2006 Ruling 2005-0165001R3 - 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: Will a First Nation be taxable on income it earns from its participation as the limited partner in a Limited Partnership?

Position: No, such income will be tax-exempt to the First Nation.

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, income of the First Nation is exempt from tax.

XXXXXXXXXX 								2005-016500

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling - XXXXXXXXXX)

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the XXXXXXXXXX (the "First Nation"). We also acknowledge your subsequent submissions of XXXXXXXXXX

We understand that, to the best of your knowledge and that of the First Nation, none of the issues involved in this ruling is:

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

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

(iv) before the courts, or

(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 (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 also known as the XXXXXXXXXX and is an Indian Band as defined under Section 2 of the Indian Act.

2. The address of the First Nation is XXXXXXXXXX. The mailing address of the First Nation is: XXXXXXXXXX.

3. The First Nation is served by the XXXXXXXXXX Tax Services Office in XXXXXXXXXX and files its tax returns with the XXXXXXXXXX Taxation Centre.

4. The First Nation has XXXXXXXXXX reserves (collectively, the "Reserve"), individually identified as the following:

• XXXXXXXXXX
• XXXXXXXXXX

Most of the reserve-resident First Nation members and most of the First Nation's facilities are located on XXXXXXXXXX.

5. The First Nation is comprised of the XXXXXXXXXX communities of XXXXXXXXXX

6. The First Nation has a total registered population of XXXXXXXXXX members, with XXXXXXXXXX of the members living on the First Nation's Reserve.

7. The First Nation is governed by a democratically elected Chief and XXXXXXXXXX Council members.

8. The First Nation employs an administrator who, under the direction of the band council, is responsible for administrative management of the First Nation.

9. The First Nation is currently in the process of negotiating a treaty agreement and a comprehensive land claim with the Government of Canada and the Government of XXXXXXXXXX.

10. The First Nation has a comprehensive funding arrangement in place with the Department of Indian and Northern Affairs Canada.

11. Pursuant to an Order-In-Council, the First Nation is authorized to manage its revenue moneys (as defined by the combined operation of section 62 and subsection 2(1) of the Indian Act) pursuant to section 69 of the Indian Act.

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

• Treaty land claims
• Economic development
• Education services
• Communications services
• Forestry services
• Family support services
• Youth services
• Community services
• Social and education counselling
• Library
• Literacy enhancement
• Road and public work maintenance
• Child development services
• Health services
• Housing
• Animal control
• Social assistance
• Recreational facilities
• Fire protection

13. The First Nation provides a number of educational programs and services to its residential members, such as computer training, academic skills upgrading, wellness and life skills programs and professional development.

14. The First Nation maintains several facilities including:

• Band offices
• Primary school (This refers specifically to a school for kindergarten to Grade 3. Children in Grade 4 and above are bussed to schools off the Reserve.)
• Adult education centre
• Child development centre
• Computer lab
• Gymnasium/community centre
• Library
• Health station
• Water pump house
• Sewage lift station and lagoons
• Garbage transfer station
• Playground
• Outdoor ice rink
• Church.

15. The Minister of Indian Affairs and Northern Development recently approved the First Nation's financial administration bylaw passed pursuant to section 83 of the Indian Act.

16. In XXXXXXXXXX the First Nation developed a XXXXXXXXXX (the "Plan"), which regulates land use and activities within the Reserve. All lands within the Reserve are held in a traditional manner and are owned in common by the First Nation membership. The First Nation government has agreements with individual members and businesses for their use of the land and any improvements thereon. Development on the Reserve will be guided by the Plan. The Plan consists of both short-term and long-term plans.

17. The First Nation, XXXXXXXXXX, has created an entity known as the XXXXXXXXXX (the "Society"). The Society has entered into a XXXXXXXXXX-year health services agreement with Health Canada to allow for the transfer of health programs and services and for the funding resources to provide for these services. In addition, the Society and the First Nation have also entered into a XXXXXXXXXX year community funding flow through agreement to allow the community to provide certain community health services.

18. The First Nation builds and maintains its own houses for First Nation members with assistance from the Canada Mortgage and Housing Corporation. Reserve-resident members may construct their own houses provided the band council approves the location and the construction plans. The First Nation currently has a shortage of housing and is planning to expand construction of new housing for members as funds become available.

19. All of the First Nation's homes are serviced by water and sewer delivery infrastructures that the First Nation has constructed and maintains. 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.

20. The First Nation provides garbage collection services to its members on the Reserve.

21. All populated 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.

22. The First Nation has a Natural Resources Department, which is responsible for the management of natural resources in the First Nation's traditional territory and includes:

• A community forester
• A fisheries representative
• A wildlife committee
• An archaeological assessment team
• A species at risk inventory program
• A data base on land resource management.

23. In connection with its Natural Resources Department, the First Nation has entered into a contribution agreement under the First Nations Forestry Program with the Minister of Natural Resources Canada.

24. The First Nation operates the XXXXXXXXXX (the "Commercial Operation") as an unincorporated proprietorship.

25. The First Nation has entered into a XXXXXXXXXX contract with XXXXXXXXXX (the "Contract").

Proposed Transactions

26. The First Nation will create a limited partnership known as the XXXXXXXXXX (the "Limited Partnership") with the following structure and characteristics:

(a) The general partner will be the XXXXXXXXXX (the "General Partner"). The General Partner is a corporation without share capital incorporated under Part II of the Canada Corporations Act. Although the Directors of the General Partner have discretion to admit other members, the only members of the General Partner are members of the First Nation. The corporate objects of the General Partner are:

• To foster and advance employment and vocational training for aboriginal people of the XXXXXXXXXX;
• To participate in the financial support of business and employment opportunities wherever they may be found;
• To enter into cooperative joint ventures and other forms of business organizations on behalf of the people of XXXXXXXXXX; and
• To do all those things which are ancillary to and associated with the first three objects of the corporation.

(b) The limited partner of the Limited Partnership will be the First Nation.

(c) The General Partner will subscribe for one unit of the Limited Partnership by paying a cash price of $XXXXXXXXXX per unit.

(d) The Limited Partner will subscribe for XXXXXXXXXX units of the Limited Partnership by paying a cash price of $XXXXXXXXXX per unit.

(e) All profits, losses and distributions of the Limited Partnership will be proportionately allocated to the General Partner and the Limited Partner based upon the respective number of units that they hold.

27. The First Nation will transfer the assets and business of the Commercial Operation to the Limited Partnership. The First Nation will receive a promissory note from the Limited Partnership equal to the tax cost of the property so transferred. The First Nation will receive additional Limited Partnership units equal to the difference between the fair market value of the property so transferred and its tax cost.

28. The First Nation will transfer its rights and obligations under the Contract to the Limited Partnership. The First Nation will receive a promissory note from the Limited Partnership equal to the tax cost of the property so transferred. The First Nation will receive additional Limited Partnership units equal to the difference between the fair market value of the property so transferred and its tax cost.

Purpose of Proposed Transactions

29. The objective behind creating the Limited Partnership and transferring the Commercial Operation and the Contract to the Limited Partnership is to enable the First Nation to access profits for use in governance activities, to improve infrastructure on the Reserve, to maintain existing services to members of the First Nation and to fund programs that further the socio-economic activities of the members of the First Nation while also minimizing the First Nation's exposure to third party liability.

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, will include income allocated from the Limited Partnership, and any income or gains that might arise in connection with the transfer of the Commercial Operation or the Contract to the Limited Partnership.

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.

Comments:

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 July 18, 2005, the Department of Finance Canada released draft legislation 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 July 18, 2005, 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) of the Act to the definition of "charitable gifts" and the proposed addition of paragraph (d.1) to the definition of "total charitable gifts" in subsection 118.1(1) of the Act.

You have also asked for our comments on whether the phrase "public body performing a function of government" as used in paragraph 149(1)(d.5) of the Act is to be interpreted in the same manner as for paragraph 149(1)(c). The answer is yes.

Yours truly,

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