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: Is the Entity a public body performing a function of government as that term is used in paragraph 149(1)(c) of the Act?
Reasons: It is not clear that the Entity, which is a corporation, is a public body as its relationship with its members appears to be essentially based on regular corporate principles. Further, it does not appear that the Entity is performing a function of government. It has no power to tax or govern its members. The Entity does not offer significant services to its members that are similar to those offered by a municipal or provincial government and does not itself negotiate on behalf of its members.
May 12, 2009
Compliance Programs Branch HEADQUARTERS
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XXXXXXXXXX (the "Entity")-Application of Paragraph 149(1)(c)
This is in response to your email of January 14, 2009, requesting our views as to whether the Entity qualifies as a "public body performing a function of government" as that term is used in paragraph 149(1)(c) of the Income Tax Act (the "Act").
The Entity wrote to our Directorate in XXXXXXXXXX requesting an advance income tax ruling to confirm its tax-exempt status as a paragraph 149(1)(c) entity. As the proposed transaction was completed before the ruling was finished, this file was transferred to you at the XXXXXXXXXX Tax Services Office for review. XXXXXXXXXX .
The Entity was incorporated XXXXXXXXXX under the XXXXXXXXXX . The Entity was established by XXXXXXXXXX .
Currently, the Entity's primary funding for administration costs comes from XXXXXXXXXX . The Entity also receives funding from XXXXXXXXXX .
Is the Entity a "public body performing a function of government" as that term is used in paragraph 149(1)(c) of the Act? In particular, is the Entity's provision of XXXXXXXXXX services XXXXXXXXXX or the operation of XXXXXXXXXX a function of government as required by paragraph 149(1)(c) of the Act?
Paragraph 149(1)(c) of the Act provides an exemption from tax for a "municipality in Canada, or a municipal or public body performing a function of government in Canada." To qualify for this exemption the Entity must both be a public body and be performing a function of government.
(i) Meaning of the Term "Public Body"
The term "public body", as used in paragraph 149(1)(c) of the Act, is not defined, and thus we must rely on the general usage of this term. Black's Law Dictionary, which is an American publication, defines a public agency as "a department or agency of government which has official or quasi official status." The same source defines a public authority as "an agency established by government though not a department thereof but subject to some governmental control".
The Dictionary of Canadian Law (3rd Edition, Carswell), defines "public body" as follows:
"(i) The government of Canada or a province; (ii) a crown corporation, board, commission or agency of a government; (iii) a municipality; (iv) a body elected or appointed under an act: (A) to develop, administer or regulate schools, hospitals, health facilities, libraries, water utilities, drainage and irrigation works, sewage works, local improvements or public utilities; or (b) to levy and collect taxes."
Generally, the CRA has accepted that Indian bands or Indian organizations that clearly provide government services and are accountable to either the federal, or a provincial or territorial government, or directly to the band members they represent, are public bodies.
With respect to corporations, our Directorate generally takes the view that, to be a public body, the corporation must either be created by a special statute or be created as a result of implementing a statute with specific duties assigned to the corporation by that statute. In addition, the federal government or a provincial or territorial government, or the "public" that the corporation is serving or representing should have some specific control over the actions and operation of the corporation and the corporation should be accountable to either that government or that public.
The Entity was not established under a special statute nor was it created as a result of implementing a statute. It was created, as any other corporation could be, XXXXXXXXXX . Further, we question whether the Entity is subject to either government or public control. There does not appear to be a statutory or other requirement that gives the government control or oversight of the Entity. Although the Entity receives grant money from XXXXXXXXXX as well as from XXXXXXXXXX , we are not convinced that agreements entered into with XXXXXXXXXX or any government department to receive this funding would necessarily be considered "governmental control". Many organizations in Canada receive government money and the receipt of funding, in and of itself, does not result in an organization being a public body.
We note that the Entity's members XXXXXXXXXX , there appears to be little if any "governance" of XXXXXXXXXX directly by the Entity. Also, although not a determinative factor, since XXXXXXXXXX individuals have a limited ability to control the activities of the Entity. There is no direct election of the Entity's executive by XXXXXXXXXX .
XXXXXXXXXX that incorporated the Entity control the Entity. The Entity and XXXXXXXXXX have entered into a contract based on the incorporating and other creating documentation, in which the duties of the Entity are detailed and the obligations to XXXXXXXXXX have been agreed upon. In the present situation, we must ask if the Entity is answerable to XXXXXXXXXX because it is a public body or because the Entity agreed to provide XXXXXXXXXX with particular services in its incorporating documentation.
In our opinion, the better view is that the Entity is not a public body, as its relationship to XXXXXXXXXX is more akin to the usual relationship between a corporation and its shareholders than to the relationship between a government and the individuals it represents. XXXXXXXXXX .
(ii) Performing a Function of Government
In addition to being a public body, the Entity must also perform a "function of government" in order to qualify for the exemption from tax provided by paragraph 149(1)(c) of the Act. Again, the term "function of government" is not defined in the Act and reference must be made to the ordinary usage of this term.
A government taxes its residents and sets laws for the orderly management of the area over which it has jurisdiction. As part of managing the area, the government offers a wide variety of services. It is important to note that any particular service provided by a government is not necessarily equivalent to a "function of government".
Our Directorate has accepted that providing municipal-type services, such as water, sewage removal, the pick-up of garbage and the maintenance of infrastructure such as roads, sewers and public buildings is a function of government. Further, providing a key service traditionally offered by the provinces or territories such as social services, overseeing of the environment, health services, and education is generally considered to constitute performing a function of government. Our Directorate also accepts that negotiating a treaty with the federal government, or a provincial or territorial government, is a function of government.
Our Directorate has in the past acknowledged that an Indian band providing health services pursuant to a "Health Transfer Agreement", in which several health-related services are transferred from Her Majesty the Queen to the Indian Band, is performing a function of government. However, those situations involved Indian bands that were clearly public bodies and, further, involved entities that provided several health-related services to their members and had powers to govern their members. XXXXXXXXXX .
The Entity provides XXXXXXXXXX services and XXXXXXXXXX . With respect to the XXXXXXXXXX services, the Entity appears to be simply acting as an agent for XXXXXXXXXX . In any event, the XXXXXXXXXX services provided are not sufficient, on their own, to constitute a function of government.
(iii) Application of Paragraph 149(1)(d.5) to the Entity
The Act contemplates municipalities or municipal and public bodies establishing subsidiary organizations and provides a specific exemption from tax for such subsidiaries, with restrictions. Proposed paragraph 149(1)(d.5) of the Act contains an exemption for corporations, commissions and associations, where not less than 90% of the capital is owned by the municipality or municipal or public body, provided that not more than 10% of the income of the corporation, commission or association is earned from activities carried on outside the geographical boundaries of the municipality or municipal or public body.
Proposed paragraph 149(11) of the Act defines the geographical boundaries of a paragraph 149(1)(c) entity to be either:
"...(a) the geographical boundaries that encompass the area in respect of which an Act of Parliament or an agreement given effect by an Act of Parliament recognizes or grants to the body a power to impose taxes; or
(b) if paragraph (a) does not apply, the geographical boundaries within which that body has been authorized by the law of Canada or a province to exercise that function..."
Generally, the geographical boundaries of an Indian band are either its reserve or lands transferred to it pursuant to a land settlement agreement or self-government agreement.
The existence of proposed paragraph 149(1)(d.5) suggests that the scheme of the Act is to exempt a public body performing a function of government from tax under paragraph 149(1)(c) of the Act, and to exempt subsidiaries of such a body under paragraph 149(1)(d.5) of the Act (where certain conditions are met). The Act clearly contemplates that subsidiaries of paragraph 149(1)(c) entities will not necessarily themselves be paragraph 149(1)(c) entities.
XXXXXXXXXX . This paragraph will only exempt income earned by the Entity if not more than 10% of its income for the period is generated from activities carried on outside the boundaries of XXXXXXXXXX .
The Entity appears to receive a majority of its income as funding from XXXXXXXXXX . Proposed paragraph 149(1.2)(a) of the Act provides that when determining the amount of a subsidiary's income from activities carried on outside the geographical boundaries of its controlling public body, income earned from activities carried on under an agreement in writing between the subsidiary and Her Majesty in right of Canada is not included if the activities take place in Canada. Therefore, it is likely that the funding provided by XXXXXXXXXX would not be considered as income earned by the Entity from activities carried on outside the geographical boundaries of XXXXXXXXXX . This reasoning would also apply to the agreement with XXXXXXXXXX for XXXXXXXXXX and to any other agreements the Entity may have with the federal government or with any provincial or territorial government (for activities undertaken within the province or territory).
(iv) Application of Paragraph 149(1)(l) of the Act to the Entity
It is possible that the Entity may qualify for an exemption from tax under paragraph 149(1)(l) of the Act. In order to qualify for an exemption from tax under this provision, the Entity cannot be a charity, it must be organized and operated exclusively for social, welfare, civic improvement, pleasure, or recreation or for any other purpose except profit, and no part of the income of the Entity can be paid or made payable to any of the members of the Entity.
In reviewing the Entity's incorporating documents we note that XXXXXXXXXX , which could result in the Entity not qualifying for an exemption under this provision. In addition, the exemption provided by paragraph 149(1)(l) of the Act is based on a yearly determination as to whether the Entity is operated in the required manner, which is not something that we can confirm, but which must be established each year.
In our view, the Entity does not meet the definition of a "public body". The relationship between XXXXXXXXXX and the Entity seems to be based essentially on corporate law principles. XXXXXXXXXX and the Entity do not appear to be in the same relationship as that found between a band and its members, or between a municipality and its residents.
Historically, the CRA has required that to be performing a function of government an organization must have the ability and powers to govern its members, tax its members, pass by-laws or provide municipal- or provincial-type services to its members. The Entity XXXXXXXXXX . The XXXXXXXXXX are not sufficient in and of themselves to constitute a function of government.
Further, while the CRA has previously taken the position that health services provided by Indian bands or Indian organizations pursuant to a Health Transfer Agreement may demonstrate a function of government, especially when taken together with other factors, providing one such service does not necessarily meet the requirements of paragraph 149(1)(c) of the Act. XXXXXXXXXX .
The Entity may qualify for an exemption from tax under paragraph 149(1)(l) of the Act. XXXXXXXXXX raises doubt as to whether this provision would apply. Further, as the Entity would have to qualify each year for the exemption, we understand that XXXXXXXXXX than the exemption provided under paragraph 149(1)(c) of the Act.
The Act contains a specific exemption for subsidiaries of public bodies performing a function of government in proposed paragraph 149(1)(d.5) of the Act. The Entity would only qualify for this exemption if XXXXXXXXXX own the Entity and are public bodies performing a function of government and if at least 90% of the Entity's income was earned from activities carried on within the geographical boundaries of XXXXXXXXXX . The Entity's primary income appears to be received from XXXXXXXXXX . However, the Entity would likely be able to rely on proposed paragraph 149(1.2)(a) of the Act, such that any federal funding would not be considered to be income earned outside the geographical boundaries of XXXXXXXXXX.
We trust that these comments will be of assistance.
Non-Profit Organizations and Aboriginal Issues
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs
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