2009 Ruling 2008-0272731R3 - Indian Band Operating a Limited Partnership

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. Whether the Band's income from a limited partnership will be exempt? 2. Whether interest paid by XXXXXXXXXX to XXXXXXXXXX will be deductible pursuant to paragraph 20(1)(c)? 3. Whether income paid to the members of a limited partnership will be reallocated on the basis of subsection 103(1) or (1.1)?

Position: 1. Yes. 2. Yes. 3. Refused to rule.

Reasons: 1. By-laws under sections 81 and 83 of the Indian Act have been passed. 2. The income from the acquired party is not tax exempt. 3. It is a question of fact whether subsection 103(1) or (1.1) would apply, and, in the particular circumstances, would depend not only on the capital invested but on the work performed by the general partner in managing the limited partnership.

XXXXXXXXXX 							2008-027273

XXXXXXXXXX , 2009

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Taxpayer") BN XXXXXXXXXX

This is in reply to the Taxpayer's letter to us of XXXXXXXXXX , requesting an advance income tax ruling in respect of certain proposed transactions described below and appointing you as its representative in this matter. We also acknowledge the information provided in various emails and telephone conversations (XXXXXXXXXX ) and your additional submissions of XXXXXXXXXX

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 the subject of a judgment of which the time limit for appeal to a higher court has not expired, or
(v) the subject of a ruling previously considered by the Directorate for 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.

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

FACTS

1. The Taxpayer's address is XXXXXXXXXX .

2. The Taxpayer is served by the XXXXXXXXXX Tax Services Office and files its income tax return with the XXXXXXXXXX Tax Centre.

3. The Taxpayer is a "band" within the meaning of this term as defined under subsection 2(1) of the Indian Act.

4. The Taxpayer has approximately XXXXXXXXXX members, of whom approximately XXXXXXXXXX live on XXXXXXXXXX Indian reserve lands. The Taxpayer's reserve lands (collectively, the "Reserves") are "reserves" within the meaning of the definition of a "reserve" in section 2 of the Indian Act.

5. A democratically elected Chief and Council Members govern the Taxpayer.

6. On XXXXXXXXXX , the Taxpayer signed a reconciliation, settlement and benefits agreement with the Province of XXXXXXXXXX (the "Province"). The Taxpayer is also in negotiations with the Province and the Government of Canada to sign a treaty under the Province's Treaty Process. These negotiations have resulted in the signing of a framework agreement.

7. The Taxpayer has a funding arrangement in place with the XXXXXXXXXX to support its treaty negotiation process. The funding through this agreement is by way of a loan from the Government of Canada, and contributions from the Government of Canada and the Province.

8. The Taxpayer has a comprehensive funding arrangement in place with the Department of Indian and Northern Affairs Canada ("INAC"), which helps to fund the Taxpayer's public works, social services and infrastructure programs.

9. The Taxpayer has a funding arrangement in place with the Canada Mortgage and Housing Corporation ("CMHC") to finance personal residence construction for members of the Taxpayer.

10. The Taxpayer has passed various by-laws pursuant to section 81 of the Indian Act, and section 83 of the Indian Act for which the Taxpayer has received ministerial approval. These by-laws include:

Budget By-law

Building By-law

Animal Control By-law

Finance By-law

Children's Curfew By-law

Multiple Suite By-law

Nuisance By-law

Property Assessment By-law

Property Taxation By-law

Residency By-law

Rates By-law

Expenditure By-law

Street and Traffic By-law

11. The Taxpayer assesses and charges property tax on the Reserves in accordance with its bylaws.

12. The Taxpayer provides or administers, as applicable, an extensive list of public works, social services and infrastructure programs, including but not limited to programs serviced by the following departments/areas:

• Social Services Department
• Education Department
• Health Department
• Housing Department
• Public Works Department
• Lands Department
• Recreation Department
• Legal/Taxation Department
• Fisheries Department
• Finance Department
• Language Department
• Employment and Training Department
• Membership Department
• Treaty Department
• Preschool/Daycare
• Economic Development

13. Facilities maintained or financed by the Taxpayer include:

• Taxpayer offices located on the Reserves used for Taxpayer meetings
• XXXXXXXXXX pump station
• Roads and bridges on the Reserves
• Residential housing for Taxpayer members on the Reserves

14. Services provided by the Taxpayer include building houses for Taxpayer members living on the Reserves, with assistance from CHMC, and providing garbage collection services and the infrastructure for water and sewage services for members living on the Reserves.

