2013 Ruling 2013-0478751R3 - 149(1)(c) Ruling - Indian Band and Partnership

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 allocation by a Limited Partnership to an Indian Band exempt from tax pursuant to 149(1)(c)?

Position: Yes

Reasons: The Indian Band is a public body performing a function of government.

XXXXXXXXXX
2013-047875

XXXXXXXXXX, 2013

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling – XXXXXXXXXX

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 as well as various telephone conversations (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 if a judgment has been issued, the time limit for appeal to a higher court has expired; or
(v) the subject of a ruling previously considered 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.

Our understanding of the relevant definitions, the facts, proposed transactions and the purposes of the proposed transactions is as follows:

DEFINITIONS

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

a) "Band" has the meaning provided under subsection 2(1) of the Indian Act;

b) "Eligible Person" as defined in the partnership agreement, means:

(i) a Band, or;
(ii) Xco, or;
(iii) any person that is wholly owned, directly or indirectly, by persons described in (i) and (ii);

c) "Bare Trustco" means XXXXXXXXXX;

d) "FN1" means the XXXXXXXXXX;

e) "FN2" means the XXXXXXXXXX;

f) "First Nations" means collectively, FN1 and FN2;

g) "GP Inc." means XXXXXXXXXX an affiliate of Xco that will be the general partner of the Limited Partnership;

h) "Indian Act" means the Indian Act R.S.C. 1985, c.I-5, as amended;

i) "Limited Partnership" refers to the XXXXXXXXXX to be formed to own and operate the XXXXXXXXXX;

j) XXXXXXXXXX;

k) "LP Inc." refers to an affiliate of Xco that will be a limited partner of the Limited Partnership;

l) "Member" means an individual whose name appears on the "Band List" of the FN1, as defined in the Indian Act and maintained by the FN1 in accordance with section 10 of the Indian Act;

m) "Reserve" means the FN1's reserves as described in paragraph 3 of this letter and that are "reserves" as defined in subsection 2(1) of the Indian Act;

n) "Xco" means XXXXXXXXXX;

o) "Yco" means XXXXXXXXXX, a wholly owned subsidiary of Xco, which itself is owned by the Province of XXXXXXXXXX.

FACTS

1. The FN1's mailing address is XXXXXXXXXX. The FN1 is served by the XXXXXXXXXX Tax Services Office and files any tax documentation with the XXXXXXXXXX Tax Centre. The FN1's business identification number is XXXXXXXXXX.

2. The FN1 is a Band.

3. The FN1's reserves are: XXXXXXXXXX.

4. The FN1 has approximately XXXXXXXXXX Members, of whom approximately XXXXXXXXXX live on the Reserve.

5. FN1 is governed by a democratically elected chief and XXXXXXXXXX elected councillors who were elected pursuant to the Indian Act. The chief and band council are responsible for the governance of the FN1 and have the power to make by-laws in accordance with the Indian Act.

6. The FN1 employs a Chief Executive Officer who, under the direction of the chief and council, is responsible for administrative management of the FN1.

7. The FN1 has passed the following by-laws pursuant to section 81 of the Indian Act:

a. Animal Control By-law
b. Children's Curfew By-law
c. Nuisance By-law
d. Streets and Traffic By-law
e. Waste Management By-law
f. Firearms Regulation By-law
g. Use of Public Wells By-law
h. Control of Snow Vehicles By-law
i. Establish Fire Department By-law
j. Control of Motor Vehicles By-law
k. XXXXXXXXXX Park By-law
l. Control of Campgrounds By-law
m. Garbage Bag Tag Collection By-law

8. The FN1 is one of the listed Bands that are authorized pursuant to the Indian Band Revenue Moneys Order, #SOR/90-297, to control, manage, and expend in whole their revenue money under subsection 69(1) of the Indian Act.

9. The FN1 has entered into a XXXXXXXXXX whereby the FN1 has accepted responsibility to provide certain health programs and services to its Members. The services to be provided are set out in the XXXXXXXXXX. Programs include those related to prenatal care, infant development, health education, substance abuse and addiction services, mental health, home care and other community health issues. XXXXXXXXXX.

