4 January 2010 Internal T.I. 2008-0296671I7 - First Nations as Public Bodies under the FSMA

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 (FN) that does not have a section 81 by-law under the Indian Act, but has a law under subsection 5(1) of the FSMA, qualify as a public body performing a function of government for the purposes of 149(1)(c) of the Income Tax Act?

Position: Not definitive. Unless the FN also has section 81 by-laws under the Indian Act, activities of the FN will have to be reviewed.

Reasons: There may be circumstances where a paragraph 5(1)(a) law has been enacted but the activities of the FN are not sufficient to qualify the FN as a public body performing a function of government under paragraph 149(1)(c) of the Act.

January 4, 2010

Policy and Communications Officer			Income Tax Rulings Directorate
Charities Directorate                  Policy, Planning and Legislation Division 
 	                                          Legislative Policy and 
                                                Regulatory Affairs Branch
320 Queen Street, Place de Ville, Tower A, 7th floor
Ottawa, ON  K1A 0L5					Pamela Burnley
(613) 957-2100
								2008-029667
Dear Ms. Mott:

Required Property Tax Laws for Purposes of Paragraph 149(1)(c) of the Income Tax Act (the "Act")

You have requested our comments in connection with our technical interpretation 2008-028043 dated December 22, 2008. In that document, we dealt with the application of the First Nations Fiscal and Statistical Management Act (the "FSMA") as a replacement for section 83 of the Indian Act. We opined that if a First Nation ("FN") has enacted a section 81 by-law under the Indian Act and a subsection 5(1) law under the FSMA, the FN would be considered to be a public body performing a function of government (a "PBPFG") for purposes of paragraph 149(1)(c) of the Act. You would like to know whether a FN that has a subsection 5(1) law under the FSMA, but that does not have a section 81 by-law under the Indian Act, will qualify as a PBPFG. In other words, is enacting a property tax law under subsection 5(1) of the FSMA sufficient, in and of itself, to demonstrate that a FN is a PBPFG?

We understand that being a PBPFG is relevant not only to the tax exemption available under paragraph 149(1)(c) of the Act, but also with respect to the FN's ability to issue charitable donation receipts, which is the primary concern of your Directorate.

First Nation as a Public Body Performing a Function of Government

The determination of whether a FN is a PBPFG is made on a case by case basis. Generally, the Canada Revenue Agency ("CRA") accepts that FNs that are given authority to provide public or governmental services and that are accountable to either the federal, or a provincial or territorial government, or directly to the band members they represent, are public bodies. As discussed in the December 2008 document, to operate a property tax system through the FSMA, a FN must be listed in the schedule to the FSMA. To be added to the schedule, a FN must submit a band council resolution to the Governor in Council requesting to be added to the schedule. Generally, only FNs that are currently bands as defined in the Indian Act may make such a request. Therefore, a FN that has an approved law under the authority of the FSMA can be considered a public body.

A FN is considered to be performing a function of government if it demonstrates that it performs functions and provides services in a manner generally exhibited by a government. Examples of situations where the CRA usually considers a FN to be performing a function of government are as follows:

1. The existence of comprehensive Health Services Transfer Agreements, between Her Majesty the Queen in Right of Canada and the FN. These agreements provide for the transfer of control of health programs and services and associated resources from the Minister of Health (Health Canada) to the FN.

2. The FN provides elementary and secondary education in band-operated schools.

3. The FN is or has been involved in the negotiation of a settlement agreement with Canada and will continue to be involved in the administration and implementation of the settlement agreement.

4. The FN provides and administers public works, social services and infrastructure programs for its members. Examples of this may include: maintenance and development of capital infrastructure, existence of family support and community services, provision of a water treatment and delivery system, fire and police protection and medical services.

(Note: Any one of these activities or services may not be sufficient for the FN to be considered a PBPFG; it depends on the scope of the service or activity.)

With respect to your specific question, we are concerned that there may be cases where the scope and use of the property tax law is so restricted that there are no underlying, or only minimal, governance activities. Therefore, we are not prepared to conclude that a taxation law enacted under paragraph 5(1)(a) of the FSMA is sufficient to demonstrate that a FN is performing a function of government. Other activities of the FN would have to be reviewed to make a proper determination.

Expenditure laws under paragraph 5(1)(b) of the FSMA are approved at the same time as the taxation laws under paragraph 5(1)(a) of the FSMA. Taxation revenues may only be used for the approved expenditures allowed under paragraph 5(1)(b). If the listed expenditures in the approved law are sufficiently detailed and appropriate, this may provide enough evidence that the FN is performing a function of government. However, the mere existence of these laws, in and of itself, is not sufficient.

Paragraph 5(1)(d) of the FSMA allows for the creation of laws regarding borrowing from the First Nation Finance Authority ("FNFA"). The FNFA and the First Nation Financial Management Board ("FMB") are other institutions established under the authority of the FSMA. To become a borrowing member, a FN must first create a law regarding the financial administration of the FN and have the FMB approve its financial management system. The FNTC will not approve a borrowing law made under paragraph 5(1)(d) unless the FN has unutilized borrowing capacity and has obtained and forwarded to the FNTC a certificate received from the FMB certifying its financial management system.

The FSMA gives the FNTC the authority to establish standards respecting the criteria for the approval of laws made under paragraph 5(1)(d) of the FSMA (the borrowing laws). Section 2.1 of the Standards Establishing Criteria for Approval of Borrowing Laws (the "Standard") states that "the borrowing law must authorize borrowing only for the provision of capital infrastructure to the reserve that is within the categories of capital infrastructure listed in Schedule 1 to this Standard."

Schedule 1 is a long list of capital infrastructure categories such as:

• building design
• police, fire and other protection services
• roads and streets
• community health buildings
• water purification and supply
• retaining walls
• drainage ditches, etc.

Therefore, when a FN borrows from the FNFA under the requirements of the FSMA, it can only be for a capital project of the FN.

Conclusion

Despite the comprehensive and detailed nature of the provisions of the FSMA, we are of the view that where a FN does not have a section 81 by-law under the Indian Act, the existence of a paragraph 5(1)(a) law under the FSMA is not sufficient, in and of itself, for us to conclude that the FN is a PBPFG. Other activities of the FN must be reviewed to ensure that it is performing a function of government. A review of the concurrent paragraph 5(1)(b) law may be of assistance in this regard.

Where a FN has borrowed from the FNFA under the requirements set out in the FSMA (i.e., under paragraph 5(1)(d) of the FSMA), and the capital project for which the FN has borrowed is significant as a function of government, such as building roads, sewers, or houses for its members, the FN should be considered to be a PBPFG for the purposes of paragraph 149(1)(c) of the Act. Again, the mere existence of a law under paragraph 5(1)(d) of the FSMA is not sufficient; a review of the details is still required.

We understand that determinations of this nature are beyond the scope of your Directorate and will be left to other areas (in particular, local Tax Services Offices and, occasionally, Income Tax Rulings) to review. In the future, once there is more direct experience with the FSMA, we may determine that merely enacting certain laws, or combinations of laws, under the FSMA will result in the FN involved being a PBPFG. We will inform you of any such decision.

We trust that these comments will be of assistance.

Yours truly,

Eliza Erskine
Manager
Non-Profit Organizations and Aboriginal Issues Section
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch