31 August 1998 Internal T.I. 9513277 - XXXXXXXXXX

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: Is trust exempt that received settlement funds for Indian band.

Position: Trust has no exemption under Indian Act, but is not taxable if income payable to beneficiary. If band is beneficiary it may be exempt.

Reasons: Indian Act does not exempt trust. Indian band may be exempt per 149(1)(c).

            August 31, 1998

      Sudbury Taxation Centre Headquarters
      T3 Assessing      D. Duff

            951327

XXXXXXXXXX

This is in reply to the round trip memorandum of May 11, 1995, and subsequent correspondence (including the 1994 to 1996 tax returns and financial statements of the XXXXXXXXXX) and telephone conversations regarding the taxation of the XXXXXXXXXX. We apologize for the delay in our response.

XXXXXXXXXX

Our comments

Paragraph 81(1)(a) of the Income Tax Act (the (“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. A trust is not an Indian and, consequently, is not itself exempt from taxation pursuant to section 87 of the Indian Act. In our view, it is irrelevant whether the funds settled in the XXXXXXXXXX are described in section 90 of the Indian Act. Paragraph 104(6)(b) of the Act provides that a trust (other than an employee trust or a trust governed by an employee benefit plan) 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 Act requires the beneficiary to include in income the amount that would be the trust’s income, but for subsection 104(6), that became payable to the beneficiary. Finally, subsection 104(24) deems an amount to be payable for these purposes if it was paid or the beneficiary was entitled to enforce payment in the year. As we have not seen the trust agreement, we cannot comment on whether it would get a deduction under paragraph 104(6)(b) of the Act on the basis that the beneficiary can enforce payment each year.

Where the Indian band had to include the amounts in income, one would have to consider whether the band qualified for exemption under paragraph 149(1)(c) of the Act. It is a question of fact as to whether an Indian band may be considered to be a public body performing a function of government in Canada and thereby qualify for exemption from Part I tax pursuant to paragraph 149(1)(c) of the Act. The Department considers that an Indian band that has passed by-laws under both sections 81 and 83 of the Indian Act is a public body performing a function of government. The Department also considers bands that had reached an advanced stage of development as was formerly required by section 83 of the Indian Act to be public bodies performing a function of government. Bands that do not meet these requirements can be considered on a case-by-case basis. The Department considers that bands that have been involved in negotiating and implementing Treaty Land Entitlements could qualify as such public bodies.

We have no information on the XXXXXXXXXX band nor do we have a copy of the Land Claim Settlement Agreement so we cannot make conclusive comments on whether it would be exempt under paragraph 149(1)(c) of the Act. Also, we have not been advised that it is the beneficiary under the XXXXXXXXXX. Although we do note that Note 2(d) to the December 31, 1996 financial statements states “XXXXXXXXXX” This note indicates that, in their view, the trust income is paid annually to the band, which is exempt, and then loaned back to the trust.

If the XXXXXXXXXX band is not exempt pursuant to paragraph 149(1)(c) of the Act you should consider whether its income from the XXXXXXXXXX is exempt pursuant to the Indian Act. Paragraph 87(1)(b) of the Indian Act also exempts the personal property of an Indian band where the property is situated on a reserve. One would have to consider the various connecting factors that could connect the band’s income from the trust to a reserve in order to determine whether the income would be exempt in the band’s hands. We would point out, though, that based on Williams v. The Queen (92 DTC 6320), in our view, the purchase of investments from an institution on reserve would not, in itself, be sufficient to exempt the interest income earned thereon. While this is one factor to weigh in determining whether interest earned is exempt from taxation there could be other factors that would connect the income to a location off reserve.

In the case of Arnold Recalma v. Her Majesty the Queen (96 DTC 1520), the Tax Court of Canada considered the taxability of income earned by an Indian living on reserve, from investments purchased from an on reserve branch of a bank. It should be noted that the nature of the property in question was the income from the investments and not the investments themselves. The court had to determine if the investment income was situated on the reserve. This determination required a review of all relevant connecting factors and consideration as to how much weight should be given to each factor. The following were considered in determining the situs of the investment income:

a) the residence of the taxpayer;

b) the origin or location of the capital used to buy the securities;

c) the location of the bank branch where the securities were bought;

d) the location where the investment income is used;

e) the location of the investment instruments;

f) the location where the investment income payment is made; and

g) the nature of the securities and in particular:

(i) the residence of the issuer;

(ii) the location of the issuer's income generating activity from which the investment is made, and

(iii) the location of the issuer's property in the event of a default that could be subject to potential seizure.

While the court considered all of these factors it placed considerable weight on (g)(ii), the location of the income generating activity of the issuer of the securities. In Recalma, the income in question was interest from banker's acceptances and income from mutual fund units. Basically, the court concluded that income from these investments started with companies off the reserve and was passed through a bank on reserve to the taxpayers. It was held that the investment income of the taxpayer was not personal property situated on a reserve. The court concluded that in making these investments the taxpayers chose to invest in the economic mainstream of normal business conducted off the reserve. This position was confirmed by the Federal Court of Appeal (98 DTC 6238). Since we have no information on the nature of the investments of the XXXXXXXXXX, we cannot comment on whether the interest would be exempt income to the XXXXXXXXXX band.

Bryan Dath
Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate

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