the Trustees at an Institution pursuant to the Trust Agreement.

24. All beneficial right, title and interest in the Property shall continue to vest in the Beneficiary.

25. For the first XXXXXXXXXX days, the Trust will have three trustees. They will consist of a federally registered trust company, the Chief of the First Nation and a Councillor selected by the Council of the First Nation. One of the Trustees is required to be such a trust company for at least the first XXXXXXXXXX-year period following the effective date of the Trust Agreement and for successive XXXXXXXXXX -year periods following that XXXXXXXXXX -year period unless the Voting Members terminate that requirement. Subsequent to this XXXXXXXXXX days period, there will be XXXXXXXXXX Trustees, all of whom will be Members (other than the trust company). One such Trustee who is a Member must reside off the Reserve.

26. Portions of the Compensation to be deposited into the General Trust Account will be designated as Short Term Trust Capital, as follows:

Payment of Compensation
Portion Designated as
Short Term Trust Capital
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

The remaining Settlement Capital will be designated as Long Term Trust Capital.

27. In addition to transfers described above, the Short Term Trust Capital will be used for the following:

(a) to pay additional amounts, to the First Nation's lawyers on account of their legal fees and disbursements up to a cumulative total amount of $XXXXXXXXXX;

(b) to transfer up to a cumulative total of $XXXXXXXXXX to the trust established under the XXXXXXXXXX Agreement for the purpose of completing the acquisition of XXXXXXXXXX Land as described in paragraph 29 below;

(c) to transfer additional amounts to a cumulative total of $XXXXXXXXXX to the Advancement of Education Trust Account, to be used in the manner described in paragraph 30 below; and

(d) to transfer additional amounts up to a cumulative total of $XXXXXXXXXX to the First Nation by transfer to the Band Capital Account to be used for Band Development as described in paragraph 31 below.

Commencing on the first day of the fiscal year following the XXXXXXXXXX anniversary of the date on which the Trust comes into effect, all remaining Trust Property (except for Income Earned, Income Realized, income included in the Annual Distribution or Trust Property in the Advancement of Education Trust Account) shall be designated as Long Term Trust Capital.

28. In accordance with Schedule "XXXXXXXXXX" to the Trust Agreement, the First Nation will use the monies transferred to the Band Per Capita Distribution Account to make a per capita payment to Qualified Persons, as follows:

Age as of the Effective Date
Per Capita Benefit
XXXXXXXXXX years or older
$XXXXXXXXXX
XXXXXXXXXX years, inclusive
$XXXXXXXXXX
less than XXXXXXXXXX years
see below

A Qualified Person under XXXXXXXXXX years of age may, after his or her XXXXXXXXXX birthday, receive $XXXXXXXXXX for each year of or portion thereof between the effective date and his or her XXXXXXXXXX birthday. XXXXXXXXXX may be paid immediately in trust to such Qualified Person's lawful guardian.

The Band Per Capita Distribution Account shall be closed on the earlier of the XXXXXXXXXX anniversary of the effective date of the Trust Agreement and the date on which all per capita benefits are paid. The First Nation shall contribute all remaining capital, if any, in the Band Per Capita Distribution Account to the Trust by depositing such capital to the General Trust Account.

29. The XXXXXXXXXX Agreement provides a process by which the XXXXXXXXXX Trustees may purchase XXXXXXXXXX Land. In accordance with Schedule "XXXXXXXXXX" to the Trust Agreement, the XXXXXXXXXX Trustees will use the monies transferred to the trust account established under the XXXXXXXXXX Agreement for the purpose of paying the purchase price and acquisition costs of XXXXXXXXXX Land recommended by the Council. The XXXXXXXXXX Trustees shall refund to the Trustees any monies not actually spent on the purchase price and acquisition costs of XXXXXXXXXX Land as well as monies spent on the purchase price and acquisition costs of XXXXXXXXXX Land if such XXXXXXXXXX Land is not set apart as a Reserve.

30. In accordance with Schedules "XXXXXXXXXX" and "XXXXXXXXXX" to the Trust Agreement, the Trustees shall invest the monies transferred to the Advancement of Education Trust Account in Authorized Investments. Income arising from such investments shall be disbursed by the Trustees to the Band Advancement of Education Account in the manner described in paragraph 34 below. The Advancement of Education Trust Account shall be closed on the XXXXXXXXXX anniversary of the effective date of the Trust Agreement and the trust capital therein shall be transferred to the General Trust Account and be treated thereafter as part of the Long Term Trust Capital.

31. In accordance with Schedule "XXXXXXXXXX" to the Trust Agreement, the First Nation may use the monies transferred to the Band Capital Account to pay for or fund Band Development (which may include a contribution by the First Nation to the Trust by a deposit to the General Trust Account). Schedule "XXXXXXXXXX" provides a petition process by which Members may require that particular proposed Band Development first be approved by the Members. In any case, the First Nation may use up to $XXXXXXXXXX from the Band Capital Account to reimburse the trust established under the XXXXXXXXXX Agreement for expenditures made for new housing on the Reserve.

32. The Long Term Trust Capital will be invested by the Trustees as a long-term asset for the future benefit of the First Nation. Once in each fiscal year following the XXXXXXXXXX anniversary of the effective date of the Trust Agreement and upon receiving a resolution from the Council directing them to do so, the Trustees shall transfer up to XXXXXXXXXX percent of the total book value of the Trust Capital to the Band Capital Account.

