31 January 1996 External T.I. 9423785 - INDIANS - TRUST 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

(a) In order to provide a status Indian with tax exemption on his or her income received from a trust, is it sufficient that the trust is administered by trustees who are resident on reserve? (b) To that end, would a corporate trustee be considered to reside on reserve if it maintained an office on reserve, from which it administered the trust, although its head office would be located off reserve?

Position:

(a)No.

(b)No.

Reasons:

(a)In light of Williams, one must consider all factors that serve to connect trust income to a location that is either on or off reserve.

(b)The corporate trustee would reside at the location of its head office. The exception in paragraph 7 of IT-447 is not intended to apply in determining the application of the Indian Act to the Income Tax Act.

			942378
XXXXXXXXXX		J.D. Brooks

Attention: XXXXXXXXXX

January 31, 1996

Dear XXXXXXXXXX:

Re: Exemption from Taxation Provided by Paragraph 87(b) of the Indian Act

We are writing to you in reply to your letter of September 7, 1994 in which you requested a technical interpretation concerning income earned in a trust by status Indians. I apologize for the unavoidable delay that has been encountered in replying to your request. As you know, there has been some uncertainty as to how the decision of the Supreme Court of Canada in Williams v. Her Majesty the Queen, 92 DTC 6320, (1992) 1 CTC 225, should apply in instances such as those for which you would like an interpretation.

You presented the following scenario:

1.XXXXXXXXXX is a corporation incorporated under the Trust and Loan Companies Act (Canada) and is resident in Canada.
XXXXXXXXXX
and as part of its business, offers its services as a professional trustee.

2.XXXXXXXXXX will open an office located on a reserve as defined in the Indian Act.

XXXXXXXXXX

3.As part of its business, that office will provide the professional trustee services of XXXXXXXXXX to customers including individuals who are Indians as defined in the Indian Act and bands as defined in that Act. An individual Indian may reside on the reserve on which the office of XXXXXXXXXX is located, on another reserve or off reserve. The bands may be from other reserves.

4.From its office on reserve, XXXXXXXXXX will administer trusts for beneficiaries such as those described in paragraph 3 above. The assets of a particular trust, however, will be debt and equity instruments that, for the most part, will be issued by off-reserve entities. Certain trusts established by bands will be for the purpose of investing amounts received by a band as a land claims settlement. Although some part of the trust's assets might be comprised of a deposit at a branch of XXXXXXXXXX located on the reserve, it is unlikely that such deposits would represent the majority of the trust's assets.

5.The books and records relating to such a trust would be kept at the on-reserve XXXXXXXXXX office. Day-to-day administration of the trust's activities would also be carried out at such branch, recognizing that some tasks would be accomplished through centralized systems that would be accessed from that on-reserve office. Investment management advice for the trust may be provided by another company in the XXXXXXXXXX that would not be located on a reserve.

6.XXXXXXXXXX may not be the only trustee of a given trust. In some circumstances, there may be other individual or corporate trustees involved. If the trust was administered by more than one trustee, the majority of trustees for such a trust would be comprised of persons who resided on a reserve.

Your View

In your view, where XXXXXXXXXX is the sole trustee for a trust and such trust is administered from an office located on a reserve, such trust would be treated as being located on a reserve. You hold the same view where XXXXXXXXXX is a co-trustee of a trust, the majority of the trustees of which reside on a reserve. You assume that the location of a trustee's office on reserve is sufficient to enable the trustee to be considered to be resident on the reserve.

It is also your view that any income earned by such trust and distributed to a beneficiary that is an Indian or band would, pursuant to section 87 of the Indian Act, be considered to be personal property situated on a reserve and therefore exempt from taxation in the beneficiary's hands under the Income Tax Act regardless of the individual's place of residence or the fact that the band may be from a reserve other than the reserve on which XXXXXXXXXX would maintain an office.

Our View

The fact situation which you set out is quite specific and it appears that it may relate to definite contemplated transactions. Assurance as to the tax consequences of contemplated transactions can only be given in response to a request for an advance income tax ruling. If you wish to obtain any binding commitment with respect to an actual case with facts similar to your example, an advance income tax ruling application should be submitted. We do, however, provide the following comments for your information.

Paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act establish the Indian exemption from taxation. Section 87 of the Indian Act exempts from taxation the personal property of an Indian situated on a reserve. In determining whether the income earned by an Indian is situated on a reserve, and thus exempt from taxation, the approach taken by the Supreme Court of Canada in the case of Williams must be followed. This approach requires the examination of all factors connecting income to a reserve to determine if the income is located on the reserve. In Williams, the Supreme Court ruled that the proper approach to determining the situs of intangible personal property is to evaluate the various connecting factors which tie the property to one location or another. The Court also indicated that the ultimate question is to determine to what extent each connecting factor is relevant in determining whether taxing the particular kind of property in a particular manner would erode the entitlement of an Indian to personal property situated on a reserve.

The Supreme Court noted that "the purposes of the conflict of laws have little or nothing in common with the purposes underlying the Indian Act." "The test for situs under the Indian Act must be constructed according to its purposes, not the purposes of the conflict of laws", and so it is not appropriate to simply adopt general conflict of law principles when determining whether income is connected to a reserve.

Prior to the Williams decision, it had been the Department's view that trust income of an Indian was exempt if the location of the trust, which in turn depended on the residence of the trustees, was on a reserve. Until we have further studied the effects of the Williams decision, the Department maintains its general view on trusts as expressed in Interpretation Bulletin IT-447, that the residence of a trust is dependent on the residence of the majority of the trustees exercising management and control of the trust. Paragraph 7 of IT-447 states an exception to the general rule which may apply where the management and control of a trust is exercised by a branch office of a company. In that case, the trust may be determined resident in the jurisdiction where the branch office is located even though the company itself is resident outside that jurisdiction. We have highlighted the word "may" since the exception will not necessarily apply to every trust with a trustee that is a branch office. The exception is intended for those situations where all of the other indicators of residence of a trust point to one jurisdiction and it is one that is different from the company's jurisdiction. In addition, the taxation of Indians was not specifically contemplated by the exception. In our view, in determining the exemption of an Indian's income from taxation in your situation, your trust company would not fit within the exception provided for in paragraph 7 of IT-447.

One general direction provided by the Supreme Court in Williams was that "an overly rigid test which identified one or two factors as having controlling force ... would be open to manipulation and abuse." The Supreme Court rejected the situs of the debtor test as the sole test for determining whether the personal property of an Indian or band was situated on a reserve. The approach adopted in Williams requires the examination of all factors connecting income to a reserve to determine if the income is located on the reserve.

With respect to investment income, the Department has taken the view that the location of a savings account at a bank branch on a reserve would not in itself be sufficient to exempt the interest income earned thereon. Where a bank account is considered to be situated at a location on reserve, this is one factor to weigh in determining whether interest earned on deposits in that account is exempt from taxation. There could be other factors that would connect the income to a location off reserve. When all potential factors indicate a reserve location, the investment income will be subject to exemption. For instance, when a registered Indian lives on reserve, earns exempt income and makes deposits of funds into a savings account in a branch of a bank located on a reserve, the interest income earned on such account will be exempt from income taxation in the hands of that Indian. On the other hand, when a registered Indian lives off reserve and earns only taxable income, the deposit of funds into a savings account located on reserve by means of an automated teller machine located off reserve will not be sufficient to exempt the interest income earned on such account.

In our view, the situs of a trust would not in itself ensure that income received by a beneficiary of the trust would be considered to be connected to a reserve. The connecting factors specific to an individual investor would have to be examined. In determining whether the income received by an Indian from a trust would be exempt, an important factor to consider could be the nature of the underlying property in the trust, and whether that property would be viewed as being located on a reserve if considered on its own merits. Other relevant factors could include the residence of the trustees, the residence of the beneficiaries, the source of the capital of the trust, and the place where the trust is managed.

With respect to monies from land claims settlements, the nature of the monies (i.e., whether they are tax-exempt) would first have to be determined in establishing whether the interest earned thereon is taxable. Generally, the monies will be exempt from taxation by virtue of section 87 of the Indian Act if, as described in paragraph 90(1)(b) of the Indian Act, they were "given to Indians or to a band under a treaty or agreement between a band and Her Majesty." With regard to paragraph 90(1)(b) of the Indian Act, the Supreme Court of Canada held, in Mitchell v. Peguis Indian Band ((1990) 2 SCR 85), that the words "treaty" and "agreement" take colour from each other and that the use of the word "given" is a distinct and pointed reference to the process of cession of Indian lands. Thus, in our view, an agreement would have to be similar in nature to a treaty for the exemption to apply. The agreement would have to implement a treaty; that is, it must be an agreement which implements a treaty obligation. Furthermore, the property that was given must be related to the settlement of land issues.

In the case of treaty land entitlement trust property, whether property held by a trust for the benefit of Indians or a band qualifies as "personal property" of the Indians or the band for the purposes of paragraph 87(1)(b) of the Indian Act is a question of fact to be determined largely by the wording of the trust documents. Typically, the "personal property" of the Indians or the band would be the interest in the trust, rather than the property held by the trust.

Pursuant to paragraph 90(1)(b) of the Indian Act, personal property that was given to Indians or to a band under a treaty or agreement between the band and Her Majesty, shall be deemed always to be situated on a reserve. This provision also applies to property that is considered as given ancillary to the original treaty agreement. Accordingly, property transferred by the Crown to a trust for the benefit of Indians or bands, that enures to Indians or bands through the discharge by "Her Majesty" of her treaty obligations, will qualify under paragraph 90(1)(b) of the Indian Act. In our view, it would not matter whether the Crown was the settlor of the trust or the Crown gave the property to a band which in turn was the settlor of the trust.

The initial investment income derived from property which comes within subsection 90(1) of the Indian Act would be income earned from property deemed to be situated on a reserve and so would be exempt from taxation. However, it is questionable if income earned on accumulated investment income in these circumstances would receive the protection of subsection 90(1) of the Indian Act.

Also, paragraph 90(1)(b) of the Indian Act concerns only the original property given by Her Majesty to a band. If the original property is substituted by the band or by a trust for the band, the substituted property would not constitute property given by Her Majesty and therefore paragraph 90(1)(b) of the Indian Act would not apply to such substituted property. Where the trust chooses to invest its funds in securities instead of depositing the funds in a bank account, the securities would constitute substituted property. Whether or not income earned on such securities would be exempt from tax in the hands of the beneficiary is a question of fact.

Concerning the tax consequences to the trust itself, a trust is not an Indian and consequently is not itself exempt from taxation pursuant to section 87 of the Indian Act. However, subparagraph 104(6)(b)(i) of the Income Tax Act provides that a trust (other than an employee trust) may deduct in computing its income for a taxation year an amount not exceeding the amount which would be its income for the year, as became payable in the year to a beneficiary.

Paragraph 104(13)(a) of the ITA provides that an amount which became payable in the year to a beneficiary under a trust is included in computing the income of the beneficiary.

These comments are general in nature and do not specifically take into consideration the facts in the hypothetical situation which you outlined. As stated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, these comments are not binding on the Department.

We trust that our comments are of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch