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 the assignment to a trust by an Indian band of its right to receive in the future certain revenues otherwise payable to the band would result, pursuant to subsection 56(4) of the Income Tax Act, in the income being included in computing the band's income and not that of the trust.
Position:
Yes.
Reasons:
If the band had received the funds directly (and subsequently settled those funds in the trust), it would not have been subject to tax by virtue of paragraph 149(1)(c) of the Income Tax Act. Normally, subsection 56(4) operates as an avoidance provision to tax funds in the hands of a recipient who has a higher tax rate than the person who took receipt of the funds. Nevertheless, it is a non-discretionary provision that applies where the circumstances so dictate.
56(4) requires the two parties to be not dealing at arm's length. It is noted that the band is the settlor of the trust and the sole income beneficiary, and that it has retained de facto control of the trust. Furthermore, the band transferred its rights to receive revenue to the trust without consideration. Thus, it is apparent that the band and the trust are not dealing at arm's length.
56(4) would not apply if the property from which the income is derived were also transferred to the trust. Such is not the case.
963752
XXXXXXXXXX J.D. Brooks
Attention: XXXXXXXXXX
February 19, 1997
Dear Sirs:
Re: XXXXXXXXXX
This letter is in reply to your letter of November 8, 1996 in which you requested our opinion concerning the tax treatment of the Band and an inter vivos trust which has been settled by the Band, named the XXXXXXXXXX. You described the Facts, Rationale, Relationship of Trust and Band, and Tax Status of the Band as follows.
Facts
The Trust was created pursuant to a trust agreement (the "Trust Agreement") made as of XXXXXXXXXX A copy of the Trust Agreement was attached to your letter. The Trust was created to receive, invest and reinvest revenues (the "XXXXXXXXXX") to which the Band was entitled in connection with
XXXXXXXXXX
On settlement of the Trust, the Band assigned to the Trust the bare right to receive in the future the revenues otherwise payable to the Band under the
XXXXXXXXXX
Rationale
The reason for the creation of the Trust and the assignment by the Band of its right to the XXXXXXXXXX was to create a permanent capital fund for the use and benefit of the Band. The XXXXXXXXXX will form the capital of the Trust and will remain in the Trust until the Trust Termination Date. Income arising from investment and reinvestment of the capital of the Trust (referred to in the Trust Agreement as "XXXXXXXXXX") will, following payment of Trust expenses, be paid out of the Trust annually to the Band and used for the benefit of the Band and its members. Because the present and future entitlement to the XXXXXXXXXX has been absolutely assigned to the Trust, and since the Trust Agreement does not permit capital to be paid out of the Trust to the Band, the members of the Band are assured that the capital fund will grow through continued deposit of XXXXXXXXXX The capital fund will be available to benefit future generations of the Band and allow them to govern their lives from a position of financial security. Subject to the termination provisions, which can only be invoked with the written approval of XXXXXXXXXX% of the adult members of the Band, it is anticipated that the Trust would endure for upwards of a century. The Trust Agreement permits amendment in several circumstances, but in most cases only following ratification by XXXXXXXXXX% of the members of the Band obtained by a membership vote.
The establishment of the Trust was not at all motivated by tax considerations. In the absence of the Trust, in your view, it would have been absolutely clear that none of the XXXXXXXXXX would have been subject to income tax. Now that the Trust has been established for bona fide non-tax reasons (as explained above), the Band is seeking to confirm that it will not be adversely affected from the tax perspective, i.e., that there will be no significant tax liability on the Trust.
Relationship of Trust and Band
The Band was the Settlor of the Trust, is the income beneficiary of the Trust, and retains substantial de facto control of the Trust, by virtue mainly of the ability of the Band Council to appoint and replace the Trustees of the Trust. The individual Trustees serve in office at the pleasure of the Band Council, and the Corporate Trustee can be removed upon XXXXXXXXXX days written notice. As a result, it is your opinion that the Band and the Trust do not deal at arm's length for purposes of the Income Tax Act (the "Act").
Tax Status of the Band
The Band has passed bylaws under both of sections 81 and 83 of the Indian Act and therefore it is your understanding that the Band qualifies as a tax-exempt entity pursuant to paragraph 149(1)(c) of the Act as a municipal or public body performing a function of government.
The situation you outlined is a factual situation and some of the described transactions have already occurred. As you are aware, the Department does not provide binding opinions on completed transactions and it does not provide binding opinions on proposed transactions other than by way of advance income tax rulings. If you have questions regarding completed transactions, you should normally contact your local Tax Services office. Nevertheless, we have set out below some comments of a general nature which may be of assistance to you.
Where an Indian band, within the meaning of subsection 2(1) of the Indian Act, has passed bylaws under both section 81 and 83 of the Indian Act, it is our view that the band would qualify for exemption from Part I tax pursuant to paragraph 149(1)(c) of the Act by virtue of being a public body performing a function of government in Canada.
Where such a tax-exempt band transfers to a trust with which it does not deal at arm's length a right to receive revenue and, in the case where the income is from property, does not also transfer the property to the trust, the revenue should be included pursuant to subsection 56(4) of the Act in computing the income of the band. As described in paragraph 10 of Interpretation Bulletin IT-419 (Meaning of Arm's Length), on the basis that there has been no attempt to avoid or evade taxes, the income would not be included in computing the income of the trust. Also pursuant to that Interpretation Bulletin, a band and a trust as described above would be considered to not deal at arm's length with each other.
With respect to income earned in a trust, it is our view that trusts do not qualify for exemption pursuant to the Indian Act since they are not Indians. Thus, with respect to the taxability of income in the hands of a trust, it is irrelevant whether the investment decisions occur on reserve or whether there are any other factors that might determine the situs of the trust to be on a reserve. However, trusts that are not employee trusts or trusts governed by an employee benefit plan are able, pursuant to subsection 104(6) of the Income Tax Act, to deduct in computing their income such amount as becomes payable in the year to a beneficiary. We direct your attention to subsection 104(24) of the Income Tax Act, which states that, for purposes of subsection 104(6), an amount shall be deemed not to have become payable unless it was paid or the beneficiary was entitled to enforce payment of it.
These comments represent an expression of opinion and, as stated in Information Circular 70-6R2 dated September 28, 1990, are not binding on the Department. The comments are based on the information supplied and there has been no effort to determine the accuracy of your statements. Accordingly, we do not confirm that the Band has passed bylaws under both of sections 81 and 83 of the Indian Act, and we do not confirm that the revenues that are payable to the trust consist of rents from XXXXXXXXXX.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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