14 April 2008 Internal T.I. 2008-0271861I7 - Taxation of payment to Nisga'a citizen

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: Whether a payment by the Nisga'a Lisims Government to a Nisga'a citizen XXXXXXXXXX is taxable and, if it is taxable, whether a Remission Order applies.

Position: Likely taxable. The Remission Order might apply.

Reasons: This payment appears to be a payment out of a Nisga'a Settlement Trust. These payments are deemed to be payments of trust income and are taxable, pursuant to the Nisga'a Nation Taxation Agreement. The Remission Order only applies if the amount paid is situated on former reserve lands (i.e., if s.87 of the Indian Act would have applied if the reserve lands had not been surrendered). We have insufficient facts to determine whether or not the payment is taxable or whether the Remission Order applies.

 								April 14, 2008

Ms. Betty Reid					HEADQUARTERS
	First Nations Section				Eliza Erskine
	Audit Division					(613) 274-3022
	Northern BC & Yukon TSO
								2008-027186

Taxation of Payment to Nisga'a Citizen from Nisga'a Lisims Government

We are writing further to our email discussions with you of March 18, 2008 (Reid/Erskine), regarding a telephone inquiry to us from a tax preparer seeking to determine whether a particular payment from the Nisga'a Lisims Government to a Nisga'a citizen not resident on a reserve or former reserve would be exempt from tax. We appreciate your assistance in this matter, and have provided the name, telephone number and fax number of the tax preparer at the end of this memo. We have indicated to him that you will contact him once you have heard from us.

Facts

The tax preparer was unable to provide us with many details, despite having himself spoken with both his client and the Nisga'a Lisims Government. The facts he provided to us are as follows:

• His client (Ms. N) is a Nisga'a citizen (presumably as that term is used in the Nisga'a Final Agreement (the "NFA").
• Ms. N is not resident on a reserve or land that was formerly a reserve.
• In XXXXXXXXXX, Ms. N received a cheque in the amount of $XXXXXXXXXX from the Nisga'a Lisims Government, accompanied by a letter stating something like (we were never sent a copy of this letter and the tax preparer read part of the contents over the phone):
• "XXXXXXXXXX ... to be effective on the signing of the treaty ... for all Nisga'a citizens who are XXXXXXXXXX ."
• Ms. N indicated that the amount was not taxable, although she did not explain why. She may have been advised of this by the Nisga'a Lisims Government, however, this has not been confirmed.
• After first speaking with us at the beginning of March, the tax preparer contacted representatives of the Nisga'a Lisims Government, who refused to provide any information or comments with respect to tax matters. They did tell the tax preparer to look at paragraph 28 of the Nisga'a Nation Taxation Agreement (the "NNTA"), which was an ancillary document to the NFA.
• The tax preparer was unable to obtain any firm details concerning the nature of the payment, although he thinks there was some indication that it was considered to be a payment of capital out of the trust referred to in the NFA.

Relevant Agreements & Legislation

The NFA is a "treaty and a land claims agreement" and is intended to be a final settlement of "aboriginal rights, including aboriginal title, in Canada of the Nisga'a Nation" (Ch.2, paras. 1 and 22). While Chapter 20 of the NFA sets out who can be enrolled as a Nisga'a Citizen, there do not appear to be any specific provisions dealing with payments to Nisga'a Citizens.

Paragraph 28 of the NNTA deals specifically with the taxation of payments out of a Nisga'a settlement trust. In particular, it states that such distributions (of income or capital) are not taxable

"except that:

a. any amount of income or capital distributed in a particular year to a beneficiary who is a Nisga'a citizen will be deemed for purposes of subsection 104(13) of the Income Tax Act to be income of the trust that was payable to the beneficiary in the particular year;"

Subsection 104(13) of the Income Tax Act (the "Act") provides that income of a trust that was payable to a beneficiary in a particular year "shall be included in computing the income for a particular taxation year of [the] beneficiary". Thus, the effect of paragraph 28 of the NNTA is to cause all distributions out of a Nisga'a settlement trust to a beneficiary be trust income included in the beneficiary's income for tax purposes. ¹

In Chapter 16 (Taxation) of the NFA, the government agreed to provide transitional tax relief with respect to amounts currently exempt from tax pursuant to s.87 of the Indian Act. This promise was carried out through Remission Order SI/2000-39, Nisga'a Final Agreement Indian Remission Order (the "Remission Order"). The Remission Order provides that remission is granted of any tax imposed

"in respect of

(a) the estate or interest of an Indian in former reserve lands;
(b) the personal property of an Indian situated on former reserve lands; and
(c) an Indian's ownership, occupation, possession or use of any property referred to in paragraph (a) or (b)"

as long as the property or Indian referred to in (a) or (b)

"would, but for the Nisga'a Final Agreement, be exempt from taxation by reason of the applicability of section 87 of the Indian Act."

Discussion

We have not been provided with enough facts to allow us to give you our final views on whether the amount described by the tax preparer is taxable. However, we have some general comments which we hope will be of assistance to you in discussing the matter with him.

If the payment is in fact a distribution out of a Nisga'a settlement trust, then the payment is trust income payable to a beneficiary and taxable in the hands of the recipient in accordance with paragraph 28 of the NNTA and subsection 104(13) of the Act. However, the payment may be effectively exempt from tax by virtue of the Remission Order and paragraph 87(1)(b) of the Indian Act, if it is personal property of an Indian situated on a reserve (or, in this case, situated on former reserve lands). We assume that Ms. N is an Indian for purposes of the Indian Act.

As you are aware, whether or not an amount is personal property of an Indian situated on a reserve is a question of fact that can only be determined having regard to all of the circumstances. In this particular case, we are told that Ms. N is not resident on a reserve (or former reserve lands), so the payment isn't connected to the reserve by virtue of the location of the recipient. The payer is the Nisga'a Lisims Government or the payment was directed to be made by the Nisga'a Lisims Government. To the extent that the payer or the person directing the payment is resident on a reserve (or former reserve lands), that might be a connecting factor, although it isn't clear how much weight should be given to such a factor. Finally, the underlying nature of the payment may be a connecting factor. If the payment was made out of the capital of a Nisga'a settlement trust, and the capital distributed was derived directly from the sale or surrender of reserve lands, this will likely be a strong connecting factor between the payment and former reserve lands. On the other hand, if the payment was made out of the income of the trust, there is no inherent connection to a reserve.

It is important to keep in mind that not all payments out of the capital of a Nisga'a settlement trust will be amounts derived directly from the sale or surrender of reserve lands; in fact, we would expect that much of the capital of a Nisga'a settlement trust is derived from amounts paid to settle disputes over non-reserve lands and aboriginal rights relating to non-reserve lands. To the extent that a payment is a distribution of capital that does not relate to former reserve lands, the underlying nature of the payment will not be a connecting factor for purposes of determining whether the Remission Order applies. Also, while a distribution of capital out of a trust generally isn't taxable (unless the property has been transferred into the trust on a tax deferred basis), in this case the effect of paragraph 28 of the NNTA is to deem any payment out of the trust to a Nisga'a citizen to be a distribution of income, so that even if the amount received by Ms. N is a distribution of trust capital it is taxable unless the Remission Order applies.

To summarize our comments, if the payment is a distribution out of a Nisga'a settlement trust, it must be included in Ms. N's income as trust income and it is likely that most or all of the amount will be subject to tax, unless the Remission Order applies. Whether or not the Remission Order applies will depend on whether the payment is sufficiently connected to former reserve lands. We note that the present situation is different from the situation discussed in our interpretation #2007-0237821E5, dealing with payments to XXXXXXXXXX First Nation, because in that case it was not clear how the income was intended to be treated for purposes of the Act. In the present situation, the NNTA specifically invokes subsection 104(13) of the Act.

Finally, if the payment is not a distribution out of a Nisga'a settlement trust, then we do not have sufficient information to determine what provisions of the Act might apply. For example, if the payment comes from the Nisga'a Lisims Government, and is means tested, then it might be a social assistance payment, and taxable under 56(1)(u) of the Act. In any event, the Remission Order will apply to eliminate any tax on the payment to the extent that it is personal property of Ms. N situated on former reserve lands. In considering whether or not the Remission Order applies, it is important to remember that while the payment may clearly be connected with the Nisga'a First Nation, it is not necessarily situated on a reserve or former reserve lands.

Contact Information

Please contact XXXXXXXXXX . As discussed, we have advised him that you will be in touch with him.

We trust that our comments will be of assistance to you. Please do not hesitate to contact us if you have any questions on this matter.

Yours truly,

Robin Maley
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES

1 . See the comments of Tom Falconer in his paper Fiscal Aspects of the Nisga'a Final Agreement, CTJ (2000), Vol. 48, No.6, p. 1847.