13 January 2000 External T.I. 9927035 - FIRST NATIONS CORP. TAXABLE

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 taxable income earned by a corporation owned by a First Nation is exempt from income tax.

Position: Question of fact.

Reasons: For taxation years and fiscal periods that begin after 1998, the taxable income of a corporation owned by one or more municipalities in Canada may be exempt from Part I tax pursuant to paragraph 149(1)(d.5) of the Income Tax Act if not less than 90% of the corporation's capital is owned by the municipality or municipalities and the income of the corporation from activities carried on outside the geographical boundaries of the municipality or municipalities does not exceed 10% of the corporation's income for the period. Thus, if the particular First Nation which owns the corporation qualifies as a municipality, the corporation's taxable income may be exempt from Part I tax under paragraph 149(1)(d.5).

XXXXXXXXXX 	J. Gibbons
		5-992703
January 13, 2000

Dear XXXXXXXXXX:

We are replying to your letter of October 6, 1999, in which you requested our views on whether a particular corporation is taxable. The two shareholders of the particular corporation hold all of the shares of the corporation in trust for a First Nation. The corporation earns all of its revenue off reserve, some on crown land, and its profits are used for the benefit of a First Nation.

As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, a request for a written opinion on completed transactions is generally considered by a taxpayer's local tax services office. Accordingly, you may wish to submit all relevant facts and documentation to the appropriate Tax Services Office for their comments. We have, however, provided some general comments below.

For taxation years and fiscal periods that begin after 1998, the taxable income of a corporation owned by one or more municipalities in Canada may be exempt from Part I tax pursuant to paragraph 149(1)(d.5) of the Income Tax Act if not less than 90% of the corporation's capital is owned by the municipality or municipalities and the income of the corporation from activities carried on outside the geographical boundaries of the municipality or municipalities does not exceed 10% of the corporation's income for the period. Thus, in your example, if the particular First Nation which owns the corporation qualifies as a municipality, the corporation's taxable income may be exempt from Part I tax under paragraph 149(1)(d.5).

Whether or not an Indian Band may be regarded as a municipality was considered in the 1994 case of Otineka Development Corporation Limited and 72902 Manitoba Limited v. Her Majesty the Queen (94 DTC 1234). The Court concluded that, since there is no definition of a "Canadian municipality" in the Income Tax Act, the term must be given its ordinary meaning and is not to be solely determined by the provincial legislation governing municipalities. It was the Court's view that 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 Otineka, 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, counselling 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. It is the Agency's position that a First Nation would have to demonstrate that it fits within the facts of the Otineka case in order to be considered a municipality in Canada.

We also note that paragraph 149(1)(d.5) is subject to subsections 149(1.2) and (1.3) of the Act. By virtue of subsection 149(1.2), income of a corporation derived from activities carried on outside the geographical boundaries of the municipality or municipalities that own the corporation does not include income derived from activities carried on pursuant to an agreement in writing with Canada, a province, or a municipality within the geographical boundaries of, respectively, Canada, a province or a municipality. 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.

Based on your statement that the corporation earns all of its income off reserve, the corporation would not be exempt under paragraph 149(1)(d.5), and thus its income would be taxable.

We trust that these comments will be of assistance.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate

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