2006 Ruling 2006-0201611R3 - First Nation Settlement Trust

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: 1) Does a particular First Nation qualify as a public body performing a function of government for purposes of paragraph 149(1)(c) of the Act?

2) Is the particular trust subject to the attribution rule in subsection 75(2) of the Act?

3) In the event that income earned on trust income is paid to the First Nation during the year in which it is earned, is that income deductible by the trust pursuant to subsection 104(6) of the Act?

Position: 1) Yes.

2) Yes.

3) Yes.

Reasons: 1) The First Nation has demonstrated that it performs many of the functions necessary to bring it within paragraph 149(1)(c).

2) The Settlor is a capital beneficiary of the trust and the trust property reverts to the Settlor on windup.

3) There is a possibility that the Trustees may pay income earned on trust income in any given year to the First Nation. To the extent that amounts are in fact so paid, subsection 104(24) provides that they will be considered payable for purposes of a deduction by the Trust pursuant to subsection 104(6).

XXXXXXXXXX                                            2006-020161

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling - XXXXXXXXXX (the "First Nation")

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.

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.

In this letter, the following terms have the meanings specified:

"Business Projects" means commercial projects or undertakings, which are intended to benefit the First Nation or its Members by promoting economic development and employment opportunities.

"Community Projects" means non-commercial projects or undertakings, which are intended to benefit the First Nation or its Members including:

• Projects designed to promote education and vocational training;
• Projects designed to promote housing on and off reserve;
• Projects designed to promote health, including dental health and drug and alcohol counselling or rehabilitation;
• Projects designed to promote First Nation governance and administration including construction and maintenance of related facilities;
• Projects designed to promote social, cultural and recreational activities, including construction and maintenance of related facilities;
• Acquisition of additions to reserve lands and expenses related thereto; and
• Expenses relating to the acquisition of XXXXXXXXXX, real property more fully described in Article XXXXXXXXXX of the Trust Indenture.

"Members" means, at a particular time, all of the individuals who, in accordance with the membership code of the First Nation and in accordance with the Indian Act, are members of the First Nation at that time and a "Member" means any one of them.

"Specified Amount" means the amount that was the value of the Settlement Payment at the time that such funds were contributed to the Trust by the First Nation less:

• the total initial capital payments made to the Members pursuant to Article XXXXXXXXXX of the Trust;
• the expenses paid pursuant to Article XXXXXXXXXX of the Trust; and
• if a capital payment has been made to the First Nation pursuant to Article XXXXXXXXXX of the Trust, the amount of such payment.

Provided, however, that the Specified Amount otherwise determined shall be increased or decreased at the end of each XXXXXXXXXX year period commencing on XXXXXXXXXX, by the same percentage that the cost of living (as determined by reference to the Consumer Price Index, published by Statistics Canada, or by such other reference as the Trustees consider reasonable) has increased or decreased during each such XXXXXXXXXX year period;

And provided further that the Specified Amount otherwise determined may be increased or decreased by the Members in accordance with the procedures and limitations described in Article XXXXXXXXXX of the Trust.

"Trust Property" means:

• the original $XXXXXXXXXX with which the First Nation will have settled the Trust (the "Original Property");
• the Settlement Payment (after it has been contributed to the Trust by the First Nation);
• all other property subsequently paid or transferred to or otherwise vested in and accepted by the Trustees as additions to the Trust Property;
• all income which has been retained and added to the capital of the Trust; and
• all other property from time to time representing the Original Property, the Settlement Payment and the said additions and accumulations or any part or parts thereof.

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 within the meaning of the Indian Act, R.S.C. 1985, c I-5 as amended (the "Indian Act"), represented and governed by its duly elected Chief and Council (the "Band Council"). The First Nation's mailing address is:

XXXXXXXXXX.

2. The First Nation's Business Number is XXXXXXXXXX. It deals with the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre.

3. The First Nation has a reserve, as defined in section 2 of the Indian Act, which is located on approximately XXXXXXXXXX (the "Reserve").

4. The First Nation has approximately XXXXXXXXXX Members approximately XXXXXXXXXX of whom live on the Reserve.

5. The First Nation has a comprehensive funding arrangement in place with Indian and Northern Affairs Canada.

6. The First Nation has passed by-laws addressing various matters including property tax, intoxicants, law and order and traffic,

7. Facilities maintained by the First Nation on the Reserve include:

• Band offices;
• A school;
• An arena;
• A public works building;
• A water treatment plant; and
• XXXXXXXXXX teachers' residences.

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

• The maintenance of roads and bridges on the Reserve;
• The operation of a water treatment facility;
• The operation of a wastes-water program and garbage collection; and
• The operation, in conjunction with the Government of Canada, of a school for students from kindergarten to grade 12.

9. The First Nation is involved in the operation of economic development programs including the operation of XXXXXXXXXX, a company wholly owned by the First Nation, which employs XXXXXXXXXX full-time employees and up to XXXXXXXXXX additional contractors in the XXXXXXXXXX.

10. In XXXXXXXXXX the First Nation submitted a claim to the Specific Claims Branch of the Department of Indian Affairs and Northern Development relating to the surrender of certain land by the First Nation in XXXXXXXXXX and the exchange of certain land authorized in XXXXXXXXXX. The claim asserted that the Band had adhered to Treaty 6 on the condition that certain sections of land known as the "XXXXXXXXXX" (real property more fully described in Article XXXXXXXXXX of the Settlement Agreement) would be added to its reserve, and that those sections had not been provided to the First Nation. The First Nation resubmitted the claim to the Government of Canada in XXXXXXXXXX.

11. On XXXXXXXXXX, in connection with the claim described in 10 above, the First Nation and its then Chief, suing on her own behalf and on behalf of the Members of the First Nation, commenced Action XXXXXXXXXX in the Trial Division of the Federal Court of Canada (the "Action") against the Government of Canada.

12. The Government of Canada and the First Nation have engaged in settlement negotiations and have negotiated a draft settlement agreement with respect to the Action (the "Settlement Agreement").

13. The Settlement Agreement calls for a payment of $XXXXXXXXXX from the Government of Canada to the First Nation (the "Settlement Payment").

Proposed Transactions

14. The First Nation will execute a trust indenture, which will set out the terms of the XXXXXXXXXX (the "Trust").

15. The Trust will require that at all times there shall be one (1) corporate trustee and such number of individual trustees as are from time to time appointed or elected in accordance with the terms of the Trust (collectively, the "Trustees").

16. In accordance with the terms of the trust indenture, the First Nation will settle the Trust by transferring the Original Property to the Trustees.

17. Pursuant to Article XXXXXXXXXX of the Settlement Agreement, the First Nation will direct the Government of Canada to deliver to the Trustees, on the First Nation's behalf, the Settlement Payment, to be held and administered in accordance with the terms of the Trust.

18. The Trust will authorize the Trustees to effect various capital distributions including:

(i) Pursuant to Article XXXXXXXXXX, an initial capital distribution to Members in the amount of $XXXXXXXXXX per Member;

(ii) Pursuant to Article XXXXXXXXXX, such future capital distributions to Members as may be authorized by Band Council;

(iii) Pursuant to Article XXXXXXXXXX, a capital distribution or distributions to the First Nation for the purpose of acquiring all or any part of the real property known as XXXXXXXXXX; and

(iv) Pursuant to Article XXXXXXXXXX capital distributions to the First Nation for Community Projects and/or for Business Projects.

19. Article XXXXXXXXXX of the Trust will authorize the Trustees to distribute amounts from the Trust's net income derived from the Trust Property to the First Nation for Business Projects and/or for Community Projects as the First Nation may from time to time direct.

20. The capital and income distributions described in 18 and 19 above are subject to the restrictions contained in Article XXXXXXXXXX of the Trust, which will provide that:

• Band Council must approve each such distribution;
• No distribution may be made to Members if it would have the effect of reducing the value of the Trust Property and the undistributed net income derived therefrom below the Specified Amount; and
• Annual distributions of $XXXXXXXXXX may be made to the First Nation for Community Projects or Business projects but no distributions in excess of such amount shall be made in any year if such distribution would have the effect of reducing the value of the Trust Property and the undistributed net income derived therefrom below the Specified Amount.

21. The Trust will provide that if a Member is under the age of majority at the time of a capital distribution pursuant to 18(i) or (ii), above ("Distribution Date"), the Trustees will not make the distribution to him or her. Rather, the distribution to the minor individual will take place when that Member attains the age of majority.

The amount distributed from Trust capital to that Member will be increased or decreased by the amount that the cost of living has increased or decreased between the Distribution Date and the date that the Member attains the age of majority.

22. Article XXXXXXXXXX of the Trust will provide that at the end of each year, the Trustees shall accumulate any amount of the net income derived from the Trust Property that has not been paid to the First Nation during the year pursuant to 19 above, and shall add such amount to the Trust Property.

23. Article XXXXXXXXXX of the Trust will provide that on termination of the Trust, the Trustees shall pay the whole of the Trust Property and the net income derived therefrom to the First Nation.

Purpose of the Proposed Transactions

24. The purpose of the proposed transactions is to ensure that the Settlement Payment provides a long-term benefit to the First Nation and its Members.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed plan and purpose of the proposed plan, and provided that the terms of the Plan are as described above, 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 described above, which, for greater certainty, may include the Settlement Payment, Trust income paid to the First Nation pursuant to 19 above and amounts described in Ruling B, below.

B. Income or loss from the investment of the Settlement Payment, or from property substituted therefor, and any taxable capital gain or allowable capital loss from the actual or deemed disposition of the Settlement Payment, or property substituted therefor, 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. Income deemed in this manner to be income of the First Nation will be excluded from the income of the Trust.

C. To the extent that any income in a taxation year from the property of the Trust in respect of which subsection 75(2) of the Act does not apply, including, in particular, income on reinvested income from Trust Property, is in fact paid to the First Nation pursuant to 19 above, it will be considered to have become payable in the taxation year to the First Nation for purposes of paragraph 104(6)(b) of the Act and may be deducted in computing the income of the Trust for the taxation year. For additional clarity, any income in a taxation year from the Trust Property in respect of which subsection 75(2) of the Act does not apply, including, in particular, income on reinvested income from Trust Property, that is retained in the Trust pursuant to 22 above, will not be deductible from the income of the Trust pursuant to paragraph 104(6)(b).

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 transactions are 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
Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch