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: Will a First Nation be taxable on income it earns from its participation in a limited partnership and from its ownership of shares of the general partner?
Position: No, the income will be tax exempt.
Reasons: The First Nation qualifies as a public body performing a function of government within paragraph 149(1)(c) of the Act. As a result of this, income of the First Nation is exempt from tax.
XXXXXXXXXX 2005-014384
XXXXXXXXXX, 2005
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling - XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling 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 this ruling 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 under Section 2 of the Indian Act R.S.C. 1985, c. I-5, as amended. Its mailing address is XXXXXXXXXX
2. The First Nation is served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre.
3. The First Nation's reserves are known as XXXXXXXXXX (collectively, the "Reserves"). The Reserves satisfy the definition of "reserve" in section 2 of the Indian Act.
4. The First Nation has a total registered population of XXXXXXXXXX members with XXXXXXXXXX members being resident on the Reserves.
5. A democratically elected Chief and XXXXXXXXXX Council members govern the First Nation. All of the First Nation's offices are located on XXXXXXXXXX.
6. The First Nation, as a member of the XXXXXXXXXX, is currently in the process of negotiating a treaty agreement XXXXXXXXXX with the Government of Canada and the Government of XXXXXXXXXX.
7. The First Nation has a comprehensive funding arrangement in place with the Department of Indian and Northern Affairs Canada ("INAC").
8. The First Nation provides and/or administers an extensive list of public works, social services and infrastructure programs including but not limited to:
- Environmental services
- Lands and trusts services
- Land management with delegated authority under sections 53 and 60 of the Indian Act
- Maintenance of Indian registration and band lists
- Elementary/Secondary Instructional services
- Social Assistance
- Family violence programmes
- Adult care programmes
- Disabilities initiatives
- National child benefit re-investment programme
- Community capital facilities
- Band housing
- New on-reserve housing approach
- The Community Economic Development Organization to assist with business planning for reserve residents and to assist with loans and/or loan guarantees
- Economic development opportunity fund
- Resource acquisition initiative
- Major business projects programme
- Resource partnership programme
- Regional partnership programme
- Regional partnership fund
- Resource access negotiation
- Child and family services
- Project haven (family violence emergency shelters)
- Brighter futures programme
- Language programme
- Gathering strength education programme
- Youth work experience programme
9. Facilities maintained by the First Nation include:
- Band offices XXXXXXXXXX, a facility available for rental and also used for the First Nation's Annual General Meetings, as well as youth and elder programs
- XXXXXXXXXX campgrounds
- XXXXXXXXXX school, a preschool for children ages 3 and 4.
- Elder housing facilities
- XXXXXXXXXX, a computer lab offering training for reserve residents of all ages
10. The First Nation has passed eleven by-laws pursuant to section 81 of the Indian Act. The by-laws deal with the following matters:
- Occupancy and building maintenance
- Foreshore area Fishing
- Zoning
- Band membership
- Disorderly conduct and nuisance
- Rates and regulations for waterworks use
- Sanitary sewer connection
- Storm drain connection
- Regulation of retail shopping on holidays
- Nuisances and disturbances
- Commercial property
11. The First Nation has passed and received ministerial approval for several by-laws pursuant to section 83 of the Indian Act. These by-laws deal with the following matters:
- Property tax and taxation
- Property tax expenditure
- XXXXXXXXXX rates
- XXXXXXXXXX rates
12. The XXXXXXXXXX, of which the First Nation is a member, has begun negotiating a Health Services Transfer Agreement with Health Canada on behalf of the First Nation.
13. The First Nation has an Order-in-Council authorizing it to manage its revenue moneys pursuant to Section 69 of the Indian Act.
14. The First Nation is in the process of negotiating a specific land claim in respect of XXXXXXXXXX
15. The First Nation has control of its own membership list pursuant to Section 10 of the Indian Act.
16. The First Nation has a XXXXXXXXXX% interest in a joint venture known as XXXXXXXXXX (JV#1). JV#1 is a XXXXXXXXXX The fee simple land is owned by XXXXXXXXXX. ("HoldCo"). The co-owners of HoldCo are a corporation controlled by the First Nation ("FNCo") and the other party to JV#1. FNCo holds a XXXXXXXXXX lease on the reserve land portion of XXXXXXXXXX.
17. The First Nation has a XXXXXXXXXX% interest in an unincorporated joint venture known as XXXXXXXXXX (JV#2). JV#2 is a XXXXXXXXXX HoldCo owns the fee simple land. FNCo holds a XXXXXXXXXX lease on the reserve land portion of XXXXXXXXXX
Proposed Transactions
18. The First Nation will create a limited partnership under the XXXXXXXXXX, to be known as XXXXXXXXXX (the "Limited Partnership").
19. The general partner of the Limited Partnership will be a corporation to be incorporated under the XXXXXXXXXX, which will be called XXXXXXXXXX. (the "General Partner"). The First Nation will be the sole shareholder of the General Partner. Members of the First Nation will elect the Directors of the General Partner. The General Partner will subscribe for one Limited Partnership unit at a cost of $XXXXXXXXXX and will have the sole authority to manage the affairs of the Limited Partnership.
20. The First Nation will be the limited partner (the "Limited Partner") of the Limited Partnership and will subscribe for XXXXXXXXXX units at a cost of $XXXXXXXXXX.
21. The First Nation intends to transfer its interest in JV #1 and JV #2 to the Limited Partnership at fair market value. As the interests in these two unincorporated joint ventures represent an interest in the underlying assets and liabilities of those joint ventures, the consideration will be defined by way of the following formula:
- The proportionate interest in the undivided interest in the liabilities of the joint ventures (i.e. XXXXXXXXXX% of the liabilities in JV #1 and XXXXXXXXXX% of the liabilities in JV #2) will be assumed by the Limited Partnership.
- To the extent that the tax cost of the undivided interest in the assets of the joint ventures exceeds the proportionate interest in the liabilities of the joint ventures, then a demand non-interest bearing promissory note will be issued by the Limited Partnership to the First Nation.
- The excess of the fair market value of the joint ventures over the consideration issued in the previous two components will be added to the Limited Partner's capital otherwise belonging to the First Nation."
22. Profits of the Limited Partnership will be allocated and any cash distributions therefrom will be made in proportion to the number of Limited Partnership units held by the recipient.
Purpose of the Proposed Transactions
23. The First Nation proposes to undertake the proposed transactions described above in order to limit its potential exposure to third party liability with respect to its interests in JV#1 and JV#2.
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:
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 allocated from the Limited Partnership, dividends from the General Partner or consideration received from the Limited Partnership for the First Nation's interests in JV#1 and JV#2.
The above advance income tax ruling, which is based on the Act and Regulations in their 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 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and is binding on the Canada Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX
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.
On February 27, 2004, the Department of Finance Canada released legislative proposals to amend certain provisions of the Act, including paragraph 110.1(1)(a) and subsection 118.1(1) of the Act (the "Proposed Amendments"). Section 110.1 of the Act permits a deduction in computing taxable income in respect of gifts made by corporations to registered charities and to certain other entities. The Proposed Amendments would expand the list of the recipient entities referred to in section 110.1 of the Act to include a public body performing a function of government in Canada. Section 118.1 of the Act provides for a charitable donations tax credit to individuals in respect of gifts made to registered charities and to certain other entities. The Proposed Amendments would also amend section 118.1 of the Act to expand the recipient entities referred to therein to include public bodies performing a function of government.
As stated in paragraph 20 of Information Circular 70-6R5, the CRA does not provide advance income tax rulings on proposed legislation. Provided the Proposed Amendments pertaining to paragraph 110.1(1)(a) and subsection 118.1(1) of the Act are passed as released on February 27, 2004, it is our opinion that the First Nation would be entitled to issue donation receipts pursuant to the proposed addition of subparagraph 110.1(1)(a)(iv.1) to the definition of "charitable gifts" in subsection 110.1(1) of the Act and the proposed addition of paragraph (d.1) to the definition of "total charitable gifts" in subsection 118.1 of the Act.
Yours truly,
XXXXXXXXXX
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch
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