15. The Taxpayer has entered into an agreement with the Province to acquire a parcel of land known as the "XXXXXXXXXX ", hereinafter referred to as the "Particular Land." The Particular Land consists of the following:

• XXXXXXXXXX ; and
• XXXXXXXXXX .

16. The agreement between the Taxpayer and the Province in respect of the Particular Land specifies that title to the Particular Land is to be transferred directly to a new corporation, described in 17 below, to be held in bare trust for the Taxpayer. This new corporation is to be the agent or nominee of the Taxpayer, its powers or responsibilities may only be exercised at the direction of the Band Council, and title to the Particular Land may revert at any time to the Taxpayer.

17. XXXXXXXXXX . ("Landco") has been incorporated by the Taxpayer solely to act as bare trustee in respect of the Particular Land and to hold legal title to that land. The bare trustee relationship between Landco and the Taxpayer was evidenced in writing. The shares of Landco are legally registered to certain members of the Taxpayer, who hold the shares as bare trustees for the Taxpayer. Title to the Particular Land has been transferred to Landco.

18. XXXXXXXXXX ("Limited Partnerco") and XXXXXXXXXX ("General Partnerco") have been incorporated by the Taxpayer for the purposes described in the Proposed Transactions below.

PROPOSED TRANSACTIONS

19. Limited Partnerco will act as bare trustee in respect of the limited partnership units of the Limited Partnership described in 21 below, and will hold legal title to those units. The bare trustee relationship between Limited Partnerco and the Taxpayer will be evidenced in writing. The shares of Limited Partnerco will be legally registered to certain members of the Taxpayer, who will hold the shares as bare trustees for the Taxpayer.

20. General Partnerco will act as the general partner of the Limited Partnership described in 21 below. The shares of General Partnerco will be legally registered to certain members of the Taxpayer, who will hold the shares as bare trustees for the Taxpayer.

21. XXXXXXXXXX (the "Limited Partnership") will be formed by General Partnerco and Limited Partnerco for the purpose of managing and developing the Particular Land. The Taxpayer will contribute capital of $XXXXXXXXXX to acquire XXXXXXXXXX units of the Limited Partnership as a limited partner, such units to be held in bare trust for the Taxpayer by Limited Partnerco as described in 19 above. General Partnerco will contribute capital of $XXXXXXXXXX to acquire 1 unit of Limited Partnership. The Limited Partnership will be governed by a partnership agreement (the "Partnership Agreement"), the main terms of which will be as follows:

(a) There will be no provision for the admission of new partners.

(b) A separate capital account will be established and maintained for each partner in the accounting records of the Limited Partnership showing all contributions of capital (excluding loans, which are not considered to be a capital contribution or part of the capital of the partnership), as well as each partner's share of the net income and losses of the partnership and 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, will be the active manager of the partnership and will be entitled to receive management fees each year, at fair market value, for performing its duties under the Partnership Agreement.

22. The Taxpayer will enter into an agreement to sell the beneficial interest in the Particular Land and the shares of Landco to the Limited Partnership (the "Land Sale Agreement"). Under the Land Sale Agreement, the Taxpayer will dispose of its interest in the Particular Land at fair market value. Consideration for the sale will be in the form of a promissory note (the "LP Note") bearing interest at prime plus XXXXXXXXXX %. The LP Note will be secured by a registered mortgage on the Particular Land and a general security agreement (GSA) over the assets of the Limited Partnership, as well as other security. To the extent that the Limited Partnership does not pay the accrued interest in cash, it may pay the accrued interest by way of "Interest Notes", which will have similar terms to the LP Note except that they will not themselves bear interest. The Interest Notes will be accepted by the Taxpayer as absolute payment of the related accrued interest.

23. The Land Sale Agreement will include price adjustment clauses and a statement that the intention of both parties is to contract at fair market value. Should the Canada Revenue Agency (the "CRA") determine the value of the property sold to be different from the amount agreed in the Land Sale Agreement, the principal amount of the LP Note will be adjusted to reflect the change.

