2005 Ruling 2005-0136981R3 - First Nation as public body

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: Does a particular First Nation qualify as a public body performing a function of government within the meaning of paragraph 149(1)(c) of the Act, such that it would not pay Part I tax on income derived from its interest in a limited partnership or dividend income from ownership of shares?

Position: Yes

Reasons: The First Nation has entered into an agreement with the Federal government with respect to health care. In addition, the First Nation has passed by-laws pursuant to section 81 of the Indian Act. The First Nation provides schooling and numerous public works, social services and infrastructure programs

XXXXXXXXXX 2005-013698

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling - XXXXXXXXXX

This is in reply to your firm's letters of XXXXXXXXXX in which an advance income tax ruling was requested on behalf of the XXXXXXXXXX (the "First Nation").

We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:

(i) in an earlier return of the taxpayer or a related person,

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,

(iii) under objection by the taxpayer or a related person,

(iv) before the courts, or

(v) the subject of a ruling previously issued by the Directorate to the taxpayer or a related person.

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (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.

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

Facts

1. The First Nation is an Indian Band as defined in section 2 of the Indian Act. Its mailing address is XXXXXXXXXX. The First Nation is served by the XXXXXXXXXX Tax Services Office and by the XXXXXXXXXX Taxation Centre.

2. The First Nation has XXXXXXXXXX reserves, as defined in section 2 of the Indian Act, known as XXXXXXXXXX (collectively, the "Reserve"). XXXXXXXXXX

3. Most of the assets owned by the First Nation and its community are located on XXXXXXXXXX, including the band office, school and education buildings, health services, residential subdivisions and Band Council chambers.

4. In addition to the Reserve, lands have been set aside for the use and benefit of the First Nation. XXXXXXXXXX

5. The First Nation has a total registered population of XXXXXXXXXX members, all of whom are Indians as defined in section 2 of the Indian Act. Approximately XXXXXXXXXX of the First Nation members reside on XXXXXXXXXX. Non-reserve resident members generally live and work in a variety of locations outside of the Reserve.

6. A democratically elected Chief and XXXXXXXXXX elected Councillors govern the First Nation. Both on and off reserve members of the First Nation are eligible to vote for the Chief and Band Council. The Chief and Band Council are responsible for governance of the First Nation and represent the First Nation in all matters.

7. The First Nation has a comprehensive funding arrangement in place with Indian and Northern Affairs Canada ("INAC").

8. The Band Council makes band-provided housing available to eligible First Nation members. INAC and the Canada Mortgage and Housing Corporation provide funding for these houses. Allocations of band-provided housing are based on a Housing Policy established by the Band Council. All homes are built to Canadian National Housing Standards.

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

? Communication services, including cable services
? Employment/training
? Business development
? Road Maintenance
? Water/sanitation
? Local and regional economic development
? Youth Services
? Housing
? Health Services
? Animal Control
? Education Services
? Social Assistance Services
? Child Development Services
? Library Services
? Family Support Services
? Forestry Services
? Tourism Services
? Policing

10. Facilities maintained by the First Nation include:

? Band office
? Gymnasium
? Adult education centre
? Computer lab
? Water pump house
? Health station/services
? Landfill maintenance
? Garbage disposal playgrounds
? Tourism facilities
? Community complex (mall)
? Ice rink

11. The First Nation has passed by-laws pursuant to section 81 of the Indian Act. The section 81 by-laws have specific enforcement procedures set out in the by-laws and pertain to: regulation of curfew, disposal of garbage and waste, use and regulations of the garbage dump, control of misuse of firearms and animal control respecting the control of dogs on the First Nation.

12. The First Nation has an Order-in Council under section 69 of the Indian Act, giving it permission to control, manage or expend its revenue moneys.

13. The First Nation has developed a community XXXXXXXXXX-year plan to manage the development of community lots, housing, commercial development and economic development strategies. All land in the Reserve is held in a traditional manner and owned by the membership as a whole. The First Nation allows people and businesses to use the land and any improvements to the land. Most of the housing offered to band members has been built by the First Nation or its agents. Residents may construct their own buildings as long as approval is obtained from the Band Council.

14. The First Nation has entered into a Health Services Consolidated Contribution Agreement with Health Canada whereby the First Nation has accepted responsibility to provide certain health programs and services to its members. The services to be provided are set out in the Community Health Plan. Programs include those related to prenatal care, infant development, health education, substance abuse and addiction services, mental health, home care and other community health issues. The Band Council recently negotiated with Health Canada to renew its Health Services Transfer Agreement for a XXXXXXXXXX-year period commencing XXXXXXXXXX.

15. Secure lagoons are used to handle sewage wastes from all residential and commercial buildings within the community. The First Nation has constructed water-pumping facilities to provide water to residences.

16. The First Nation operates the water plant, which is located off reserve XXXXXXXXXX Each of the XXXXXXXXXX different authorities having jurisdiction over lands on XXXXXXXXXX maintains its respective water mains. All organizations and community members are charged a service fee by the First Nation.

17. The First Nation operates the sewage and sanitation system and provides garbage collection services to its members on the Reserve. All organizations and community members are charged a service fee by the First Nation.

18. XXXXXXXXXX.

19. All areas of the Reserve are serviced with electricity supplied by XXXXXXXXXX. The First Nation monitors this service on behalf of its members to ensure an appropriate level of service. When service issues arise, the First Nation resolves these issues with XXXXXXXXXX on behalf of the members.

20. The First Nation has installed a communications system on the Reserve, which provides for constant telephone and Internet access.

21. All buildings are available for use by the First Nation members. User fees and rental charges are levied for use of recreational and meeting facilities for certain activities. The Band Council establishes the user fees.

22. The First Nation owns and operates a XXXXXXXXXX square metre school and education centre for its residents. This building provides the services of primary and secondary education, a library and an Internet lab. The First Nation also provides adult education services to its members such as computer training, an entrepreneurship course, academic upgrading, professional development, wellness and health promotion.

23. By agreement, the First Nation pays tuition fees to the Province of XXXXXXXXXX for all school-aged children enrolled in provincial schools.

24. XXXXXXXXXX. The Band Council provides access to an employee pension plan to which employees contribute through payroll deductions. The Band Council, as employer, matches contributions.

25. The First Nation employs a Chief Executive Officer who, under the direction of the Band Council, is responsible for administrative management of the First Nation.

26. The First Nation owns and operates a sports centre, XXXXXXXXXX, for its residents. Various activities are held in the centre such as bingos, dances, bazaars and local or regional tournaments.

27. The First Nation holds rights to XXXXXXXXXX and other businesses, collectively, the "XXXXXXXXXX Assets."

Proposed Transactions

28. The First Nation proposes to become involved in the tourism industry. As part of this endeavour, it will purchase all of the voting shares of XXXXXXXXXX (collectively, the "Entities") from an arm's length party. The Entities operate a XXXXXXXXXX (the "Lodge") in XXXXXXXXXX. The Lodge is not located on reserve land.

29. Additionally, the First Nation proposes to become involved in the XXXXXXXXXX industry. It will form a limited partnership (the "Limited Partnership") with a corporation to be formed under the XXXXXXXXXX Business Corporations Act (the "Corporation"). The First Nation will subscribe for XXXXXXXXXX partnership units and be the limited partner. The Corporation will subscribe for one partnership unit and be the general partner. The First Nation and the Corporation may collectively be referred to as "the Partners."

30. The First Nation will transfer the XXXXXXXXXX Assets to the Limited Partnership. The Limited Partnership will then employ members of the First Nation and engage in XXXXXXXXXX operations.

31. Income and losses for any particular fiscal year of the Limited Partnership will be allocated at the end of such fiscal period to the Partners, pro rata in accordance with the number of units registered in the name of each Partner. Income may be distributed to the Partners. There will be no distributions of other assets of the Limited Partnership to the Partners except upon its dissolution.

Purpose of the Proposed Transactions

32. The purpose of the proposed transaction through which the First Nation would become involved in the tourism industry is threefold:

(i) To provide additional long-term sources of funds for the First Nation's governance obligations;

(ii) To promote economic development activities for the First Nation members with the ultimate goal being to assist in developing a sustainable, economically self-sufficient community over time; and

(iii) To provide employment, education and training opportunities for First Nation members.

33. The purpose of the proposed transaction through which the First Nation would become involved in the XXXXXXXXXX industry is threefold:

(i) to assist in developing a sustainable, economically self-sufficient community over time by helping to establish businesses that will be owned by the First Nation or its members;

(ii) to provide employment and job training for First Nation members; and

(iii) to support projects and activities for the general benefit of the First Nation.

Ruling 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, we rule as follows:

A. Because 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 therefore exempt from tax under Part I of the Act, no tax will be payable under Part I 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 or capital gains arising on the transfer of the XXXXXXXXXX Assets from the First Nation to the Limited Partnership, dividends received from the Entities or income allocated from the Limited Partnership.

The above advance income tax rulings, which are based on the Act and Regulations in their 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 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transaction is completed by XXXXXXXXXX

Note:

This letter is based solely on the facts and proposed transactions described above. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

Yours truly,

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