33. The income arising from the investment of Trust Capital, other than capital gains which are retained to offset prior capital losses as a combined result of the procedure described in subparagraph 34(a) below and subparagraph (i) of the definition of "Annual Distribution" as it is set out in the Trust Agreement (which subparagraph (i) provides for the distribution of the total capital gains less the total capital losses less the previous distributions of gains on capital), shall be due and payable in its entirety to the First Nation as at XXXXXXXXXX of each fiscal year. The fiscal year coincides with the calendar year.

34. The Trust Agreement provides the following procedures by which income arising from the investment of Trust Property will be paid to the First Nation by transfer to the Band Income Account (except for income arising from the investment of Trust Property in the Advancement of Education Trust Account, which will be paid to the First Nation by transfer to the Band Advancement of Education Account):

(a) on an ongoing basis during each fiscal year, but no later than XXXXXXXXXX of each fiscal year, the Trustees will pay to the First Nation the amount, if any, by which total taxable capital gains realized since the effective date of the Trust Agreement exceed the sum of total allowable capital losses realized since the effective date of the Trust Agreement and prior distributions of taxable capital gains since the effective date of the Trust Agreement;

(b) on an ongoing basis during each fiscal year, but no later than XXXXXXXXXX of each fiscal year, the Trustees will pay to the First Nation the amount of Income Realized (in respect of those kinds of income other than taxable capital gains);

(c) pursuant to Article XXXXXXXXXX of the Trust Agreement, if the Income Earned during a fiscal year exceeds the Income Realized during that Fiscal Year, the Trustees shall issue a promissory note dated no later than XXXXXXXXXX of the fiscal year in the amount of the excess to the First Nation which shall accept the promissory note as absolute payment.

(d) pursuant to Articles XXXXXXXXXX of the Trust Agreement, if due to the nature of the Authorized Investments held immediately prior to the end of the fiscal year, it is not possible or in the best interest of the First Nation to transfer all of the Income Realized, the Trustees shall issue an unrestricted demand promissory note in the amount of the shortfall to the First Nation, which shall accept the amount represented by the promissory note as absolute payment; and
(e) at a minimum during each fiscal year, the Trustees shall transfer the Annual Distribution.

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

35. The First Nation may invest any amounts on deposit in any of the Band Accounts. Income realized on such investment shall be deposited into the Band Income Account.

36. Pursuant to the Trust Agreement, the First Nation agrees that it will use the amounts transferred to the Band Income Account in a particular fiscal year as follows:

(a) the First Nation will transfer amounts from time to time from the Band Income Account to the Band Authorized Expense Account as are required to permit the First Nation to meet the obligations with respect to payment of administration expenses as described in paragraph 35 below; and

(b) subject to a petition process by which Members may require that a particular proposed expenditure first be approved by the Members, any remaining monies in the Band Income Account may be used by the First Nation to pay for Band Development (which may include a contribution by the First Nation to the Trust by a deposit to the General Trust Account) and to reimburse the First Nation for expenses incurred by it related to carrying out the terms of the Trust Agreement.

37. The Trustees and the Council will agree upon an annual budget for administration expenses of the Trust. The First Nation will pay budgeted administration expenses from the monies in the Band Authorized Expense Account.

38. The First Nation will use monies in the Band Advancement of Education Account to provide funds for the advancement of the education of the Members in accordance with policies developed by the First Nation from time to time. The Band Advancement of Education Account will be closed on the earlier of:

(a) the use, transfer or release of all remaining monies in the account after the close of the Advancement of Education Trust Account; and

(b) the XXXXXXXXXX anniversary of the effective date of the Trust Agreement.

The First Nation shall contribute all remaining capital, if any, in the Band Advancement of Education Account to the Trust by depositing such capital to the General Trust Account.

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

40. Pursuant to Article XXXXXXXXXX of the Trust Agreement, Article XXXXXXXXXX of the Trust Agreement will be modified to ensure that all promissory notes are payable on demand.

PURPOSE OF THE PROPOSED TRANSACTIONS

41. 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 paragraph 9 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 of the Act by the First Nation on its taxable income for such a period.

B The Compensation received from Canada in settlement of the Claim, as described in paragraph 14 and 21 above, will not be taxable to the First Nation but will be exempt according to paragraph 81(1)(a) of the Act pursuant to paragraph 87(1)(a) of the Indian Act.

C. The per capita distribution to be made by the First Nation to the Qualified Persons, as described in subparagraph 15(c) and paragraph 28 above, will not be income from a source to the Qualified Persons within the meaning of paragraph 3(a) of the Act and will not be considered proceeds of disposition with respect to a Qualified Person's interest in the Reserve.

D. Any income or loss earned on the Settlement Capital received by the Trust as described in paragraphs 14 and 21 above, earned on funds transferred by the First Nation to the General Trust Account as described in paragraphs 28, 31, 36 and 38 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 Capital, the funds transferred by the First Nation to the General Trust Account, 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 Act.

E. Any income earned on 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 the Trust Agreement and may be deducted in computing the income of the Trust for the taxation year pursuant to paragraph 104(6)(b) 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. For greater certainty, subsection 104(4) of the Act will not apply to cause there to be a deemed disposition of the Trust Property by virtue of paragraph (g) of the definition of "trust" in subsection 108(1) of the Act.

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 CRA provided that amendments to the Trust Agreement as described in paragraph 40 above are completed before XXXXXXXXXX. These rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act.

Yours truly,

XXXXXXXXXX
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch

- 17 -