2005 Ruling 2005-0112471R3 - Paragraph 149(1)(c) ruling.

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.

Principal Issues: Whether paragraph 149(1)(c) will apply to exempt the business income earned by a First Nation from its limited partnership interest.

Position: Yes.

Reasons: The First Nation can be considered a public body performing a function of government in Canada within the meaning of paragraph 149(1)(c).

XXXXXXXXXX 2005-011247

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "First Nation")

We are writing in response your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the First Nation.

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

i. in an earlier return of the First Nation or a related person;

ii. being considered by a tax services office or a tax centre in connection with a tax return already filed by the First Nation or a related person;

iii. under objection by the First Nation or a related person;

iv. before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and

v. the subject of a ruling previously issued by the Directorate to the First Nation or a related person.

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 definitions unless otherwise indicated.

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

Facts

1. The First Nation, also known as XXXXXXXXXX, is a "band" within the meaning of this term as defined under subsection 2(1) of the Indian Act.

2. The First Nation has one reserve, the XXXXXXXXXX (the "Reserve"), within the meaning of this term as defined under subsection 2(1) of the Indian Act, which is comprised of XXXXXXXXXX hectares.

3. The First Nation's mailing address is XXXXXXXXXX. It is served by the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Tax Centre.

4. The First Nation has approximately XXXXXXXXXX members (the "Members"), approximately XXXXXXXXXX of which live on the Reserve.

5. All of the First Nation's offices, along with any facilities under its control, are located on the Reserve. These facilities include a fitness centre, a band hall and a healing centre.

6. The First Nation is a party to XXXXXXXXXX and is a member of XXXXXXXXXX.

7. The First Nation's chief and council are democratically elected by the Members under Band Custom.

8. The First Nation has received an order-in-council authorizing it to manage its Revenue Moneys pursuant to Section 69 of the Indian Act.

9. The First Nation maintains a number of programs through funding provided by Indian and Northern Affairs Canada ("INAC") under a Comprehensive Funding Agreement. Some of these programs include:

? elementary/school education funding;
? post secondary education funding;
? land trust services;
? community infrastructure;
? social housing;
? economic development;
? recreation and sports;
? social assistance and social support services;
? child and family services;
? operating a day care centre; and
? operating Youth Outreach.

10. The First Nation has entered into an agreement with Health Canada, entitled the "XXXXXXXXXX", to provide a number of health services. These services are provided through the XXXXXXXXXX, located on the Reserve, and are with respect to the following:

? women's equality;
? Family Court assistance;
? court advocacy;
? health education;
? financial assistance;
? guardian financial assistance;
? the Family Growth program;
? the Head Start program;
? home and community care;
? the Brighter Futures program;
? prenatal care;
? mental health;
? AIDS prevention;
? solvent abuse;
? community health nursing;
? environmental health - drinking water safety;
? non-insured health benefits including patient transportation; and
? individual and group counseling.

11. The First Nation operates a housing support program to assist members with the construction of homes on the Reserve.

12. The First Nation maintains employment and training programs that include a full range of services.

13. The First Nation maintains its own water and sewage systems on the Reserve.

14. The First Nation looks after road maintenance on the Reserve.

15. The First Nation maintains a medical clinic on the Reserve.

16. XXXXXXXXXX

17. The First Nation has commenced proceedings in respect of a number of specific claims. The claims are in the early stages and none have been settled. These include:

? treaty annuity arrears;
? economic benefits: XXXXXXXXXX;
? lands in severalty provisions of XXXXXXXXXX;
? XXXXXXXXXX;
? treaty land entitlement;
? multiple use of rights of way;
? misuse of band funds;
? annuity review and renovation;
? loss of trapping rights; and
? loss of commercial trapping and hunting rights

18. The First Nation has entered into an unincorporated joint venture (the "Joint Venture") directly with XXXXXXXXXX to provide XXXXXXXXXX.

Proposed Transactions

19. The First Nation will incorporate a new corporation (the "Corporation"), to be called XXXXXXXXXX.

20. The First Nation and the Corporation will form a limited partnership to be known as XXXXXXXXXX (the "LP"), with the Corporation acting as the general partner. The First Nation will hold XXXXXXXXXX of the limited partnership units (the "Units"), while the Corporation will hold 1 Unit.

21. The price paid per Unit will be $XXXXXXXXXX. Any further capital sums to be contributed to the LP will be invested by the First Nation and the Corporation in proportion to the number of units held by each of them.

22. The First Nation will hold XXXXXXXXXX% of the shares of the Corporation and the remaining XXXXXXXXXX% of the shares will be held by an unincorporated association of independent contractors, all of whom will be Members who have their own businesses. The association will not itself carry on any business. Rather it will act as a liaison between XXXXXXXXXX representatives and the First Nation. The reason for this share ownership structure is to ensure that adequate representation is provided from the Members and to provide some separation of business matters from the political arena.

23. The income and losses of the LP, for both accounting and income tax purposes, will be allocated to the First Nation and the Corporation in proportion to the number of LP units held by each of them, i.e., the First Nation will receive XXXXXXXXXX% of such amounts while the Corporation will receive XXXXXXXXXX%.

24. It is expected that any income allocated to the Corporation from the LP in respect of its XXXXXXXXXX% interest will be used by it to cover the cost of administration. In any event, no independent contractor will receive any income from the LP; however, independent contractors may enter into arm's length agreements with the LP to provide services at arm's length rates.

25. The First Nation will transfer its interest in the Joint Venture to the LP by having the Joint Venture agreement amended.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to minimize third party liability claims.

Ruling

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, we rule as follows:

A. The First Nation is a public body performing a function of government in Canada within the meaning of paragraph 149(1)(c) of the Act and, accordingly, no Part I tax will be payable by the First Nation on any amounts included in its income as a result of the transactions described above, which, for greater certainty, may include income allocated from the LP and income or capital gains realized from the disposition of its interest in the Joint Venture

The above advance income tax ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular IC 70-6R5, dated May 17, 2002, and is binding on the Canada Revenue Agency provided the proposed transactions are implemented before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch

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