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: 1. Would settlement monies received by a First Nations individual impact the determination of federal and provincial income-tested benefits or credits?
2. Are certain settlement monies received by First Nations individuals exempt from tax under paragraph 87(1)(b) of the Indian Act and paragraph 81(1)(a) of the Act?
Position: 1. The determination depends on the type of settlement monies received by the individual. Generally, the settlement monies, which are situated on a reserve and exempt from tax under the Indian Act, will not impact the determination of federal and provincial income-tested benefits or credits.
2. Please see below.
Reasons: 1. Pursuant to paragraph 81(1)(a) of the Act, amounts which are exempt from tax under the Indian Act, shall not be included in computing the taxpayer’s income for purposes of the Act.
XXXXXXXXXX 2024-101907
Ananthy Mahendran
September 5, 2024
Dear XXXXXXXXXX:
Re: Settlement monies received by First Nations individuals and its impact on income-tested benefits/credits
This is in response to your email dated May 17, 2024, in which you requested our comments on the income tax treatment of certain settlement monies received by individuals who are registered or entitled to be registered under the Indian Act (First Nations individuals) and if those monies impact the determination of federal and provincial income-tested benefits or credits. We acknowledge our discussions on May 30, 2024, in respect of this matter and the additional information provided in your correspondence dated May 24, 2024, and May 31, 2024.
You indicated that the settlement monies are from the proposed settlement in the outstanding litigation around the XXXXXXXXXX Treaty (Treaty). Based on the XXXXXXXXXX news release issued by Crown-Indigenous Relations and Northern Affairs Canada (CIRNAC), it is our understanding that the purpose of the proposed settlement is to provide compensation to address past claims, to honour the Treaty obligations, and to support the XXXXXXXXXX to invest in a brighter future for their communities and grow the local economies in the Treaty territory. Therefore, it is our view that these settlement monies are received under a specific claim as described on the CIRNAC website (Specific claims (rcaanc-cirnac.gc.ca) (footnote 1) and are separate and distinct from settlement monies received under comprehensive land claims or modern treaties.
Our Comments
This technical interpretation provides general comments about the provisions of the Income Tax Act (Act) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.
The personal property, including income, of a First Nations individual is exempt from tax under section 87 of the Indian Act only if the property is situated on a reserve (Exempt Income).
Exempt Income and its impact on income-tested credits and benefits
Paragraph 81(1)(a) of the Act provides that amounts which are declared to be exempt from tax by virtue of another enactment of the Parliament of Canada (e.g., the Indian Act) shall not be included in computing the individual’s income for purposes of the Act. Accordingly, the Exempt Income of a First Nations individual is not included in computing the individual’s income under Part I of the Act. This means that a federal or provincial income-tested credit or benefit that is determined based on income under Part I of the Act, will not be impacted by the individual’s Exempt Income. However, certain income-tested credits and benefits, such as the Canada workers benefit, have legislation that specifically includes Exempt Income in its determination.
Per capita distributions
You also asked about the income tax treatment of specific claims settlement monies paid out as per capita distributions (PCDs). The tax treatment of these PCDs is mainly dependent on how the PCDs are paid to the members of a First Nation. The PCDs can be paid by the First Nation or by a trust established by the First Nation.
If the First Nation issues and directly pays the PCDs to its First Nation members, it is CRA’s longstanding position that the PCDs are generally not income from a source or proceeds of disposition of property to the members, and the PCDs are not included in the members’ income under Part I of the Act. The impact on income-tested credits and benefits would be the same as discussed above for Exempt Income.
If the PCDs are paid directly by the trust out of its capital, it is the CRA’s position that the PCDs are not income under Part I of the Act, and therefore are not included in the member’s income. On the other hand, where the PCDs are paid or payable out of the income of the trust, the PCDs are included in the member’s income under Part I of the Act unless the income is Exempt Income. PCDs paid out of the income of the trust will be Exempt Income if the trust income is situated on a reserve. It is always a question of fact whether a particular income is situated on a reserve. In the case of income from a trust, several factors are taken into account, including how and where the trust generates its income, the residence of the trustees (or those controlling the trust property), and the residence of the beneficiaries. The first of these factors is usually given the most weight.
Interest income received on settlement monies
Additionally, you asked about the income tax treatment of interest income (pre-judgment and post-judgment) received by First Nation members. Pre-judgment interest means an amount, classified as interest by the courts or under the terms of the settlement agreement, that is interest payable for the time between the emergence of the cause of action and the date of the award or settlement.
Interest income is generally included in income under Part I of the Act (i.e., paragraph 12(1)(c)). However, as outlined in Income Tax - Technical News No. 30 - Canada.ca (footnote 2) (ITTN 30), the CRA has an administrative position for pre-judgment interest related to awards for personal injury or death, wrongful dismissal, and retroactive worker's compensation payments. Accordingly, pre-judgment interest on such awards would not be included in the recipient’s income under the Act. Where the administrative position does not apply to the pre-judgment interest, it along with any post-judgment interest, will be included in income under Part I of the Act unless it is determined to be Exempt Income.
Generally, interest income received by a First Nations individual will be Exempt Income where all of the following conditions are met:
1. the interest income is from a savings or chequing account, or from a term deposit or guaranteed investment certificate (GIC);
2. the savings or chequing account, or the term deposit or GIC, was obtained at a financial institution (including a bank branch) located on a reserve;
3. the financial institution is required to pay the interest income at a location of the financial institution on a reserve; and
4. if the investment is a term deposit or GIC, then the interest rate is fixed or can be calculated at the time the investment was obtained.
For more information, see Information on the tax exemption under section 87 of the Indian Act - Canada.ca (footnote 3) , under the heading of “Interest and investment income”.
Other property income received from investing settlement monies
Furthermore, you asked about the tax treatment of other property income received from investing settlement monies, such as dividend income, capital gains, and rental income.
Generally, if a First Nations individual is a shareholder of a corporation that operates only on a reserve, any dividends the individual receives from the corporation will be Exempt Income. This applies when the head office, management, and principal income-generating activities of the corporation that pays the dividends are situated on a reserve. Any capital gain from the disposition of a personal use property (PUP) of a First Nations individual will be Exempt Income if the PUP was located on a reserve. If the PUP was not located on a reserve, any capital gain from the disposition of the PUP will generally be taxed in the same manner as non-First Nations individuals. Any rental income received by a First Nations individual will be Exempt Income if the rental property is located on a reserve.
For more information, see Information on the tax exemption under section 87 of the Indian Act - Canada.ca, under the heading of “Interest and investment income”.
Comprehensive land claim or modern treaty settlements
Under paragraph 90(1)(b) of the Indian Act, settlement monies (i.e., personal property) provided to First Nations individuals under a comprehensive land claim or modern treaty are deemed always to be situated on a reserve and are therefore exempt from tax under section 87 of the Indian Act, regardless of where these monies are situated. The impact on income-tested credits and benefits would be the same as discussed above for Exempt Income.
We trust these comments will be of assistance to you.
Yours truly,
Ms. Nerill Thomas-Wilkinson, CPA, CA
Manager
Non-Profit Organizations and Indigenous Issues Section
Speciality Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 https://www.rcaanc-cirnac.gc.ca/eng/1100100030291/1539617582343
2 https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/itnews-30/archived-income-tax-technical-news-no-30.html#P180_33759
3 https://www.canada.ca/en/revenue-agency/services/indigenous-peoples/information-indians.html#hdng9
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