22 October 1999 Internal T.I. 9910937 - INDIAN BAND AS A MUNICIPALITY

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:

1. Is band a municipality per 149(1)(c)?

2. Is a corporation owned by the band exempt from tax?

Position:

1. No decision.

2. No decision.

Reasons:

1. It is a question of fact. Not enough information to make that determination.

2. It depends on whether the band is a municipality, and, in addition, for taxation years beginning after 1998, on whether the income of the corporation exceeds the 10% threshold in 149(1)(d.5). No information provided regarding income carried on off the reserve.

		October 22, 1999

	Edmonton Tax Services 	HEADQUARTERS
		David Shugar
	Attention: Randy Mann	957-2134
		7-991093

XXXXXXXXXX

We are writing in reply to your letter of April 20, 1999, wherein you requested our comments on whether the XXXXXXXXXX (the "Band") meets the definition of a Canadian Municipality as set out in the Otineka decision and whether the income of the XXXXXXXXXX would be exempt under paragraph 149(1)(d.5) of the Income Tax Act (the "Act").

Our Comments

Does the Band qualify as a municipality under paragraph 149(1)(c) of the Act ?

In the 1994 case of Otineka Development Corporation Limited and 72902 Manitoba Limited v. Her Majesty the Queen (94 DTC 1234), the Tax Court of Canada concluded that, since there is no definition of a "Canadian municipality" in the Act, the term must be given its ordinary meaning and is not to be solely determined by the provincial legislation governing municipalities. In the Court's view, the powers conferred under the Indian Act and their exercise by The Pas Indian Band created a form of self-government that is an essential attribute of a municipality. In that case, the band had passed by-laws to regulate water, garbage disposal, weed control, domestic animal control, law and order, the provision of housing and other by-laws. It also provided services to band members in areas such as education, health care, social services, employment and training services, counseling and economic development. In the end, the Court concluded that the band was a municipality for the purposes of former paragraph 149(1)(d) of the Act (the relevant section prior to the enactment of paragraph 149(1)(d.5) of the Act) and that corporations owned by the band were exempt from taxation as municipally-owned corporations.

In our view, for an Indian band to be considered a municipality in Canada, it would have to demonstrate that it fits within the facts of the Otineka case. It would be ideal if we could look to certain by-laws as determinative of a First Nation's status but the court said that if the First Nation is "a community having and exercising powers of self government and providing the type of service customarily provided by such a body", then it can be considered to be a municipality. Accordingly, each case is a question of fact.

The information provided to us states that the XXXXXXXXXX, provides services to the band members in areas such as education, social services, employment and training, socio-economic development, public works, ambulance services and fire protection. The Band operates XXXXXXXXXX schools, from kindergarten to post-secondary, with an enrollment of over XXXXXXXXXX students. The Public Works Department is responsible for roads, water, sewer, and gas maintenance. The Band also has departments dealing with capital planning, residential development, recreational facilities, and security services. By-laws have been passed to regulate animal control, litter control, trespass, hawkers and peddlers, and occupancy and maintenance of dwellings. The Band had also reached an advanced stage of development as was formerly required by Section 83 of the Indian Act to be performing a function of government. The chief and council are democratically elected and meet regularly on Band matters. Based on the information provided it appears that the Band may be a municipality for purposes of paragraph 149(1)(c) of the Act. Although the information provided indicates that the Band may be a municipality, the documentation provided is not sufficient to make that factual determination. In order to make a determination that the Band provides substantially the same services to its band members on the reserve as any municipality in Canada of comparable size, a review should be made of all the relevant facts and circumstances to determine if they are similar to the facts in the Otineka case. Answers to questions such as, "Does the Band have a complex and sophisticated structure related to its governance? Do the democratically elected council members hold frequent council meetings relating to all matters affecting the Band and the reserve? Are there extensive consultations by the council with the band members? Does the governmental structure resemble that of any municipal body?" may provide necessary information. The minutes of the various meetings may provide evidence of the frequency and content of such meetings. Organization charts may provide evidence of the structure.

Is the XXXXXXXXXX (the "Company") exempt from tax?

One of the conditions for the Company to be exempt from tax under paragraph 149(1)(d.5) of the Act is that a municipality own at least 90% of the corporation's shares. The sole shareholder of the Company is the Band. Since a determination has not been made regarding whether the Band is a municipality, we can only provide the following general comments.

If the Band is not a municipality under paragraph 149(1)(c) of the Act, the corporation will be taxable. If it is found that the Band was a municipality at all times, the following comments apply.

Former paragraph 149(1)(d) of the Act provided that no tax was payable under Part I on the taxable income of a person for a period when the person was "a corporation ... not less than 90% of the shares or capital of which was owned by ... a municipality, or a wholly-owned subsidiary to such a corporation ..." This provision did not apply if there existed any right, contingent or absolute, for a person other than Her Majesty in right of Canada, a province or a Canadian municipality to acquire shares of the corporation. Former paragraph 149(1)(d) of the Act applied to fiscal periods that began before 1999. The Company's taxation year is the calendar year. You have not provided us with information concerning any outstanding rights to acquire shares of the Company. In our view, provided no person other than Her Majesty in right of Canada, a province or a Canadian municipality had a right to acquire shares of the Company under the conditions described above, the Company could have become exempt from Part I tax no sooner than January 1, 1994, the start of the taxation year that includes January 28, 1994, being the time of the decision in Otineka.

In 1998, paragraph 149(1)(d) of the Act was amended, and new paragraphs 149(1)(d.1) to (d.6) of the Act were added, applicable to taxation years and fiscal periods that begin after 1998. Paragraphs 149(1)(d.5) and 149(1)(d.6) of the Act, subject to new subsections 149(1.2) and (1.3) of the Act, clarify the scope of the exemption from Part I tax. For a municipal corporation to be exempt, the income of the corporation from activities carried on outside the geographical boundaries of the municipality cannot exceed 10% of its income for the period. In the case of an Indian band, the geographical boundaries of the municipality are considered to be the boundaries of the reserve lands. Reserve lands are defined in the Indian Act as a tract of land, the legal title to which is vested in Her Majesty, that has been set apart by Her Majesty for the use and benefit of a band, and for purposes of section 87 of the Indian Act includes 'designated lands'. Designated lands is defined in section 87 of the Indian Act, as a 'tract of land or any interest therein, the legal title to which remains vested in Her Majesty and in which the band for whose use and benefit it was set apart as a reserve has, otherwise than absolutely, released or surrendered its rights or interest.'

Subsection 149(1.2) of the Act excludes certain income from the determination of whether more than 10% of the income of a corporation is derived from activities carried on outside the geographical boundaries of the municipality or municipalities that own the corporation. Specifically, income derived from activities carried on pursuant to an agreement in writing with Canada, a province, or a municipality, within that other government's geographical boundaries, is not included in the 10% determination. Subsection 149(1.3) of the Act provides that 90% of the capital of a corporation that has issued share capital is to be considered to be owned by one or more municipalities only if the municipalities are entitled to at least 90% of the votes associated with the shares of the corporation. New subsection 149(1.1) of the Act contains the provision, formerly in paragraph 149(1)(d) of the Act, concerning rights to acquire shares of the corporation. In your letter of April 20, 1999, you advised us that you suspect that more than 10% of the Company's income is from activities carried on in its branches outside the reserve. An analysis would have to be done for taxation years beginning after 1998 to determine if the Company exceeds the 10% threshold. If, as a result of your analysis of the Company's 1999 taxation year, you find that the Company's income from activities carried on outside the reserve exceeds the 10% threshold, the Company would cease to be exempt from Part I tax in that year.

Subsection 149(10) of the Act applies when a corporation becomes or ceases to be exempt from Part I tax and deems a disposition and reacquisition of assets held by a corporation at fair market value. If the corporation's status changes, subsection 149(10) of the Act applies. In our view, paragraph 149(10)(a) of the Act would apply on December 31, 1993, immediately before the start of the taxation year that includes January 28, 1994, the time of the decision in Otineka, since prior to that time the corporation was considered to be taxable. (If the T2 return is not under objection or appeal, the taxpayer would be constrained by the status claimed on filing and the time of the change of status would occur at the beginning of the next taxation year, provided it was not similarly constrained.) The Company's income would be exempt throughout 1994 and until a subsequent change in its status. If you find that, generally, the Company's income from activities carried on outside the reserve over the years has been greater than 10%, and that activities have remained fairly consistent into 1999, the first year to which paragraph 149(1)(d.5) of the Act applies, subsection 149(10) of the Act would apply on the first day of the fiscal year and the corporation would not be exempt beginning January 1, 1999.

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

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