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.
Principal Issues: 1. Is the LP income of the Band tax-exempt because the Band is a public body performing a function of government as described in paragraph 149(1)(c) of the ITA? 2. Whether 20(1)(c) allows the deduction of interest for an amount owing between an Indian band and its subsidiary.
Position: 1. Yes. 2. Yes.
Reasons: 1. The Band has passed various by-laws pursuant to sections 81 and 83 of the Indian Act. 2. The subsidiary borrowed the amount from the band in order to obtain income-producing property. The subsidiary is taxable on the income from the property acquired with the amount borrowed. Substantially similar to rulings issued recently to same taxpayer.
XXXXXXXXXX 2010-036036
XXXXXXXXXX , 2010
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling Request: XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge our several telephone conversations regarding this matter.
We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:
(i) in an earlier return of the taxpayer or a related person,
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,
(iii) under objection by the taxpayer or a related person,
(iv) before the courts, or
(v) the subject of a ruling previously issued by the Directorate to the taxpayer or a related person.
Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
FACTS:
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
1. XXXXXXXXXX (the "Band") is a "band" as defined in subsection 2(1) of the Indian Act.
2. The Band's mailing address is XXXXXXXXXX . The Band is served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre. The Band's business number is XXXXXXXXXX .
3. The Band has approximately XXXXXXXXXX members, XXXXXXXXXX whom live on land set aside for the Band. This land is "reserve" land as that term is defined in subsection 2(1) of the Indian Act.
4. The Band has passed various by-laws pursuant to sections 81 and 83 of the Indian Act.
5. The Band has entered into an agreement of purchase and sale with respect to the land and building located in XXXXXXXXXX and legally described as XXXXXXXXXX (the "Property"). The Property is located outside the geographical location of the Band and is not reserve land.
6. XXXXXXXXXX
7. The terms of the agreement of purchase and sale allow for title to the Property to be transferred to a new corporation that will hold the Property as bare trustee for the Band. The agreement of purchase and sale also provides that the purchaser can be a limited partnership in which the Band holds a majority interest.
8. The Band has incorporated XXXXXXXXXX Members of the Band hold legal title to the shares of this corporation as bare trustees for the Band. XXXXXXXXXX acts as bare trustee and holds security and finance notes on behalf of the Band.
9. The Band has also incorporated XXXXXXXXXX Members of the Band hold legal title to the shares of this corporation as bare trustees for the Band. XXXXXXXXXX owns and manages loans and mortgages for the Band and other related parties, with the primary purpose of earning interest income from these funds.
10. For the purposes of the proposed transactions described below, the Band has incorporated two new corporations: "Limited Partnerco" and "General Partnerco". Members of the Band hold legal title to the shares of these corporations as bare trustees for the Band.
11. The Band has entered into a written agreement with Limited Partnerco, the terms of which include Limited Partnerco acting as bare trustee for the Band and holding the limited partnership units acquired by the Band.
12. General Partnerco and Limited Partnerco have entered into a limited partnership agreement (the "Limited Partnership") for the purpose of managing the Property. Through its bare trustee, Limited Partnerco, the Band has contributed $XXXXXXXXXX to acquire XXXXXXXXXX units of Limited Partnership and is a limited partner. General Partnerco is the general partner and has contributed $XXXXXXXXXX to acquire 1 limited partnership unit.
13. The Limited Partnership is governed by a partnership agreement between General Partnerco and Limited Partnerco. The main terms of the agreement include:
a. No provision for the admission of new partners;
b. That a separate capital account be established and maintained for each partner in the accounting records of the Limited Partnership showing:
i. all contributions of capital (excluding loans),
ii. each partner's share of the net income and losses of the partnership and
iii. the amount of any distributions made to a partner.
No partner is entitled to receive interest from the partnership on the balance, if any, in the partner's capital account.
c. General Partnerco, as general partner of the Limited Partnership, is the active manager of the partnership and is entitled to receive management fees each year, at fair market value, for performing its duties as described in the partnership agreement.
14. Under the partnership agreement described in 13 above, General Partnerco will negotiate all contracts and manage all projects and operations for the Limited Partnership.
15. Under the partnership agreement described in 13 above, the income and losses of the Limited Partnership, both for accounting and income tax purposes, will be allocated to the General Partnerco and the Limited Partnerco in proportion to the number of units each hold in the Limited Partnership.
16. A new corporation ("Landco") has been incorporated on behalf of the Limited Partnership. Landco has entered into an agreement with the Limited Partnership to act as bare trustee for the Limited Partnership with respect to the Property and will hold legal title to the Property.
17. The Band has assigned the agreement of purchase and sale for the Property to the Limited Partnership for consideration of $XXXXXXXXXX . This assignment includes a price adjustment clause and a statement that both parties intend the contract to be conveyed at fair market value. If the Canada Revenue Agency later determines that the fair market value of the contract was in excess of $XXXXXXXXXX then the amount of consideration will be adjusted accordingly.
PROPOSED TRANSACTIONS
18. XXXXXXXXXX XXXXXXXXXX will borrow from the Band an amount equal to the fair market value of the land and building being purchased by the Limited Partnership and the transaction costs applicable on this purchase in exchange for a promissory note due on demand ("XXXXXXXXXX Promissory Note"). XXXXXXXXXX will provide security to the Band in the form of a general security agreement over the assets of XXXXXXXXXX and other security. The XXXXXXXXXX Promissory Note will bear interest at the prime interest rate as statistically monitored by the Bank of Canada.
19. XXXXXXXXXX will hold legal title to the XXXXXXXXXX Promissory Note and the other security described in 18 above as bare trustee for the Band. If XXXXXXXXXX does not pay the accrued interest in cash, it may pay the accrued interest through the issuance of a note (an "Interest Note"), which will have terms similar to the XXXXXXXXXX Promissory Note; in particular, the Interest Note will also be due on demand. No interest will accrue with respect to the Interest Note. Interest Notes will be accepted by XXXXXXXXXX and the Band as absolute payment of the related accrued interest; notwithstanding this last fact, as a protective measure, XXXXXXXXXX and XXXXXXXXXX will annually file an agreement in prescribed form (Form T2047) in accordance with paragraph 78(1)(b) of the Act to have the accrued interest deemed paid by XXXXXXXXXX and deemed received by XXXXXXXXXX and the Band for income tax purposes.
20. XXXXXXXXXX will lend the money it borrowed from the Band pursuant to the XXXXXXXXXX Promissory Note to the Limited Partnership in exchange for a promissory note ("Limited Partnership Promissory Note") due on demand. The interest rate on the Limited Partnership Promissory Note will be the prime rate as statistically monitored by the Bank of Canada plus XXXXXXXXXX %. The Limited Partnership Promissory Note will be secured by a registered mortgage on the Property and a general security agreement over the assets of the Limited Partnership, as well as other security. If the Limited Partnership does not pay the accrued interest in cash, it may pay the accrued interest through the issuance of a note (an "Interest Note"), which will have terms similar to the Limited Partnership Promissory Note; in particular, the Interest Note will also be due on demand. No interest will accrue with respect to the Interest Note. Interest Notes will be accepted by XXXXXXXXXX as absolute payment of the related accrued interest. Notwithstanding this fact, as a protective measure, the Limited Partnership and XXXXXXXXXX will annually file an agreement in prescribed form (Form T2047) in accordance with paragraph 78(1)(b) of the Act to have the accrued interest deemed paid by the Limited Partnership and deemed received by XXXXXXXXXX for income tax purposes.
21. The Limited Partnership will use the funds acquired from the Limited Partnership Promissory Note to purchase the Property. The Limited Partnership will hold the beneficial interest in the Property. Legal title to the Property will be held by Landco, which will hold the Property as bare trustee for the Limited Partnership. Under the bare trustee agreement, Landco's powers and responsibilities may only be exercised at the discretion of the beneficial owner and title to the Property may revert at any time to the beneficial owner.
22. The Limited Partnership Promissory Note and the XXXXXXXXXX Promissory Note will be subject to cross-default provisions.
PURPOSE OF PROPOSED TRANSACTIONS
The purposes of the proposed transactions are:
23. To generate a long-term source of income for the Band to support the governance, public works and infrastructure needs of the community and to promote economic development such that the Band will become economically self-sufficient while maintaining a stewardship role over its lands; and
24. To protect the Band from liability arising from the XXXXXXXXXX activities related to the Property and to protect the Band's interest in the Property, while otherwise maintaining the position of the Band had it undertaken to directly own, manage and rent the Property.
RULINGS 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, we rule as follows:
A. Because the Band is considered a public body performing a function of government in Canada within the meaning of paragraph 149(1)(c) of the Act, and therefore exempt from tax under Part I of the Act, no tax will be payable under Part I of the Act by the Band on the partnership income received from the Limited Partnership referred to in 15 above, or on the interest income earned by the Band from the XXXXXXXXXX Promissory Note.
B. Provided that XXXXXXXXXX has the legal obligation to pay interest on the XXXXXXXXXX Promissory Note and the Limited Partnership Promissory Note continues to be held by XXXXXXXXXX for the purpose of gaining or producing income from property, XXXXXXXXXX will be entitled, pursuant to paragraph 20(1)(c) of the Act, to deduct in computing its income from a taxation year, the interest paid or payable (depending on the method regularly followed by XXXXXXXXXX in computing its income for the purposes of the Act) on the XXXXXXXXXX Promissory Note in respect of that taxation year, to the extent such amount does not exceed a reasonable amount.
The above advance income tax rulings, which are based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX .
Nothing in this letter should be construed as implying that the Canada Revenue Agency has agreed to or accepted any of the tax consequences relating to the facts and proposed transactions described above except as expressly stated in the rulings. This letter is based solely on the facts and proposed transactions described above. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader. Without restricting the generality of the preceding statement, it should be noted that nothing in this letter should be interpreted as confirming, either expressly or implicitly, the formation of the Limited Partnership and whether it is a partnership at law, or whether any amounts are reasonable and reflect fair market value.
Yours truly,
XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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