10. Each year the FN1 enters into a comprehensive funding agreement with Aboriginal Affairs and Northern Development Canada (AANDC). The funding covers essential services provided by the FN1 to and for its Members and funded by the Government of Canada. Under this agreement AANDC provides funding to the FN1 to assist in providing the following services to its Members: fire protection services, waste management services, education, day care, assisted living, and other social programs.

11. The FN1 is responsible for providing fire protection services on the reserve. To provide these services the FN1 owns, funds, maintains and operates a fire station, XXXXXXXXXX fire trucks, XXXXXXXXXX. The FN1 employs a fire safety officer who oversees about XXXXXXXXXX part time firefighters who are paid on a per call basis. XXXXXXXXXX. Similarly, if an emergency occurs outside the reserve, the dispatcher may direct the FN1 to be the first responder, in which case the FN1 would receive compensation from the responsible township.

12. The FN1 is responsible for garbage collection services on the reserves. It owns the necessary equipment and hires the personnel for these services.

13. The FN1 is responsible for providing education to the FN1 children that live on the Reserve. It meets this obligation through an agreement with the local municipal school boards under which the FN1 pays tuition to the local school boards for the attendance of the FN1 children at these schools.

14. The FN1 constructs housing for eligible Members who reside on the Reserve, which is funded by a subsidy from AANDC and borrowed funds. Allocations of band-provided housing are based on a Housing Policy established by the FN1.

15. The FN1 funds, owns, operates and maintains XXXXXXXXXX apartment buildings, consisting of XXXXXXXXXX unit apartment buildings (XXXXXXXXXX) and XXXXXXXXXX unit building for families.

16. The FN1 has entered into agreements with Canada Mortgage and Housing Corporation (CMHC) to allow the FN1 to assist Members in maintaining housing. It is the responsibility of the FN1 to apply, on behalf of the FN1 Members, for portions of this amount.

17. The FN1 has developed a community XXXXXXXXXX-year plan to manage the development of community lots, housing, commercial development and economic development strategies. The FN1 allows people and businesses to use the land and make any improvements to the land. The FN1 leases certain of its lands to persons that are not Members of the FN1. Where these tenants wish to construct or demolish buildings on the leased land, they are required to obtain permission and a building permit from the FN1.

18. The FN1 has a Works Department that is responsible for the repair and maintenance of the roads on the Reserve.

19. All of the buildings and facilities below are owned, funded, operated and maintained by the FN1:

a. Administrative Building (This building houses the offices for the executive of the FN1 including offices for the Chief, secretary to the Chief and Council, administrative secretary, human resources manager, band administrator, Finance Department (XXXXXXXXXX employees), Membership (XXXXXXXXXX), Education Department (XXXXXXXXXX employees), Adult Literacy (XXXXXXXXXX) and Housing Department (XXXXXXXXXX employees)).
b. Recreation Centre / Gymnasium (The gymnasium is located in the Recreation Centre owned by the FN1. The Recreation Centre includes a stage and an office for the building supervisor).
c. Employment Training Centre (Houses a couple of class rooms/meeting rooms used for adult employment training, a computer lab with several computers, an office for the director of adult training and his/her assistant as well as a workshop for woodworking training).
d. Health Clinic (The building is used to provide health services to the FN1 members. It houses the XXXXXXXXXX. Several departments operate out of the clinic including: mental health, healthy babies program, aids program and transportation aid for off-reserve medical appointments).
e. Landfill (The FN1 maintains a dump for the Reserve as well as a trash compactor. The FN1 is responsible for garbage collection and recycling which is handled by the FN1's Roads Department).
f. Roads and Bridges on the Reserve (This includes a works department building that houses several vehicles including: loaders, dump trucks, bulldozers, a grader, and a back hoe. XXXXXXXXXX employees are employed to maintain and repair the roads on the reserves).
g. Playgrounds (The FN1 operates a baseball field with bleachers including a building which houses a change room and a canteen. The FN1 also provides XXXXXXXXXX smaller playgrounds for use by its youth with slides and swings and other playground equipment).
h. Tourism Facilities (XXXXXXXXXX).

20. The FN1 purchases water from XXXXXXXXXX. The water runs to a booster substation, which is owned and operated by the FN1, and distributes the water throughout the Reserve. The FN1 is responsible for the infrastructure to accommodate this water supply.

21. The FN1 has installed a communications system on the Reserve, which provides for constant telephone and internet access. The FN1 installed the fibre optics for the system and the system is administered and maintained by the FN1.

22. Certain buildings and a sports centre owned and operated by the FN1are made available for use by the FN1 Members. User fees and rental charges are levied for the use of recreational and meeting facilities for certain activities. The FN1 establishes the user fees.

PROPOSED TRANSACTIONS

23. The First Nations have reached an agreement with Xco under which the First Nations will acquire an interest in the Limited Partnership.

24. Yco will transfer the XXXXXXXXXX to the Limited Partnership.

25. Bare Trustco will agree to hold title to the partnership interest as nominee and agent for and on behalf of the First Nations. The shares of Bare Trustco will be legally registered in the names of the Chiefs of each of the FN1 and the FN2, whom will hold the shares as nominee and agent for the FN1 and the FN2, respectively.

26. The proposed relationship between Bare Trustco and the First Nations will be evidenced in writing by the Draft Nominee Agreement.

27. There will be no transfer of partnership units or the issue of units to any person other than an Eligible Person.

28. The First Nations will contribute approximately $XXXXXXXXXX to the Limited Partnership for approximately a XXXXXXXXXX% interest in the Limited Partnership based on the expected value of the assets at closing and LP Inc. and GP Inc. will contribute approximately $XXXXXXXXXX to the Limited Partnership for approximately a XXXXXXXXXX% interest in the Limited Partnership based on the expected value of the assets at closing.

29. GP Inc. will negotiate, on behalf of the Limited Partnership, all contracts and manage all projects and operations to which the Limited Partnership is a party in respect of the XXXXXXXXXX.

30. The Limited Partnership will commence operations after the XXXXXXXXXX approves the transfer of the XXXXXXXXXX to the Limited Partnership, grants the Limited Partnership a XXXXXXXXXX licence and makes a XXXXXXXXXX in favour of the Limited Partnership. Thereafter, the Limited Partnership will make distributions and allocate income and losses to its partners from time-to-time in accordance with the partnership agreement.

PURPOSES OF PROPOSED TRANSACTIONS

31. The purposes of the proposed transactions are as follows:

a) To generate a long-term source of income for the FN1 to support the governance, public works and infrastructure needs of each community and to promote economic development such that the FN1 will become economically self-sufficient while maintaining a stewardship role over their lands.
b) To protect the FN1 from liability arising from activities related to the XXXXXXXXXX.
c) To provide employment and job training for Members of the FN1.
d) To support projects and activities for the general benefit of the FN1.

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 FN1 is, and as long as it continues to be, 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 FN1 on income allocated to the FN1 by the Limited Partnership in respect of the operation of the XXXXXXXXXX, carried on 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 in its 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 the Proposed Transactions are completed by XXXXXXXXXX.

OPINION

So long as Bare Trustco continues to hold the partnership interest in the Limited Partnership as nominee and agent for the First Nations as described in paragraphs 25 and 26, the income allocated to Bare Trustco by the Limited Partnership on such partnership interest will be the income of the First Nations and not the income of Bare Trustco for purposes of computing income under Part I of the Act.

It is not the practice of the CRA to issue an income tax ruling on an issue related solely to the common law. Therefore, nothing in this letter should be construed as implying that the CRA has reviewed or agreed that the Draft Nominee Agreement creates an agency relationship for income tax purposes.

CAVEAT

Nothing in this letter should be construed as implying that the CRA has reviewed or agreed:

• that the partnership agreement creates a legal partnership for income tax purposes;
• to the determination of the adjusted cost base, paid-up capital or fair market value of any shares or other property referred to herein; or
• to any tax consequences relating to the facts and the Proposed Transactions described herein other than those described in the rulings given above.

This letter is based solely on the facts and the 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. A copy of this letter will be forwarded to the Charities Directorate of the CRA.

Yours truly,

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