1999 Ruling 9917483 - EXEMPTION OF FIRST NATIONS FROM TAX

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. Whether the B and C First Nations are each considered to be a public body performing a function of government and thus qualify for exemption under paragraph 149(1)(c) of the Income Tax Act.

2. Whether each of the B Trust and the C Trust is a separate trust?

3. Whether subsection 75(2) will apply to deem undistributed income of the trust to be income of the B First Nation or the C First Nation?

4. Will each trust be able to deduct, under paragraph 104(6)(b), in computing its income for a year, amounts that become payable to the relevant First Nation?

Position:

1. Yes, based on a factual determination, the First Nations are each considered to be a public body performing a function of government in Canada, as per paragraph 149(1)(c).

2. Not a matter to be ruled on;

3.Yes.

4. Yes, provided that the trustees exercise their discretion before the end of the year to make such amounts payable.

Reasons:

1. Primarily since each of the First Nations has negotiated with Canada a land settlement agreement which is the subject of this ruling and will be involved in the administration and implementation of the settlement. In addition, each of the First Nations provides an extensive list of community services and programs. Based on the facts provided, the First Nations are providing essential community services even though they haven't formalized the services in by-laws.

2. This is a question of fact and law, and it is not appropriate for us to make a binding ruling in this matter. Whether there are two trusts or only one does not affect the essence of the rulings.

3. The B First Nation and the C First Nation, will contribute the funds to the trusts. The two First Nations are entitled to the compensation in respect of certain reserve lands, and they will direct Canada to place their monies into the trusts which the First Nations will create. Thus there is constructive receipt by the First Nations. It is noted in the Settlement Agreement (XXXXXXXXXX) that if the Trust Agreement is not approved, Canada will place the compensation payment in two equal shares into the Revenue Accounts (i.e. in the CRF) - these Accounts are maintained for the benefit of specific Bands.

4. The trust provides that the payment of income to the beneficiaries is at the absolute discretion of the trustees, so a deduction can be made only if that discretion is exercised. It is noted that any amount of income that becomes payable will be paid shortly afterwards by the issuance of an unrestricted demand promissory note, and that the trust has the authority to borrow in order to meet its obligation to pay cash for such note. Note that such income will not include amounts subject to subsection 75(2).

XXXXXXXXXX
XXXXXXXXXX 3-991748
XXXXXXXXXX

Attention: XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: Request for Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX on behalf of the Applicants for an Advanced Income Tax Ruling in respect of the Proposed Transactions. That letter supersedes your ruling request letter of XXXXXXXXXX. We acknowledge your correspondence of XXXXXXXXXX and the trust document received with your letter of XXXXXXXXXX.

You advised us that to the best of your knowledge and the knowledge of the responsible officers of the Applicants:

(a) none of the issues involved in the requested rulings have been considered by a taxation services office or taxation centre in connection with a tax return already filed; and

(b) none of the issues involved in the requested rulings is under objection or appeal.

EXHIBITS

The following documents were submitted in conjunction with the ruling request.

(a) a copy of the most recent draft Settlement Agreement;

(b) a copy of the most recent draft Trust Agreement creating the Trusts;

(c) a summary of selected governmental and legislative powers and responsibilities exercised by the First Nations;

(d) a copy of the questionnaire that elicited the information in the previous exhibit; and

(e) community profiles for the First Nations published by the Department of Indian Affairs.

Copies of the By-laws passed by the XXXXXXXXXX were received with your letter of XXXXXXXXXX.

DEFINITIONS

In this letter:

(a) "Act" means the Income Tax Act (Canada), R.S.C. 1985, c. I (5th Supp.) as amended to the date of this letter;

(b) "Applicants" means the B First Nation, the C First Nation and the Trusts;

(c) "Canada" means Her Majesty the Queen in Right of Canada;

(d) "Council" means, in respect of a First Nation, the "council of the band" as defined in subsection 2(l) of the Indian Act;

(e) "Council Resolution" means a written resolution signed by a quorum of the Council of a First Nation adopted at a duly convened meeting of the Council;

(f) "Distribution" means a payment out of the Trust and "Distribute" means the act of making a Distribution;

(g) "First Nations" means the B First Nation and the C First Nation and "First Nation" means either one of them;

(h) "Income", in respect of each Trust for a year, means all of the income derived from the property of the Trust for that year calculated in accordance with section 3 of the Act without reference to subsection 104(6) of the Act, as more particularly described in the Trust Agreement;

(i) "Indian Act" means the Indian Act, R.S.C. 1985, c. 1-5, as amended to the date hereof, and the regulations made pursuant to that Act;

(j) "XXXXXXXXXX Trust" (the "B Trust") has the meaning ascribed in the Trust Agreement;

(k) "XXXXXXXXXX Amount" (the "B Amount") means the sum the B First Nation is entitled to receive pursuant to the terms of the Settlement Agreement;

(l) "XXXXXXXXXX First Nation" (the "B First Nation") means the XXXXXXXXXX First Nation, and is the Indian Band referred to in XXXXXXXXXX, a band as defined in subsection 2(l) of the Indian Act;

(m) "XXXXXXXXXX Trust" (the "C Trust") has the meaning ascribed in the Trust Agreement;

(n) "XXXXXXXXXX Amount" (the "C Amount") means the sum the C First Nation is entitled to receive pursuant to the terms of the Settlement Agreement;

(o) "XXXXXXXXXX First Nation" (the "C First Nation") means the XXXXXXXXXX First Nation, a band as defined in subsection 2 (1) of the Indian Act;

(p) "XXXXXXXXXX" (the "Province") means Her Majesty the Queen in Right of the Province of XXXXXXXXXX;

(q) "Reserve" means "reserve" as defined in subsection 2(l) of the Indian Act;

(r) "XXXXXXXXXX" (the "Claim") means the claims of the First Nations to the Lands which resulted in the Settlement Agreement;

(s) "XXXXXXXXXX" (the "Lands") means the XXXXXXXXXX;

(t) "Settlement Agreement" means the settlement agreement negotiated between the First Nations, the Province and Canada concerning the Claim;

(u) "Settlement Amount" means the B Amount or the C Amount, as the case may be;

(v) "Trusts" means the B Trust and the C Trust, and "Trust" means either one of them, and "XXXXXXXXXX Trusts" means, collectively, the B Trust and the C Trust;

(w) "Trust Agreement" means the agreement referred to as exhibit (b) above, providing for the XXXXXXXXXX Trust Arrangement between the First Nations and the Trustees pursuant to which the Trustees agree to hold and invest certain property received by the First Nations pursuant to the Settlement Agreement for the benefit of the First Nations;

(x) "Trust Arrangement" has the meaning ascribed in the Trust Agreement;

(y) "Trustees" means the trustees of the Trust.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

FACTS

1. The First Nations were members of one First Nation known as the XXXXXXXXXX.

2. On XXXXXXXXXX, representatives of XXXXXXXXXX, entered into a treaty known as theXXXXXXXXXX.

3. In accordance with XXXXXXXXXX, reserves were to be selected and set apart for the benefit of, inter alia, the XXXXXXXXXX.

4. The First Nations have asserted that the Lands were selected and set apart as an Indian reserve.

5. The matter in dispute between the parties is the Claim. The Claim arose when the Lands were relinquished by Canada without reference to the Indian Act then in force and the lands or some of the lands were patented by the Province.

6. Canada accepted the Claim for negotiation of a settlement under its specific claims policy. The Province accepted the Claim for negotiation of a settlement.

7. The First Nations have agreed to accept compensation in the form of money and lands for the loss of the Lands and damages resulting from the loss of the use of such lands.

8. The First Nations, Canada and the Province have completed negotiations on the matters arising from and in relation to the Claim and wish to enter into the Settlement Agreement in order to achieve a final settlement of the Claim.

9. Each of the First Nations has legislative or governmental authority respecting the geographic area of its reserve and its members and (either itself or through its Council or otherwise) provides its members with various services. The details of governmental authority and community functions are described in detail in the community profiles and First Nation surveys submitted with the ruling request. Each of the First Nations has negotiated with Canada and the Province the agreements which are the subject of this ruling request.

10. Each First Nation has undergone a community approval process to ratify the Settlement Agreement and the Trust Agreement.

PROPOSED TRANSACTIONS

11. The Settlement Agreement will be executed by the First Nations and by Canada and the Province. The Trust Agreement will be executed by the First Nations and the Trustees.

12. Under the terms of Settlement Agreement, in exchange for the transfer and release to Canada and the Province of the First Nations' interest in the Lands, the First Nations are to receive compensation partly in the form of land and partly in the form of money. The Settlement Agreement, inter alia, provides:

(a) a parcel of land will be set apart as a reserve under the Indian Act for the use and benefit of the First Nations jointly;

(b) the B First Nation will receive the B Amount and the C First Nation will receive the C Amount; and

(c) the B First Nation will settle the B Trust and will authorize and direct Canada to deposit the B Amount to the B Trust. Similarly, the C First Nation will settle the C Trust and will authorize and direct Canada to deposit the C Amount to the C Trust.

13. The Trust Agreement will provide that the B Amount and the C Amount are to be held in trust in the B Trust and the C Trust, respectively, and invested by the Trustees until certain Distribution conditions are met. B First Nation will be the beneficiary of the B Trust. C First Nation will be the beneficiary of the C Trust. Subject to paragraph 15 below, amounts will be distributed from a Trust to the particular First Nation only for specified purposes related to its development as set out in the Trust Agreement.

14. Under the terms of the Trust Agreement, any person may apply to the appropriate Council for a Distribution to be made from the appropriate Trust. A Council may itself sponsor and submit an application on behalf of the appropriate First Nation for a Distribution. The Council will review the application and make a recommendation to the Trustees for or against the requested Distribution. The Trustees will then review the application and make a decision for or against the requested Distribution. The Trustees are not obligated to accept the recommendation of the Council. All Distributions must be to or for the benefit of the appropriate First Nation.

15. The Trust Agreement will provide that an amount equal to the Income of each Trust for a particular taxation year may be payable to the First Nation that is beneficiary of that Trust, if the Trustees determine in their absolute discretion that the Trust may otherwise be subject to tax under Part I of the Act. That payment will be made by the Trust issuing and delivering to the First Nation, as soon as practicable after the end of that year, a non-interest bearing, unrestricted demand promissory note in an amount equal to the Income of the Trust. The Trustees will be empowered to borrow funds to satisfy the payment of any such promissory notes. The ability of the First Nation to demand payment of the promissory notes and the ability of the Trustees to honour such demand will not be restricted in any manner by the Trust Agreement or the Settlement Agreement.

16. The Trustees will be empowered to manage the property of each Trust and, specifically, will have the power and responsibility to invest the trust property within the parameters set forth in the Trust Agreement. The Trustees will also be empowered to select the financial institution to be used by the Trust.

17. The investment objectives for each Trust shall be to achieve a reasonable return on the investment of trust property having regard to current market conditions while structuring the portfolio to achieve long-term preservation of capital. The Trustees shall consider, but not be in any way bound by, any general investment guidelines provided from time to time by the Council of one or both First Nations.

18. XXXXXXXXXX Trustees will initially be named as Trustees of each Trust in the Trust Agreement. Thereafter, there will be XXXXXXXXXX.

19. The Trust shall have a term of XXXXXXXXXX, at which time the Trust shall terminate. At that time, the trust property held in the B Trust will be distributed to the B First Nation and the trust property held in the C Trust will be distributed to the C First Nation.

20. Either First Nation may withdraw from the Trust Arrangement at any time by providing to the Trustees a Council Resolution setting out the date of the required withdrawal and stating that the Council Resolution has been ratified in a community referendum held according to the provisions of the Trust Agreement. The effect of the withdrawal would be that each Trust would be separately administered by Trustees that are separately appointed. At any time after a withdrawal, either First Nation may amend its Trust or create a new Trust. The amended or new Trust must be similar to the Trust, have the same primary purpose as the Trust and have a term ending not before XXXXXXXXXX, whichever is later.

PURPOSES OF THE PROPOSED TRANSACTION

The purposes of the Proposed Transactions are:

(a) generally, to provide for the settlement of the Claim; and

(b) specifically, to establish the Trusts for the benefit of the First Nations, the purpose of which Trusts is to provide funds to the First Nations to enable them to provide for their development as enduring benefits of the settlement as more particularly set out in the Trust Agreement.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, and further provided that there are no other transactions which may be relevant to the rulings requested, our rulings are as follows:

A. In any year in which the B First Nation continues to provide community services of the type and magnitude referred to in paragraph 9 above and is involved in the implementation of its Settlement Agreement, the B First Nation will be considered to be a public body performing a function of government in Canada within the meaning of paragraph 149(1)(c) of the Act and, accordingly, no tax will be payable under Part I by that First Nation on any Income of a Trust in a year that is included in that First Nation's income.

B. In any year in which the C First Nation continues to provide community services of the type and magnitude referred to in paragraph 9 above and is involved in the implementation of its Settlement Agreement, the C First Nation will be considered to be a public body performing a function of government in Canada within the meaning of paragraph 149(1)(c) of the Act and, accordingly, no tax will be payable under Part I by that First Nation on any Income of a Trust in a year that is included in that First Nation's income.

C. Pursuant to subsection 75(2) of the Act, any income or loss of a Trust from a Settlement Amount or from property substituted therefor and any taxable capital gain or allowable capital loss from the disposition of property substituted for a Settlement Amount shall be deemed to be income or loss, as the case may be, or a taxable capital gain or allowable capital loss, as the case may be, of the First Nation that will transfer that Settlement Amount to the Trust as described in paragraph 12 of the proposed transactions.

D. To the extent that, for each taxation year, the trustees of each Trust exercise their discretion before the end of the year to declare the Income of the Trust to be payable to the First Nation that is the beneficiary of the Trust, each Trust will be entitled pursuant to paragraph 104(6)(b) of the Act to deduct in computing its income for the year, the amount that becomes so payable in the year.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 issued by the Canada Customs and Revenue Agency on December 30, 1996, and are binding provided that the Settlement Agreement is executed by the First Nations, the Province and Canada by XXXXXXXXXX.

These rulings are based on the Act in it present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling provided herein.

The above Rulings are also based on the versions of the agreements described above under the caption "Exhibits." Any substantive difference between these versions and the final versions could invalidate the Rulings.

COMMENT

1. You requested a ruling that each Trust will be a separate inter vivos trust within the meaning of subsection 108(1) of the Act. We have provided no ruling on this matter since the issue is a question of fact and law rather than an interpretation of the Income Tax Act. Our rulings are based on the assumption that the Trusts are separate trusts.

Yours truly,

XXXXXXXXXX
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch