2 August 1995 External T.I. 9516835 - NPO - INDIAN FORRESTRY CORPORATION

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:

-Whether a non-profit forestry corporation set up by aboriginal persons and described as an aboriginal community development corporation would be tax exempt.

Position TAKEN:

-It would not be exempt under paragraph 81(1)(a) of the Act, by virtue of section 87 of the Indian Act since a corporation is not an "Indian". However, It may qualify for exemption under paragraph 149(1)(l), provided it satisfies all the conditions therein, which are of course questions of fact.

Reasons FOR POSITION TAKEN:

-Previous positions and court cases.

		951683
XXXXXXXXXX	B. Kerr

Attention XXXXXXXXXX

August 2, 1995

Dear Sir/Madam:

RE: Exemption from Income Tax

This is in response to your letter of June 15, 1995, wherein you requested a ruling as to whether the XXXXXXXXXX would be exempt from income tax under the proposed set-up.

You describe this company as an aboriginal non-profit community development corporation, whose members will include any member of the XXXXXXXXXX The Head Office of the company is located in the XXXXXXXXXX Indian Reserve

XXXXXXXXXX

Our Comments

The situation described in your letter involves actual proposed transactions with identifiable taxpayers. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in the enclosed Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Taxation. However, we can offer the following general comments.

Paragraph 81(1)(a) of the Income Tax Act (the "Act") exempts from taxation an amount that is declared to be exempt from income tax by any other enactment of the Parliament of Canada. Since a corporation is not an "Indian" within the meaning assigned by the Indian Act, its income is not exempt from taxation pursuant to section 87 of the Indian Act. Therefore, a corporation will be taxable on its income unless otherwise exempt from taxation under another provision of the Act. For example, a corporation may qualify for exemption from Part I tax on its taxable income in a period if it meets the conditions outlined in paragraph 149(1)(l) of the Act.

In order for a corporation to be exempt under paragraph 149(1)(l), inter alia, it must be organized as well as operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit and no part of its income may be payable to or otherwise available for the personal benefit of any of its members or shareholders.

To establish the purpose for which a corporation was organized, the Department will normally look to the instruments by which it was created such as letters patent, articles of incorporation and so on. If a review of these documents reveals that the corporation was created for other than one or more of the purposes described above, the corporation would not qualify for exemption. A corporation not only has to be organized for such purposes, it must also be operated for those purposes. Of course, whether or not a corporation was operated for such purposes is a question of fact that can only be determined retrospectively based on a review of its operation in the period concerned.

Paragraph 149(1)(l) of the Act contemplates that a corporation may carry on income generating activities and earn income and still qualify for exempt status. However, there must be a causal relationship between the profit making activity and the exempt purpose of the corporation. In other words, the income generating activity cannot be the principal activity of the corporation and must be carried on, and the resulting income must be used, by the corporation to achieve its declared exempt objectives. In this regard, we refer you to the case of Gull Bay Development Corporation v. Her Majesty the Queen, (84 DTC 6040). In that case, the corporation was incorporated, inter alia, to promote the economic and social welfare of persons of native origin who were members of the Gull Bay Indian Reserve. A number of band members were employed by the corporation to perform social welfare, civic improvement, and other charitable ventures. However, the corporation also carried on logging operations employing about 12 to 25 persons who worked directly in logging, from which it earned profits that were used to, inter alia, clean up the community, cut wood for elderly residents, remove unsightly abandoned cars, move a garbage dump, make hockey rinks, help other residents who could not do washing for themselves and set up an alcoholic control program. The Court found that: the corporation was not set up to carry on commercial activities even though it was engaged in a commercial activity that may have been motivated by the desire to provide employment and training to otherwise unemployed Indians on the reserve; that it was operated exclusively for the purposes set out in paragraph 149(1)(l) pursuant to its charter, even though it may raise funds for its purposes by its commercial lumbering enterprise; that having the corporation carry out the logging activities was the most efficient way of achieving the Gull Bay Indian Band Council's social welfare and civic improvement objectives; and that the social welfare activities were not a cloak to avoid payment of taxation on a commercial enterprise but were the real objectives of the corporation.

For additional comments concerning paragraph 149(1)(l), including examples of when the Department would consider the income of a corporation to be payable to or otherwise available for the personal benefit of any of its members or shareholders, we are enclosing a copy of Interpretation Bulletin IT-496 entitled "Non-profit organizations".

We trust that these comments will be of assistance.

Yours truly,

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