1 March 1999 Internal T.I. 9901997 - XXXXXXXXXX HONORIA PAID TO ELDERS

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: annuity payments to Yukon Elders of a band

Position: Amounts are taxable as annuity or trust distributions

Reasons: income per 56(1)(a) or 104(13) and the Indian Act exemption has been given up.

		March 1, 1999

Northern B.C. and Yukon HEADQUARTERS
Tax Services Office D. Duff
Mr. Ken Slawson 957-8953
Director
Attention: Betty Reid
990199

XXXXXXXXXX Honoraria Paid to Elders

This is in response to your correspondence sent in January and February, 1999, regarding the tax treatment of the honoraria paid to the elders of the XXXXXXXXXX (the “Band”) in XXXXXXXXXX, Yukon.

Facts

XXXXXXXXXX

Elders’ Monthly Payments

In the mid 1980s, all Yukon First Nation citizens, who were at least 60 years of age, began to receive elders’ payments. These amounts were provided as an advance on land claims compensation amounts, in order to provide tangible land claims benefits to those elders who might not be alive when the claims were finally settled. Payments to the Band elders now form part of the debt that the Band has to repay Canada.

Prior to the effective date of the land claims agreement, this program was administered by the Council for Yukon First Nations. The Band took over the program as of XXXXXXXXXX and continued making payments to all members 60 years old and over resident in Canada. At the Band’s general assembly on XXXXXXXXXX, they removed the residency requirement. At the general assembly on XXXXXXXXXX, they lowered the age requirement to 55.

The Band is paying $XXXXXXXXXX per month to each member aged 55 or older. The payment continues until the elder passes away. There is no requirement to do any work or provide any service to receive this amount. The payments are made by the Band and the money comes from earnings on the compensation dollars on the land claims. The Band has not formed a settlement corporation as described in the Umbrella Final Agreement.

Analysis

Umbrella Final Agreement (“UFA”)

These payments appear similar to the payments from the settlement corporations as envisaged by the UFA. Section 20.4 of the UFA provides for the creation of settlement corporations and the permitted activities of settlement corporations are listed in schedule A to chapter 20. Section 11 of Schedule A provides for the payment to Yukon Indian People who are at least 65 years old to a maximum of $3,000 per year. In addition, 12(e) permits the payment of benefits to low income Yukon Indian Persons.

Subsection 20.4.23 of the UFA provides that there will be no federal, territorial or municipal tax payable by a Yukon Indian Person on amounts distributed by a settlement corporation to a recipient in accordance with Schedule A, except for 11 and 12(e). Consequently, there was never any intent that elders payments from settlement corporations should be exempt from taxation. In this situation, the actual mechanism of funding and making the payments is not clear but they are not being paid from settlement corporations.

Income from Office or Employment

The payments are clearly not employment income. They are based on age and being a member of the Band. There is no requirement to perform any services for the Band or otherwise so there is no employment relationship.

Pension Income

Superannuation or pension benefit is defined in subsection 248(1) of the Income Tax Act (the “Act”) to include “... any amount received out of or under a superannuation or pension fund or plan...”, however, pension or pension plan is not defined in the Act. Black’s Law Dictionary defines pension as a “Retirement benefit paid regularly (normally, monthly), with the amount of such based generally on length of employment and amount of wages or salary of pensioner.” The Concise Oxford Dictionary, seventh edition, defines pension as a “... periodic payment made esp. by government, company, or employer, in consideration of past service or on retirement etc.; similar payment to person who is not a professed servant for good will, secret service, etc., or to artist, scientist, etc., to enable him to carry on work of public interest. Periodic payment by government to persons above specified age (old-age pension) or disabled or widowed;...”. Based on the above definitions, a pension is normally based on past employment or service, unless a government is providing a pension to its citizens based on certain factors such as age, disability or widowed status. In our view, the present situation is more likely an annuity as described below than a pension.

Annuity

Annuity is defined in subsection 248(1) of the Act to include “... an amount payable on a periodic basis whether payable at intervals longer or shorter than a year and whether payable under a contract, will or trust or otherwise; ...”. Paragraph 56(1)(d) of the Act includes in income “any amount received by the taxpayer in the year as an annuity payment other than an amount (i) otherwise required to be included in computing the taxpayer’s income for the year...”.

Paragraph 60(a) of the Act permits a deduction from income for “the capital element of each annuity payment included by virtue of paragraph 56(1)(d) in computing the taxpayer’s income for the year, that is to say,

(i) if the annuity was paid under a contract, an amount equal to that part of the payment determined in prescribed manner to have been a return of capital, and

(ii) if the annuity was paid under a will or trust, such part of the payment as can be established by the recipient not to have been paid out of the income of the estate or trust...”.

In our view, these payments would meet the definition of annuity and would be included in income pursuant to paragraph 56(1)(d) of the Act, provided they are not included under any other provision. It is unlikely that the recipient would be entitled to a deduction under subparagraph 60(a)(i) of the Act as there would not be a return of capital since the elders did not purchase the annuities. If the annuity is paid out of a trust, there will be a deduction pursuant to subparagraph 60(a)(ii) to the extent that the payment does not come from the income of the trust. However, as indicated above the payments are supposed to be made from the income earned on the amounts paid for the land claims settlements, so if that is the case, there will be no deduction under this provision.

Income from a trust

Paragraph 104(13)(a) of the Act requires a beneficiary of a trust to include in income the amount of the trust’s income that was paid to the beneficiary in the year. If these funds are held in trust, and the elders are beneficiaries of this trust, then the amounts will be included in their income as income from a trust to the extent that the payments come from the income of the trust. If it comes from the capital of the trust, it would not be included in income under this provision but could be considered an annuity payment to be included in income under paragraph 56(1)(d) with an offsetting deduction under paragraph 60(a) of the Act.

Summary

In our view, the amounts would likely be income to the elders either as an annuity or as income from a trust, depending on how the funds are held and paid. The full amount of the payment must be included in income, either as an annuity payment or income from a trust or a combination of both, however, any part of the payment that is from the capital of a trust will be deductible under paragraph 60(a) of the Act.

Other issues

If these settlement funds are held in trust by the Band, such a trust would be taxable on its income. In computing its income, a trust can take a deduction pursuant to paragraph 104(6)(b) of the Act for the amount of its income that was paid or payable to its beneficiaries. Consequently, if these amounts are considered payments to the beneficiaries they are deductible. On the other hand, if the payments are made from the trust income to the elders and they are not beneficiaries, the trust will not get a deduction.

We note that in one of the submissions the Band has listed as an option that they might lower the age from 60 to 55 based on the needs of the individual, with such needs being related to his or her income. Social assistance payments “made on the basis of a means, needs or income test” must be included in the recipient’s income pursuant to paragraph 56(1)(u) of the Act, unless the amount is otherwise required to be included in the income of the recipient or the recipient’s spouse. As indicated above, the Band has lowered the age to 55 without basing it on the needs of the elder. However, if this is changed, in the future, we may have to revisit these payments.

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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