24. A new company to be called XXXXXXXXXX will be incorporated by the Taxpayer solely to act as bare trustee in respect of the security to be given to the Taxpayer, and to hold (together with the Band) the LP note (in bare trust for the Band). (XXXXXXXXXX will serve a similar function for the XXXXXXXXXX Note below.) The bare trustee relationship between XXXXXXXXXX and the Taxpayer will be evidenced in writing. The shares of XXXXXXXXXX will be legally registered to certain members of the Taxpayer, who will hold the shares as bare trustees for the Taxpayer.

25. A new company to be called XXXXXXXXXX will be incorporated by the Taxpayer for the purpose of owning and managing loans and mortgages of the Taxpayer and other related parties, from which it will primarily earn interest income. The shares of XXXXXXXXXX will be legally registered to certain members of the Taxpayer, who will hold the shares as bare trustees for the Taxpayer.

26. The Taxpayer will enter into an agreement (the "LP Note Agreement") to assign its beneficial interest in the LP Note (and the related security) to XXXXXXXXXX . Under the agreement, the Taxpayer will assign its beneficial interest in the LP Note (and the related security) to XXXXXXXXXX at fair market value in exchange for another promissory note (the "XXXXXXXXXX Note") bearing interest at prime. The Taxpayer will also cause XXXXXXXXXX to transfer (as bare trustee) the LP Note (and the related security) to XXXXXXXXXX .

27. The XXXXXXXXXX Note will be secured by a GSA over the assets of XXXXXXXXXX and other security (together, the "XXXXXXXXXX Security"). Legal title to the XXXXXXXXXX Note (and the respective GSA and other XXXXXXXXXX Security) will be held by XXXXXXXXXX in bare trust for the Taxpayer, with the bare trustee relationship between XXXXXXXXXX and the Taxpayer evidenced in writing.

28. The LP Note Agreement will include price adjustment clauses and a statement that the intention of both parties is to contract at fair market value. Should the CRA determine the value of the property sold to be different from the amount agreed in the LP Note Agreement, the principal amount of the XXXXXXXXXX Note will be adjusted to reflect the change.

29. The LP Note and the XXXXXXXXXX Note will be subject to cross-default provisions.

30. General Partnerco will negotiate, on behalf of the Limited Partnership, all contracts and manage all projects and operations to which the Limited Partnership is a party in respect of the Particular Land for which the Limited Partnership has acquired the beneficial interest as described in paragraph 22, as applicable in the circumstances from time to time.

31. The income and losses of the Limited Partnership, for both accounting and income tax purposes, will be allocated to the Taxpayer and General Partnerco in proportion to the number of units they hold of the Limited Partnership.

PURPOSES OF THE PROPOSED TRANSACTIONS

The purposes of the Proposed Transactions are as follows:

i. to generate a long-term source of income for the Taxpayer to support the governance, public works and infrastructure needs of the community and to promote economic development such that the Taxpayer will become economically self-sufficient while maintaining a stewardship role over its lands; and

ii. to protect the Taxpayer from liability arising from activities related to developing the Particular Land and to protect the Taxpayer's interest in the Particular Land in particular, while otherwise maintaining the position of the Taxpayer had it undertook to directly own, manage and develop the Particular Land.

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 Taxpayer 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 Taxpayer on the Taxpayer's partnership income from the Limited Partnership, or on the interest income earned by the Taxpayer from XXXXXXXXXX with respect to the XXXXXXXXXX Note.

B. Provided that XXXXXXXXXX has the legal obligation to pay interest on the XXXXXXXXXX Note and the LP 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 for 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 Note in respect of that taxation year, to the extent such amount does not exceed a reasonable amount.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002, and are binding on the CRA provided that the proposed transactions are implemented on or before XXXXXXXXXX . These 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.

Nothing in this letter should be construed as implying that the CRA 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. Any references to documentation submitted with respect to this ruling request are provided solely for the convenience of the reader and does not form part of the facts and proposed transactions. 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, that the CRA has agreed to or accepted the income tax consequences, if any, related to the formation of the Limited Partnership and whether it is a partnership at law or whether amounts are reasonable and reflect fair market value.

Yours truly,

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch