2013 Ruling 2012-0447241R3 - First Nation 149(1)(c) - partnership income

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 income from the limited partnership exempt from income tax because the First Nation is a public body performing a function of government for purpose of paragraph 149(1)(c) of the Income Tax Act?

Position: Yes.

Reasons: The First Nation has passed bylaws pursuant to sections 81 and 83 of the Indian Act. It is governed by a Chief and council accountable to its members and XXXXXXXXXX.

XXXXXXXXXX
2012-044724

XXXXXXXXXX, 2013

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request – 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 acknowledge your additional submissions of XXXXXXXXXX.

We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request are:

(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 considered or 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.

DEFINITIONS

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

(a) "General Partner" means the XXXXXXXXXX;

(b) "Indian Act" means the Indian Act, R.S.C. 1985, c.I-5, as amended and the Regulations made under the Indian Act;

(c) XXXXXXXXXX;

(d) "Limited Partner" means the First Nation;

(e) "Limited Partnership" means the XXXXXXXXXX;

(f) "Member" means an individual whose name appears on (or is entitled to have his/her name on) the "Band List" of the First Nation, as defined in section 8 of the Indian Act;

(g) "Province" means Her Majesty in Right of the Province of XXXXXXXXXX;

(h) "Reserves" means the First Nation's reserves as described in paragraph 4 below and which are "reserves" as defined in subsection 2(1) of the Indian Act; and

(i) "Tribal Council" means the XXXXXXXXXX, of which the First Nation is a member.

FACTS

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

1. The First Nation is a "band" as defined in subsection 2(1) of the Indian Act.

2. The mailing address for the First Nation is XXXXXXXXXX. The First Nation is serviced by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre. The First Nation's business identification number is XXXXXXXXXX.

3. The First Nation has XXXXXXXXXX Members, of whom XXXXXXXXXX reside on the Reserves.

4. The First Nation has XXXXXXXXXX Reserves, which total a combined land area of XXXXXXXXXX hectares, near XXXXXXXXXX.

5. The First Nation has passed XXXXXXXXXX bylaws in accordance with Section 83 of the Indian Act. Property taxes have been collected in accordance with these bylaws.

6. The First Nation has passed XXXXXXXXXX bylaws in accordance with Section 81 of the Indian Act to provide for the health care of the First Nation's people and to establish and regulate a fire department and a fire safety committee. These bylaws have been filed and approved in accordance with Section 82 of the Indian Act.

7. The First Nation has received an order-in-council authorizing it to manage its own revenue moneys in accordance with Section 69 of the Indian Act.

8. The First Nation is governed by a Chief and council who are elected democratically in accordance with the provisions in the Indian Act.

9. XXXXXXXXXX.

10. The First Nation, or the First Nation through the Tribal Council, has negotiated the following:

• XXXXXXXXXX to cover operational requirements and programs which are administered by the First Nation to its members;
• XXXXXXXXXX; and
• XXXXXXXXXX.

11. The First Nation, through XXXXXXXXXX, administers its health programs to the Members XXXXXXXXXX.

12. XXXXXXXXXX.

13. The First Nation directly provides capital infrastructure for its Reserves and administers programs and services for its Members including:

a) health services, which include a community health centre and community health representative;

b) family & community services, which include cultural and linguistic programs and a family violence prevention program;

c) social development and employment programs, which include social assistance, employment programs, child benefit programs and cultural activities;

d) education programs, which include the administration and operation of XXXXXXXXXX (Aboriginal Head Start Program), the operation and administration of a learning centre that is staffed with a teacher and a tutor, and student transportation, allowances and tuition. XXXXXXXXXX to enhance Aboriginal learning achievement and success, and also focuses on supporting the cultural, academic, social and emotional needs of all Aboriginal learners in XXXXXXXXXX;

e) operation and maintenance of community infrastructure, which includes the operation of a water treatment plant and sewer infrastructure on Reserve, the operation of the fire hall, maintenance of an on-reserve road system, and maintenance of various community buildings and infrastructure and residential housing; and

f) financial and economic development services, which include the administration of property taxation, development of reserve lands and XXXXXXXXXX.

14. XXXXXXXXXX

15. XXXXXXXXXX.

16. XXXXXXXXXX.

PROPOSED TRANSACTIONS

17. The First Nation will incorporate the General Partner.

18. All of the shares of the General Partner will be held either directly under the name of the First Nation or in the name of the Chief as bare trustee for the First Nation. At all times, the beneficial owner of the shares will be the First Nation.

19. The Limited Partner and the General Partner will establish the Limited Partnership pursuant to the XXXXXXXXXX. The General Partner will purchase one unit in the Limited Partnership for a subscription price of $XXXXXXXXXX and the Limited Partner will purchase XXXXXXXXXX units for $XXXXXXXXXX.

20. The Limited Partnership agreement will provide that none of the units of the Limited Partnership will be owned by anyone other than the First Nation or an entity wholly-owned and controlled (directly or indirectly) by the First Nation.

21. The Limited Partnership agreement will provide that the General Partner will receive fair market value compensation for management and other services it performs for the Limited Partnership.

22. One of the terms of the Limited Partnership agreement will describe that all property purchased by the Limited Partnership will be property belonging to the Limited Partnership. In the event that the General Partner is required to have certain property registered in its name, the General Partner will hold such property as bare trustee for the Limited Partnership so that all rights and risks of ownership belong to the Limited Partnership.

23. The First Nation will sell the XXXXXXXXXX to the Limited Partnership for fair market value. As consideration, the Limited Partnership will issue to the First Nation a combination of limited partnership units (at one limited partnership unit per dollar of value) and a promissory note, which in total, equal the fair market value of the XXXXXXXXXX. XXXXXXXXXX.

24. XXXXXXXXXX.

25. The General Partner will be permitted to establish earnings retention policies in order to permit the orderly and effective continuance of the Limited Partnership.

26. The net income and taxable income for both accounting and income tax purposes of the Limited Partnership will be allocated to the General Partner and the Limited Partner in proportion to the number of units held by each of them and credited or debited to the capital account of the partner.

27. Distributions from the Limited Partnership to the Limited Partner are governed by articles XXXXXXXXXX of the partnership agreement. Specifically, distributions from the capital account to the Limited Partner must be made for community benefits as defined in the partnership agreement.

OTHER INFORMATION

28. The Limited Partnership might XXXXXXXXXX with a view to a profit.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to allow the First Nation to provide additional funding to meet its governance obligations to its Members by earning income from XXXXXXXXXX, create economic development opportunities for the community and its Members, to create employment opportunities for its Members, and thus improve the socio-economic conditions of the community and to be protected from third party liability.

RULING GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purposes of the proposed transactions, we rule as follows:

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 of the Act by the First Nation on any income or gain on the XXXXXXXXXX to the Limited Partnership or on income allocated to the First Nation by the Limited Partnership in respect of the XXXXXXXXXX by the Limited Partnership as a result of the proposed transactions described above.

The above advance income tax ruling, which is based on the Act and Regulations in their present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R5, "Advance Income Tax Rulings", dated May 17, 2002, and is binding on the Canada Revenue Agency ("CRA") provided that the proposed transactions are completed by XXXXXXXXXX.

Nothing in this letter should be construed as implying that the CRA has reviewed the partnership agreement referred to in the facts or proposed transactions set out above. In particular, this letter does not confirm that:

• the partnership agreement referred in this letter creates a legal partnership for income tax purposes;
• the CRA has agreed to or accepted either expressly or implicitly the reasonableness of any allocations of income referred to in this letter.

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.

COMMENTS

Although not a current proposed transaction, you have noted that it is possible that the First Nation will be in receipt of gifts and you have requested a ruling for that eventuality. We are unable to provide a ruling on that basis; however, we are prepared to provide the following comments.

Sections 118.1 and 110.1 of the Act provide that within specified limits, and if supported by official receipts, individual taxpayers may claim a credit against taxes payable, and corporations may claim a deduction in computing taxable income, respectively, for an eligible amount of a gift made to a "qualified donee". For the purpose of sections 118.1 and 110.1, a public body performing a function of government in Canada that has applied to and is registered by the Minister of Revenue is a "qualified donee" pursuant to subparagraph (a)(iii) of the definition of "qualified donee" in subsection 149.1(1) of the Act. The qualified donee must be shown on a list maintained and made public by the CRA. The requirement to apply, be registered and be maintained on a publicly available list became effective January 1, 2012.

The CRA is currently developing the process for a municipal or public body performing a function of government in Canada to apply for registration as a qualified donee. Until the application process is complete, the CRA will consider a municipal or public body performing a function of government in Canada to be a qualified donee for the purpose of issuing official receipts.

As a qualified donee, the First Nation is required to comply with the requirements of the Act including the requirement to keep books and records of accounts as required by subsection 230(2) of the Act.

Yours truly,

XXXXXXXXXX
For Director
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch