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: (A) Does the First Nation qualify as a public body performing a function of government for purposes of paragraph 149(1)(c)? (B) Will subsection 75(2) apply to the particular trust income in the circumstance? (C) Whether income of the trust that is not subject to the provisions of 75(2) will be considered payable to the First Nation and thus deductible pursuant to subsection 104(6)? (D) Will the per capita distributions by the First Nation to its members be considered income from a source within the meaning of paragraph 3(a) of the Act? (E) Are distributions of the trust governed by section 107(2)?
Position: (A) yes (B) yes (C) yes (D) no (E) yes, subject to subsections 107(2.001), (2.002) and (4) and (5)
Reasons: (A) The First Nations provides and administers a fairly extensive list of public works, social services and infrastructure programs. It has negotiated Health Agreements with the Crown and has passed bylaws within its community. (B) The First Nation will be the settlor of the particular trust, directing the settlement payments to the trust on behalf of the First Nation. The First Nation, including all its members, is the sole beneficiary and on termination of the trust, all of the trust property will be transferred to the First Nation. (C) To the extent income earned exceeds income realized; the excess shall be irrevocably payable to the First Nation and will be evidenced by a demand promissory note. (D) Consistent with a previous position, the per capita distributions to the First Nation members would not be considered income from a source within the meaning of paragraph 3(a) of the Act. (E) The particular trust will qualify as a personal trust since First Nation will be the settlor and the interest will not be acquired for any consideration.
XXXXXXXXXX 2006-017361
December 4, 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 above-named taxpayer. We also acknowledge your subsequent submission 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:
DEFINITIONS
In this letter, the following terms have the following meanings:
(a) "Authorized Expenses" means the expenses reasonably incurred by the First Nation in carrying out the terms of the Trust Agreement, without limitation, the following:
(i) reasonable salaries, wages, fees or remuneration of any elder employee, agent or contractor retained by the Chief and Council in carrying out the terms of the Trust Agreement,
(ii) reasonable fees, remuneration, disbursements and expenses of any advisor hired by the First Nation to assist it in carrying out the terms of the Trust Agreement,
(iii) reasonable costs associated with meetings of the Members,
(iv) costs associated with the acquisition of land,
(v) property taxes and other reasonable expenses incidental to land ownership, including costs of improving or renovating buildings;
(vi) any reasonable costs associated with having purchased land set apart as Reserve lands;
(vii) reasonable costs associated with training under the Trust Agreement; and
(viii) any other reasonable costs incurred by the First Nation in carrying out the terms of the Trust Agreement;
(b) "Authorized Investments" means any of those instruments, notes, bonds or other securities which the Trustee, in accordance with the terms of the Trust Agreement, is authorized to purchase with the Trust Property and which authorized forms of investment are more particularly set forth in Schedule A of the Trust Agreement;
(c) "Band Account" means the account of the First Nation to be established by the Chief and Council on behalf of the First Nation at a financial institution for the specific purposes of the Trust Agreement;
(d) "Band Development" means the investment and/or utilization of Bank Account money in:
(i) business operations owned by the First Nation or by Members within the community,
(ii) the acquisition of land or improvements to such land, or
(iii) any other socio-economic benefit, or any other program, service or project which is for the use, development, advantage or benefit of the First Nation or its Members but excluding, however, per capita distributions to the Members and payments to the First Nation to cover any shortfall in operating funding of the First Nation other than those specifically provided for in the Trust Agreement;
(e) "Beneficiary" means, for the purposes of the Trust Agreement, the First Nation, including all Members of the First Nation on a collective and undivided basis;
(f) "Canada" means Her Majesty the Queen in right of Canada;
(g) "Chief" means the Chief of the First Nation;
(h) "Claim" is defined in the Settlement Agreement to mean all facts, matters and issues related to or arising or resulting from:
(i) XXXXXXXXXX;
(ii) any and all claims, damages, and losses of any kind of the First Nation, the Other First Nations, and its Members resulting from or in any way related to the Claim; and
(iii) any other matter giving rise to or forming the subject matter of the Claim as it relates to those aspects of XXXXXXXXXX pertaining to the Claim.
(i) "Compensation" means the sum of $XXXXXXXXXX to be paid by Canada pursuant to Article XXXXXXXXXX of the Settlement Agreement;
(j) "Council" means, in respect of the First Nation, the "council of the band" as defined by subsection 2(1) of the Indian Act;
(k) "Council Resolution" means a written resolution signed by a quorum of the Council of the First Nation adopted at a duly convened meeting of the Council;
(l) "First Nation" means the XXXXXXXXXX;
(m) "Fiscal Year" means the Fiscal Year of the Trust which means the 12-month period commencing on XXXXXXXXXX and ending XXXXXXXXXX in each calendar year, unless otherwise established by the Trustee;
(n) "Indian Act" means the Indian Act, R.S.C. 1985, c. I-5, as amended, and the regulations made pursuant to that Act;
(o) "Member" (collectively the "Members") means any person whose name appears on the First Nation's "band list" as defined in the Indian Act and maintained by the First Nation in accordance with section 10 of the Indian Act;
(p) "Other First Nations" means the XXXXXXXXXX;
(q) "Reserve" means a "reserve" as defined in subsection 2(1) of the Indian Act;
(r) "Revenue Earned" means the income of the Trust for a Fiscal Year as such income is computed in accordance with the provisions of the Act before the application of subsections 75(2) and 104(6) and paragraph 82(1)(b) thereof, for purposes of calculating income in determining the "taxable income" of the Trust;
(s) "Revenue Realized" means the Revenue Earned that has actually been received or realized for the Fiscal Year of the Trust, and for greater certainty includes any capital gains or losses realized in the period;
(t) "Settlement Agreement" means the XXXXXXXXXX Settlement Agreement, dated for reference on XXXXXXXXXX between the First Nation, the Other First Nations and Canada pursuant to which the First Nation agrees, among other things, to accept the terms of the Settlement Agreement;
(u) "Settlement Monies" means the amount of $XXXXXXXXXX, which represents the First Nation's total Compensation amount of $XXXXXXXXXX less $XXXXXXXXXX, which represents a repayment of its share of funds previously loaned to the First Nation by Canada to help cover costs of the settlement, all of which is to be deposited by Canada on behalf of the First Nation to the Trust Account;
(w) "Trust" means the XXXXXXXXXX which is the inter vivos trust (as defined in subsection 108(1)) of the Act) to be established by the First Nation pursuant to the terms of the Trust Agreement and to be administered by the Trustee for the benefit of the First Nation in accordance with the terms of the Trust Agreement;
(x) "Trust Account" means the account to be established by the Trustee pursuant to Article XXXXXXXXXX of the Trust Agreement and to which Canada, pursuant to the Settlement Agreement, is to deposit the Settlement Monies on behalf of the First Nation;
(y) "Trust Agreement" means the XXXXXXXXXX Trust Agreement, being the proposed agreement between the First Nation and the Trustee made in accordance with the Settlement Agreement to which the Trustee agrees to hold and invest certain property (including the Compensation under the Settlement Agreement) for the benefit of the First Nation;
(z) "Trust Fee Agreement" means the agreement entered into between the First Nation and the Trustee from time to time for the payment of fees, reimbursement and other compensation to the Trustee as its compensation for acting as Trustee of and under the Trust Agreement;
(aa) "Trust Property" means all monies now or hereafter on deposit in the Trust Account and all Authorized Investments, including all investment instruments, in which the monies in the Trust Account may from time to time be invested as well as any additions or accruals thereto and also includes, without limitation, all revenue and other income realized thereon;
(bb) "Trustee" means a trust company duly incorporated, and licensed pursuant to federal and provincial legislation to carry on business as a trustee in the province of XXXXXXXXXX; and
(cc) "Value of the Trust Property" means the aggregate of:
(i) the amount of money on deposit in the Trust Account, excluding the amount of any Revenues Realized deposited to the Trust Account, and
(ii) the fair market value of all Authorized Investments purchased on behalf of the Trust by the Trustee (excluding any Revenues Realized or Revenues Earned or accruals on such Authorized Investments).
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 has XXXXXXXXXX Reserves, namely the XXXXXXXXXX.
3. The First Nation's mailing address is: XXXXXXXXXX. The closest tax services office is the XXXXXXXXXX Tax Services Office; however, the First Nation does not file income tax returns.
4. The First Nation has approximately XXXXXXXXXX Members, approximately XXXXXXXXXX of whom live on the Reserve. Each Member of the First Nation is a status Indian for purposes of the Indian Act.
5. The First Nation, along with the Other First Nations, commenced actions in the XXXXXXXXXX Trial Division and submitted a Claim to Canada alleging, amongst other issues, that Canada breached its fiduciary duty to the First Nation and the Other First Nations with respect to the alienation of a tract of land, known as the XXXXXXXXXX.
6. The First Nation, along with the Other First Nations, negotiated with Canada in respect of this Claim advanced in the XXXXXXXXXX. The First Nation will be involved in the administration and implementation of the settlement of this Claim.
7. The Settlement Agreement is a full and final settlement of the action and the Claim.
8. All of the First Nation's offices, along with any facilities under its control, are located on the Reserve. These facilities include:
? band office,
? health clinic,
? daycare facility,
? community hall,
? cultural buildings,
? maintenance shed,
? housing units,
? recreational facilities,
? band shop, and
? water treatment plant.
9. The Chief and Council are democratically elected by the Members under band custom and are responsible for governance of the First Nation. They represent the First Nation in all matters.
10. The First Nation maintains a number of programs through funding provided by Indian and Northern Affairs Canada under a Comprehensive Funding Agreement. Some of these programs include:
? band administration;
? expansion, maintenance or modification of public services and works on the Reserve including roadways, water treatment plant, sewer and water distribution system;
? expansion, maintenance or modification of existing Reserve fire protection services and fire department including the establishment of an on-Reserve fire hall;
? expansion, maintenance or modification of the housing program on the Reserve including the funding of construction of new housing, the maintenance of current housing and the operation of a housing committee;
? expansion and upgrading of the road and drainage systems;
? expansion, modification or support of social service and social assistance programs administered by the First Nation on the Reserve;
? expansion, modification or support of community facilities to meet the social, educational and recreational needs of Members on the Reserve;
? medical and health services including wellness clinics, baby clinics, community health representative services, mental health services, home care services, and medical transportation;
? daycare services and Headstart facility for Member's children on the Reserve;
? operation of a cemetery on the Reserve;
? operations and maintenance of cultural camp locations on the Reserve;
? economic development; and
? land use.
11. The First Nation has passed longstanding by-laws in connection with regulation of livestock and domestic pets on the Reserve.
12. The First Nation has entered into a Health Services Transfer Agreement with Her Majesty in right of the Government of Canada. This agreement provides for the transfer of control of health programs and services and associated resources for the Minister of Health to the First Nation.
13. The First Nation has also entered into an arrangement with Canada to assume responsibility for the delivery of programs and services such as land management, social and economic development programs and capital infrastructure. The First Nation also manages its membership registry program.
14. The First Nation and Canada have entered into the Settlement Agreement to settle the First Nation's Claim. The Settlement Agreement was ratified by the voting Members of the First Nation on XXXXXXXXXX.
15. The First Nation has also:
(a) hired professionals and payed for other services to advance its Claim against Canada;
(b) hired professionals and payed for other services to assist in negotiating and completing the Settlement Agreement in respect of the Claim; and
(c) borrowed monies from Canada in order to pay the costs incurred for research and preparation of the Claim and for the negotiation of the Settlement Agreement.
16. Under the terms of the Settlement Agreement, the First Nation absolutely surrendered to Canada, pursuant to the provisions of sections 38 and 39 of the Indian Act, all of the rights and interests the First Nation and its Members had or may now have in the Reserve lands that are the subject of the Claim.
PROPOSED TRANSACTIONS
17. Under Article XXXXXXXXXX of the Settlement Agreement, Canada has agreed to pay the First Nation the Compensation in full and final settlement of the Claim.
18. In addition, within a predetermined period, a further $XXXXXXXXXX will be paid to the First Nation and the Other First Nations pursuant to Article XXXXXXXXXX of the Settlement Agreement in respect of recovery of costs from Canada. The entitlement to this amount is separate from the Claim and will be applied as a repayment of monies previously loaned to the First Nation and Other First Nations by Canada.
19. The First Nation will irrevocably authorize and direct Canada to deposit the Settlement Monies into the Trust Account for, and on, its behalf in its capacity as sole Beneficiary of the Trust.
20. Article XXXXXXXXXX provides that the First Nation must contribute additional funds ("Contribution Amounts") to the Trust to ensure a base capital amount is maintained in the Trust to provide on-going financial benefits to the First Nation.
21. Settlement Monies and Contribution Amounts deposited in the Trust Account will be invested by the Trustee in Authorized Investments, subject to certain distributions to the First Nation and other terms and conditions of the Trust Agreement.
22. All beneficial rights, title, interest and benefit in and to the Trust Property shall vest to the Beneficiary.
23. The Trust Property is available for use by, and at the discretion of, the First Nation subject to Council Resolution and according to Article XXXXXXXXXX of the Trust Agreement, for the following purposes:
(a) compensation payments to the Trustee as provided in the Trust Fee Agreement;
(b) withholding taxes, income taxes, Goods and Services Tax and other charges that the Trust or Trustee is liable to pay as levied under the laws of Canada;
(c) the transfer of funds to the First Nation for the purpose of a primary per capita distribution (as described in 27 below) by the First Nation to specific Members;
(d) the transfer of funds to the First Nation for purposes of paying costs incurred by the First Nation in settling the Claim and ratifying the Settlement Agreement and the Trust Agreement, including legal fees;
(e) the one time transfer of funds to the XXXXXXXXXX for the purposes of paying existing debts of the First Nation in the amount of $XXXXXXXXXX;
(f) the transfer of funds to be used by the First Nation to pay Authorized Expenses, subject to the provisions of Article XXXXXXXXXX of the Trust Agreement;
(g) land purchases, up to a maximum of $XXXXXXXXXX, subject to and in accordance with the provisions of Article XXXXXXXXXX of the Trust Agreement;
(h) the purchase of Authorized Investments, subject to and in accordance with the provisions of Article XXXXXXXXXX of the Trust Agreement; and
(i) the transfer of Revenue Realized to the Band Account in each Fiscal Year, and the allocation of Revenue Earned which exceeds Revenue Realized in each Fiscal Year, subject to and in accordance with the provisions of Article XXXXXXXXXX of the Trust Agreement.
24. For purposes of 23(h) above, the Trustee will be empowered to manage the Authorized Investments. It is anticipated that investment income such as interest and dividends, as well as taxable capital gains or allowable capital losses on the actual or deemed disposition of the property, will arise.
25. It is anticipated that such investment income will be used to purchase additional Authorized Investments, thereby generating additional investment income.
26. The Trust Agreement provides the following procedures by which Revenue Earned and Revenue Realized will be paid to the Beneficiary:
(a) on an on-going basis (but no later than the last day of each fiscal year) the Trustees will estimate the Revenue Realized and will distribute such amount to the Beneficiary by transferring it to the Band Account, unless because of the nature of the Authorized Investments held by the Trust, it is not possible or it is not in the best interests of the First Nation to transfer the full amount, in which case the Trustees will transfer a smaller amount to the Band Account and will pay the difference to the First Nation by issuing a demand promissory note, dated no later than the last day of the fiscal year, to the First Nation as absolute payment; and
(b) to the extent, if any, that Revenue Earned in a Fiscal Year exceeds Revenue Realized in the Fiscal Year, the Trustees will pay the excess to the First Nation by issuing a demand promissory note, dated no later than the last day of the Fiscal Year, to the First Nation as absolute payment; and
(c) the ability of the First Nation to demand payment of the promissory note and the ability of the Trustees to honour such demand are not restricted in any way.
27. The primary per capita distributions as defined in Article XXXXXXXXXX of the Trust Agreement are to be paid for the benefit of Members living at XXXXXXXXXX , being the effective date of the Settlement ("Settlement Date"). These distributions can be summarized as follows:
Age Group Amount of Distribution
Members XXXXXX years or older as $XXXXXX per Member in each of the of the Settlement Date first and second Fiscal Years
Members under the age of XXXXX as $XXXXXX per Member upon
of the Settlement Date reaching XXXXXX years of age
28. Amounts will be paid by the Trust to the First Nation to enable it to make the per capita distributions to its Members in accordance with Article XXXXXXXXXX of the Trust Agreement. The cumulative per capita distributions made to Members cannot exceed XXXXXXXXXX percent of the Compensation amount paid to the First Nation under the Settlement Agreement.
29. Article XXXXXXXXXX of the Trust Agreement details the conditions with respect to the per capita distributions for minor children. The Trustee will maintain the funds ($XXXXXXXXXX per child) in the Trust until such time as the child attains the age of XXXXXXXXXX. At such time and upon receipt of the written confirmation required under Article XXXXXXXXXX of the Trust Agreement, the Trustee shall issue a cheque from the Trust Account in the amount of $XXXXXXXXXX to the First Nation for payment to the child. The child is entitled to receive from the First Nation, the per capita amount of $XXXXXXXXXX plus an amount representing all interest, realized net capital gains or losses, and interest accrued on such payment from the Settlement Date up to the end of the month immediately preceding the month in which the child turns XXXXXXXXXX years of age.
30. The Trustee of the Trust will be empowered to manage the property of the Trust and, specifically, will have the power and responsibility to invest the capital of the Trust, to exercise voting privileges, make distributions or pay the amount owing under promissory notes to the First Nation, to settle and adjust any claim or demand on the Trust Property within the parameters set forth in the Trust Agreement.
31. Where the Value of the Trust Property exceeds a predetermined base capital amount in the Trust, the Trustee may distribute such excess to the First Nation in accordance with the terms of the Trust Agreement.
32. Upon termination of the Trust, the Trust Property will be distributed by the Trustee to the First Nation absolutely.
PURPOSE OF THE PROPOSED TRANSACTIONS
The purposes of the proposed transactions are:
? generally, to provide for the settlement of certain claims as set out in the Settlement Agreement and to ensure that funds are available for the future benefit of the First Nation;
? specifically, to establish a Trust to administer the Settlement Monies and to facilitate the objectives set out in the Trust Agreement; and
? to provide a Trust, as a condition of the settlement of the Claims, the purpose of which is to provide funds to the First Nation to enable it to provide for the development of the First Nation in the manner determined by the Trust Agreement.
RULINGS 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 proposed transactions, which for greater certainty may include the receipt of the Compensation, receipt of Revenue Earned and receipt of Revenue Realized.
B. Revenue Earned by the Trust on the Settlement Monies transferred to it by the First Nation, as described in 24 above, or from property substituted therefore, shall be deemed to be income or a loss, or a taxable capital gain or allowable capital loss, as the case may be, of the First Nation pursuant to subsection 75(2) of the Act.
C. Any income from the property of the Trust in a taxation year to which subsection 75(2) of the Act does not apply, including income on re-invested income as described in 25 above, will be considered, except to the extent that the First Nation is obligated to recontribute such income to the Trust as described in 20 above, to have become payable in the taxation year to the First Nation and may be deducted in computing the income of the Trust for the taxation year pursuant to paragraph 104(6)(b) of the Act. Funds recontributed to the Trust, as permitted in 20 above, will be considered to be sourced first from distributed Revenue Realized subject to subsection 75(2) of the Act.
D. The per capita distributions to be made by the First Nation to the Members, as described in 27 to 29 above, will not be income from a source to the Members for purposes of the calculating their Part I income for a taxation year under section 3 of the Act.
E. Subject to subsections 107(2.001), (2.002) and (4) to (5) of the Act, where any property of the Trust is distributed by the Trust to the First Nation, as permitted by 31 and 32 above, and there is a resulting disposition of all or any part of the First Nation's capital interest in the Trust, the provisions of subsection 107(2) of the Act will apply.
The above advance income tax rulings, which are based on the Act in its 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 IC 70-6R5, dated May 17, 2002, and are 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
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2006
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2006