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. Are settlement amounts received by the XXXXXXXXXX considered employment income?
2. Would these amounts be exempt from tax when received by status Indians?
3. Is the Trust exempt from tax?
Position:
1. Yes
2. Yes if they arise based on tax exempt employment income.
3. No.
Reasons:
1. It is our understanding that the XXXXXXXXXX were employees and this settlement payment is in respect of their employment income. Consequently, these settlement payments, which they receive as a capital interest in a trust, would be considered employment income to the individual XXXXXXXXXX.
2. The exemption of this employment income would be based on whether the income to which it relates was taxable or exempt. This is consistent with our position regarding the exemption for income from a pension or a wage loss replacement plan.
3. The trust is not considered an Indian and is therefore not exempt from tax pursuant to section 87 of the Indian Act. We are however, able to rule that the Trust will be entitled, under paragraph 104(6) of the Act, to deduct in computing its income for a taxation year amounts of income of the XXXXXXXXXX Settlement Trust (including taxable capital gains of the XXXXXXXXXX Settlement Trust) that are paid or payable by the XXXXXXXXXX Settlement Trust to its beneficiaries in such taxation year pursuant to the XXXXXXXXXX Settlement Trust Agreement. As all of the income in the trust will be made paid or payable to the beneficiaries, the Trust's net income will be zero such that no income taxes will be payable by the Trust.
XXXXXXXXXX
XXXXXXXXXX 3-992386
XXXXXXXXXX XXXXXXXXXX
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
XXXXXXXXXX (the "Organization")
This is in reply to your letter of XXXXXXXXXX requesting an advance income tax ruling on behalf of the above named taxpayer. We also acknowledge receipt of your correspondence dated XXXXXXXXXX, and the information provided during our meeting and telephone conversations.
We understand that, to the best of your knowledge, none of the issues raised in this ruling is being considered by a Taxation Services Office or Taxation Centre in connection with an income tax return already filed, is the subject of any notice of objection or is under appeal.
EXHIBITS:
The following documents were submitted in conjunction with the ruling request:
a) a copy of the Final Draft - Agreement in Principle - Settlement Agreement ("Settlement Agreement") between Her Majesty and the Organization;
b) a copy of the draft XXXXXXXXXX ("XXXXXXXXXX"s) Settlement Trust Agreement;
c) a copy of Organization's original complaint to the XXXXXXXXXX ("XXXXXXXXXX").
DEFINITIONS:
In this letter:
(a) "Beneficiary" means an Eligible XXXXXXXXXX as defined in the Settlement Agreement who submits a Claim in accordance with the XXXXXXXXXX Settlement Trust Agreement and whose Claim the Trustees accept;
(b) "XXXXXXXXXX Settlement Trust" means the trust governed by the XXXXXXXXXX Settlement Trust Agreement;
(c) "Claimant" means a person who submits a Claim in accordance with the terms of the XXXXXXXXXX Settlement Trust Agreement and includes a person who submits a Claim on behalf of a XXXXXXXXXX in the circumstances described in XXXXXXXXXX of the XXXXXXXXXX Settlement Trust Agreement.
(d) "Claim" means an application made in accordance with this Trust Agreement for a distribution from the XXXXXXXXXX Settlement Trust;
(e) "Complaint" means the complaint filed by the Organization with the XXXXXXXXXX on XXXXXXXXXX;
(f) "Effective Date" means the date on which the Settlement Agreement comes into force as specified in XXXXXXXXXX;
(g) "Eligible XXXXXXXXXX" means an individual who provided services as a XXXXXXXXXX to a First Nation, Innu or Inuit Entity at any time between XXXXXXXXXX and the effective date of the Settlement Agreement, pursuant to a funding agreement between that Entity and Her Majesty, including the personal representatives of any deceased or incompetent individual but, for greater certainty, does not include an individual employed under the Public Service Employment Act (Canada), the Public Service Act (XXXXXXXXXX) or under a funding agreement with the Government of the XXXXXXXXXX or of XXXXXXXXXX as "successor in title" for the period of time during which the individual was so employed;
(h) "Settlement Agreement" means the agreement between Her Majesty the Queen in right of Canada as represented by the Minister of Health and the President of the Treasury Board and the Organization;
(i) "Settlement Amount" means XXXXXXXXXX; and
(j) "Trustees" means the Trustees so named or appointed pursuant to the XXXXXXXXXX Settlement Trust Agreement.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Facts:
1. The Organization was formed a number of years ago as a not for profit organization under Part II of the Canada Corporations Act. It is exempt from tax under Part I of the Income Tax Act (the "Act") pursuant to paragraph 149(1)(l).
2. The Organization's objective is to improve the quality of health services offered to Indians and Inuit People through the work of XXXXXXXXXX. The Organization has also been active in assisting XXXXXXXXXX in resolving a dispute with the Treasury Board of Canada ("Treasury Board") and with Health Canada. That dispute arose from pay equity claims advanced against the Treasury Board and Health Canada by XXXXXXXXXX.
3. In XXXXXXXXXX, the XXXXXXXXXX passed a Consent Order stipulating that the Treasury Board was liable to make pay adjustments to XXXXXXXXXX. Only XXXXXXXXXX who had once been administered directly by the federal government benefited from this order.
4. Funding for XXXXXXXXXX was also provided by the Federal Government pursuant to funding agreements between various First Nations, Innu and Inuit communities, with substantially all such agreements being with First Nations communities.
5. The Organization advanced claims on behalf of Eligible XXXXXXXXXX before the XXXXXXXXXX and the matter was referred to the Canadian Human Rights Tribunal ("Tribunal"). To avoid going to a hearing on the matter, the parties have attempted to mediate a settlement, with the Organization, Treasury Board, Health Canada, and the XXXXXXXXXX, the Tribunal and the Assembly of First Nations participating.
6. Approximately XXXXXXXXXX are involved in this dispute and would be covered by the settlement. Most are Indians pursuant to the Indian Act (Canada), and a very few, from XXXXXXXXXX individuals, are Inuit. The years in dispute are from XXXXXXXXXX, during which time the Indian XXXXXXXXXX provided health care services as employees on various reserves across Canada. The Inuit XXXXXXXXXX provided services at Inuit communities in XXXXXXXXXX. The employment income for duties carried out on reserve was treated by the individual status Indian XXXXXXXXXX as exempt income in accordance with paragraph 81(1)(a) of the Act and section 87 of the Indian Act.
Proposed Transactions
7. It is proposed that the Federal Government will pay $XXXXXXXXXX to the Organization in settlement of the XXXXXXXXXX Claim. The final draft of the Settlement Agreement provides for the following:
XXXXXXXXXX
XXXXXXXXXX
8. The trustees of the XXXXXXXXXX Settlement Trust will consist of a trust company and four individuals, three of whom will be Indians as defined under the Indian Act. The trustees will enter into an agency agreement with the Chartered Bank affiliated with the trustee which is a trust company. Pursuant to that agreement, the Chartered Bank located in XXXXXXXXXX will maintain trust records, and accounts and investment. The meetings and decisions of the trustees will take place at the office of the Chartered Bank in XXXXXXXXXX.
9. The office of the Chartered Bank in XXXXXXXXXX will invest the assets of the trust in federal and provincial government bonds and securities held either directly through an investment account established with the Chartered Bank, or through a special unit trust or contract set up, designed and enforced exclusively for the trust by the Chartered Bank, with certain rights exclusive to the XXXXXXXXXX Settlement Trust.
10. In addition some of the terms and conditions of the XXXXXXXXXX Settlement Trust Agreement can be summarized as follows:
a) A Claimant shall make a Claim by completing and signing a Claim form and submitting such form, as well as appropriate supporting documentation, to the Trustees or their Agent.
b) The claims administrator must assess the validity of Claims and calculate the distributions from the XXXXXXXXXX Settlement Trust.
c) Distributions in respect of a Claim will only be made once the supporting documentation has been collected and verified, a proposed distribution has been established, and the Trustees have received release forms which have been executed by or on behalf of a Beneficiary.
d) All distributions to the Beneficiaries of the XXXXXXXXXX Settlement Trust shall be made in accordance with Appendix A of the XXXXXXXXXX Settlement Trust Agreement.
e) Appendix A provides that:
XXXXXXXXXX.
11. Any monies remaining in the XXXXXXXXXX Settlement Trust which the trustees determine are not in the best interests of the XXXXXXXXXX to distribute because of the cost involved in making such a distribution, will be distributed in a manner as the Court of Queens Bench of XXXXXXXXXX considers to be in the interests of the XXXXXXXXXX and the termination of the XXXXXXXXXX settlement trust, including distribution to the Organization.
Purpose of the Proposed Transaction:
12. The proposed transactions are being undertaken to provide for the settlement of the compensation paid under the Settlement Agreement in a tax effective manner.
Rulings Requested and Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and 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. We confirm that when the XXXXXXXXXX Settlement Trust accepts a XXXXXXXXXX as a beneficiary, the XXXXXXXXXX settlement entitlement, that is the value of their proportionate share of all capital distributions of XXXXXXXXXX Settlement Trust, is employment income.
B. Provided that a status Indian XXXXXXXXXXs' employment income arising from their settlement entitlement, as ruled on in A above relates to previous employment income that was tax exempt in accordance with paragraph 81(1)(a) of the Act and section 87 of the Indian Act, we confirm that this employment income will be similarly exempt from income tax.
C. The XXXXXXXXXX Settlement Trust will be entitled, under paragraph 104(6) of the Act, to deduct in computing its income for a taxation year amounts of income of the XXXXXXXXXX Settlement Trust (including taxable capital gains of the XXXXXXXXXX Settlement Trust) that are paid or payable by the XXXXXXXXXX Settlement Trust to its beneficiaries in such taxation year pursuant to the XXXXXXXXXX Settlement Trust Agreement.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 31, 1996 and are binding on the Department provided that the Settlement Agreement and the XXXXXXXXXX Settlement Trust Agreement are entered into by XXXXXXXXXX.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
You have also asked for the following rulings on which we cannot rule, however we are prepared to provided you with the following comments:
1. That the payment of the Settlement Amount under the Settlement Agreement to the Organization will not give rise to a liability for income tax.
In our view, the payment of the Settlement Amount payable pursuant to XXXXXXXXXX of the Settlement Agreement less the amount referred to in XXXXXXXXXX will not be required to be included in computing the income of the Organization.
2. That the settlement of the XXXXXXXXXX Settlement Trust by the Organization will not give rise to a liability for income tax.
The settlement in and by itself of funds by the Organization on the XXXXXXXXXX Settlement Trust would not be income in the hands of the trust.
3. That the payments out of the XXXXXXXXXX Settlement Trust capital to the XXXXXXXXXX will not be subject to income tax.
Distributions out of the XXXXXXXXXX Settlement Trust's capital will be received by the beneficiaries as capital rather than income. Since the property of the XXXXXXXXXX Settlement Trust will consist of cash and short-term investments which will be converted to cash prior to distribution to the beneficiaries, distributions themselves would not trigger capital gains or losses to the XXXXXXXXXX Settlement Trust.
4. Although you have not specifically requested comments on income distributions of the XXXXXXXXXX Settlement Trust, we have provided the following comments for your files.
While the XXXXXXXXXX Settlement Trust may earn interest income on its investments, subsection 108(5) of the Act provides that income flowed out of a trust to a beneficiary loses its character unless the Act specifically provides. The income distributions received by the beneficiaries will be deemed to be income of the beneficiary for the year from a property that is an interest in the XXXXXXXXXX Settlement Trust and will not retain its character as interest income. In our view, this income from property will not be exempt from taxation by virtue of section 87 of the Indian Act. With respect to payments of trust income to residents of Canada, subsection 153(1) of the Act does not require tax to be withheld. However, if the recipient is non-resident, subsection 215(1) in conjunction with paragraph 212(1)(c) of the Act requires tax to be withheld at the rate of 25% unless a tax treaty determines otherwise. For instance, where the Canada-U.S. Tax Convention applies, the rate is 15% according to section 2 of Article XXII.
As discussed, we will forward our other comments on the withholding and reporting implications under separate cover.
Yours truly,
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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