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 for purposes of paragraph 149(1)(c)?
Position: Yes
Reasons: The First Nation has passed bylaws pursuant to section 81 and 82 of the Indian Act and provides extensive programs and services to its members such as social and economic development programs and capital infrastructure. The First Nation is currently in treaty negotiations and has entered into other agreements with the Crown. It also provides educational services at the primary levels.
XXXXXXXXXX 2006-016673
XXXXXXXXXX , 2006
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "First Nation") XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge your subsequent submissions of XXXXXXXXXX and the information provided during our telephone conversations (XXXXXXXXXX ).
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 a "band" within the meaning of this term as defined under subsection 2(1) of the Indian Act.
2. 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.
3. The First Nation has previously received two favourable Advance Income Tax Rulings (document numbers 2005-0122141R3 and 2004-0089061R3) dated XXXXXXXXXX , 2005 and XXXXXXXXXX , 2004 respectively, confirming it is a public body performing a function of government and exempt from Part I tax on its taxable income pursuant to paragraph 149(1)(c) of the Act.
4. Since the date of the last Ruling mentioned in 3 above, no changes have occurred with respect to the First Nation or its functions and responsibilities that would cause the previous favourable Rulings issued to the First Nation to be inapplicable. Changes have occurred to strengthen its government function as demonstrated by its current direct involvement in treaty negotiations (which were originally dealt with through the XXXXXXXXXX ). In addition, the First Nation has entered into a recent agreement with the federal and provincial governments, the XXXXXXXXXX , to care for and protect its children and families under the Child Family and Community Services Act.
PROPOSED TRANSACTIONS
5. The First Nation will enter into a project to XXXXXXXXXX , which is within the traditional territory of the First Nation.
6. The First Nation and XXXXXXXXXX ("the Corporation"), an unrelated company XXXXXXXXXX , will enter into a limited partnership agreement to form a limited partnership to be known as XXXXXXXXXX (the "LP").
7. It is estimated that the project will have a total cost of $XXXXXXXXXX . A portion of this cost may be arranged by the LP itself such that the amount of equity investment required to be contributed by each of the partners will be reduced proportionately.
8. Each partner will contribute to the capital of the LP and will be awarded a corresponding portion of LP units. It is anticipated that the First Nation will have a XXXXXXXXXX % interest in the LP.
9. A new corporation to be known as XXXXXXXXXX . (the "General Partner") will be incorporated to act as the general partner of the LP and will hold a nominal 1-unit of the LP.
10. The First Nation will incorporate a new company to be known as XXXXXXXXXX ("FN Corp") to hold its shares in the General Partner. Dividends may be paid by FN Corp to the First Nation.
11. The shares of the General Partner, each of which entitles the holder to one vote, will be held by FN Corp and the Corporation in proportion to the number of LP units held by each of them.
12. The First Nation and the Corporation will be responsible for their own financing in regard to funding their capital contributions to the LP. However, in the course of obtaining outside financing for its capital contribution, the First Nation will obtain a loan (the "Loan") from the Corporation (or an entity related to the Corporation, as the case may be) to a maximum of XXXXXXXXXX % of the First Nation's equity investment. As security for the Loan, the First Nation will pledge its LP units and FN Corp will pledge its shares in the General Partner. Any recourse on the Loan will be limited to the security pledged by the First Nation and by FN Corp.
13. It is anticipated that the Loan will bear interest at a rate equal to or in excess of the commercial market rate applicable for loans bearing similar terms and conditions. The interest rate will be determined at the time the proposed transactions are implemented.
14. The remaining XXXXXXXXXX % of capital required to be contributed by the First Nation to fund its equity interest in the LP, will be contributed by the Corporation on behalf of the First Nation. This amount will represent payment to the First Nation in respect of its cooperation in supporting this project within its traditional territory.
15. The LP will carry on the business of XXXXXXXXXX .
16. The First Nation may transfer assets that it acquires, or that it currently owns, to the LP. Although the exact ownership structure of the assets of the LP is not yet known, it is possible that some or all of the assets will be owned by one or both limited partners or in combination with the LP itself.
17. 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.
18. It is expected that the LP will make cash distributions to the First Nation and the Corporation, also in proportion to the number of LP units held by each of them.
19. The LP will enter into a further agreement with the First Nation, a Benefits Agreement, which will govern the relationship between the First Nation and the LP during the construction and operation of the project. The agreement will recognize the First Nation's role in managing impacts on archaeological, cultural and heritage resources, ensure that the First Nation participates in the social and environmental aspects of the project and will create a process for opportunities for employment and economic development for the First Nation community. The agreement will also stipulate that the First Nation will support the project in all manners reasonably possible providing that such support does not infringe upon any matters relating to the First Nation's aboriginal rights and title.
20. In relation to these rights, this agreement will establish a means of financial compensation for the benefit of the First Nation in recognition of its rights and interests with respect to the land. Specifically, the agreement will establish a Community Benefit Fund for the benefit of the First Nation community. Royalty payments will be contributed to this fund by the LP on behalf of the First Nation that will then be distributed to the First Nation, based on a predetermined formula. The structure of the fund has not yet been determined.
PURPOSE OF THE PROPOSED TRANSACTIONS
21. The purpose of the proposed transactions is to generate a long-term source of funds for the First Nation to support the governance, public works, and infrastructure needs of the community and to promote economic development to allow the First Nation to become economically self-sufficient while maintaining a stewardship role over its territorial lands.
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 considered 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 of the Act by the First Nation on any amounts included in its income as a result of the proposed transactions described above, which for greater certainty, will include:
i. any income allocated to the First Nation from the LP,
ii. dividends paid by FN Corp to the First Nation,
iii. any income, including but limited to, taxable capital gains that may arise as a consequence of the First Nation transferring any property it may hold to the LP,
iv. payments, as described in 14 above, to the First Nation by the Corporation representing compensation for its cooperation in supporting the project on its traditional territory, and
v. any payments paid to the First Nation by LP based upon the Benefits Agreement, as described in 20 above.
Comments
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.
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
Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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