2006 Ruling 2005-0126261R3 - Taxation of Indian Trust

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: (A) Will subsection 75(2) apply to the particular trust income in the circumstance? (B) Whether income of the trust that is not subject to the provisions of 75(2) will be considered payable to the First Nation and thus deductible pursuant to subsection 104(6)? (C) Does the First Nation qualify as a public body performing a function of government for purposes of paragraph 149(1)(c)? (D) Will the per capita distributions to the members of the First Nation be considered income from a source within the meaning of paragraph 3(a) of the Act?

Position: (A) yes (B) yes (C) yes (D) no

Reasons: (A) The First Nation will be the settlor of the particular trust, directing the impact benefit payments to the trust on behalf of the First Nations. The First Nation, including all its members, is the sole beneficiary and on termination of the trust, all of the trust property will be transferred to the First Nation. (B) To the extent income earned exceeds income realized; the excess shall be irrevocably payable to the First Nation and will be evidenced by a demand promissory note. (C) The First Nation provides and administers a fairly extensive list of public works, social services and infrastructure programs and has passed bylaws pursuant to section 81 of the Indian Act. (D) Consistent with our previous position, the per capita distributions to the First Nation members would not be considered income from a source within the meaning of paragraph 3(a) of the Act.

XXXXXXXXXX 							2005-012626

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "First Nation") 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 your subsequent submissions of XXXXXXXXXX and the information provided during our telephone conversations (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

(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.

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

DEFINITIONS

In this letter, the following terms have the following meanings:

(a) "Authorized Investments" means any of those instruments, notes, bonds or other securities which the Trustee, in accordance with the terms of the Trust Agreement, is authorized to purchase with the Trust Property and which authorized forms of investment are more particularly set forth in Schedule 1 of the Trust Agreement;

(b) "Band or Community Development" means the investment and/or utilization of Trust Property for the following purposes:

(i) business owned by the First Nation or by Members within the community;

(ii) construction and development of an educational centre on the Reserve,

(iii) construction of housing on the Reserve, or

(iv) any other socio-economic benefit, or any other program, service or project which is for the use, development, advantage or benefit of the First Nation or its Members including acquisition of land or improvements but excluding, however, per capita distributions to the Members and payments to the First Nation to cover any shortfall in operating funding of the First Nation;

(c) "Beneficiary" means, for the purposes of the Trust Agreement, the First Nation, including all Members of the First Nation on a collective and undivided basis;

(d) "Canada" means Her Majesty the Queen in right of Canada;

(e) "CRA" means the Canada Revenue Agency;

(f) "Chief" means the Chief of the First Nation;

(g) "Company" means XXXXXXXXXX.;

(h) "Council" means the duly elected council of the First Nation, which consists of the Chief and Councillors;

(i) "Councillor" means a member of the Council;

(j) "Council Resolution" means a decision of the Council consented to by a majority of the Councillors at a duly convened meeting of the Council;

(k) "First Nation" means the XXXXXXXXXX;

(l) "Impact Benefit Monies" means all monies to be paid by the Company to the First Nation under the Impact Benefit Agreement in respect of the Project;

(m) "Impact Benefit Agreement (IBA)" means an agreement between the First Nation and the Company XXXXXXXXXX. This agreement between the parties includes commitments from the Company regarding training and education, employment and business opportunities, environmental management, social and cultural issues and financial compensation in consideration of First Nation support for the Project;

(n) "Income" for the Taxation Year of the Trust shall be the income or loss of the Trust for such year computed in accordance with the provisions of the Act before the application of subsections 75(2) and 104(6) thereof for purposes of calculating income in determining the "taxable income" of the Trust; and shall, for greater certainty include taxable capital gains, net of allowable capital losses, and any notional or deemed amounts required to be included in computing the taxable income of the Trust, but shall exclude capital dividends and the non-taxable portion of capital gains;

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

(p) "Institution" means the bank or trust company which becomes a party to the Trust Agreement;

(q) "Member" or "Members" means any person whose name appears on the First Nation's "Band List" as defined in the Indian Act and maintained by the First Nation in accordance with section 10 of the Indian Act;

(r) "Project" means the XXXXXXXXXX;

(s) "Primary Income" means the income which arises from property received by the Trust from the First Nation and funds paid at the First Nation's direction to the Trustee pursuant to the Impact Benefit Agreement, or from property substituted for that property, for a Taxation Year of the Trust;

(t) "Reserve" means a reserve as defined in subsection 2(1) of the Indian Act;

(u) "Secondary Income" means the income, other than the Primary Income, of the Trust for a Taxation Year of the Trust;

(v) "Taxation Year of the Trust" means a calendar year unless the fiscal period in respect of which the Trust is required annually to compute its income for Canadian federal income tax purposes changes, in which event the new fiscal period shall become the Taxation Year of the Trust;

(w) "Trust" means the XXXXXXXXXX which is the inter vivos trust (as defined in subsection 108(1)) of the Act) to be established by the First Nation pursuant to the terms of the Trust Agreement;

(x) "Trust Account" means the account to be established by the Trustee at the Institution pursuant to the Trust Agreement and to which the Company, pursuant to the Impact Benefit Agreement, is to deposit the Impact Benefit Monies on behalf of the First Nation;

(y) "Trust Agreement" means the XXXXXXXXXX among the First Nation and the Trustee;

(z) "Trust Property" means all monies now or hereafter on deposit in the Trust Account and all Authorized Investments, including all investment instruments, in which the monies in the Trust Account may from time to time be invested as well as any additions or accruals thereto and also includes, without limitation, all revenue and other income realized thereon; and

(aa) "Trustee" means a trust company duly incorporated, and licensed to carry on business of a trustee in XXXXXXXXXX and which is a member institution of the Canada Deposit Insurance Corporation which has a duty to insure deposits in Accounts pursuant to the Canada Deposit Insurance Corporation Act, R.S.C., a.C-3, 5.1.

FACTS

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

2. The First Nation has one Reserve, the XXXXXXXXXX

3. The First Nation's mailing address is: XXXXXXXXXX. The closest tax services office is the XXXXXXXXXX Tax Services Office. However, the First Nation does not file income tax returns.

4. The First Nation has approximately XXXXXXXXXX Members, approximately XXXXXXXXXX of whom live on the Reserve. Each Member of the First Nation is a status Indian for purposes of the Indian Act.

5. All of the First Nation's offices, along with any facilities under its control, are located on the Reserve. These facilities include:

• band offices,
• primary school,
• maintenance shed,
• fire hall,
• health clinic,
• housing units and mobile homes,
• recreational facilities,
• water treatment plant,
• commercial buildings, and
• healing lodge.

6. The Chief and Council are democratically elected by the Members under band custom and are responsible for governance of the First Nation. They represent the First Nation in all matters.

7. The First Nation maintains a number of programs through funding provided by Indian and Northern Affairs Canada ("INAC") under a Comprehensive Funding Agreement. Some of these programs include:

• band administration;
• expansion, maintenance or modification of public services and works on the Reserve including roadways, water treatment plant, sewer and lift stations;
• expansion, maintenance or modification of existing Reserve fire protection services and fire department;
• expansion, maintenance or modification of the housing program on the Reserve including the funding of construction of new housing, the maintenance of current housing and the operation of a housing authority;
• maintenance, modification or expansion of the education program including the primary and secondary school system, the post-secondary programs, the adult learning centers and any related bussing program. The education committee along with its education director administers a primary education program consisting of a nursery, kindergarten program along with grades one to twelve;
• expansion, modification or support of social service and social assistance programs administered by the First Nation on the Reserve;
• expansion, modification or support of existing recreational activities and facilities on Reserve;
• expansion, modification or support of the justice program including legal services such as restorative justice measures, alternative measures programs, pre-release programs and community training residences;
• medical and health services including community health nursing, community health education, dental services, environmental health services, home and community care, and medical transportation;
• human resources development (employment and training);
• economic development; and
• land use.

8. The First Nation has passed by-laws pursuant to section 81 of the Indian Act. The section 81 by-laws have specific enforcement procedures set out in the by-law itself and pertain to the:

• regulation of unsupervised minors during the late evening and early morning hours;
• observance of law and order for the prevention of disorderly conduct and nuisance;
• regulation of traffic;
• regulation of the consumption of alcohol; and
• regulation of the use of all-terrain vehicles and snowmobiles.

9. The First Nation has entered into a Health Services Transfer Agreement with Her Majesty in right of the Government of Canada on XXXXXXXXXX.

10. The First Nation has been in negotiations with the Company since XXXXXXXXXX with respect to the Project to be located approximately XXXXXXXXXX.

11. The First Nation and the Company have entered into an Impact Benefit Agreement (the "IBA"). The voting Members of the First Nation ratified the IBA on XXXXXXXXXX.

PROPOSED TRANSACTIONS

12. Section XXXXXXXXXX of the IBA provides that the Company shall pay to the First Nation the stipulated payments as consideration for the First Nation consenting to the Company acquiring XXXXXXXXXX rights, licences and privileges associated with the Project from the XXXXXXXXXX Government.

13. Under the terms of the IBA, the Company will pay to the First Nation the Impact Benefit Monies as follows:

(a) $XXXXXXXXXX on signing of the IBA;

(b) $XXXXXXXXXX on obtaining regulatory approvals for the Project;

(c) $XXXXXXXXXX per year for each of the XXXXXXXXXX years of construction of the Project (to a total of $XXXXXXXXXX);

(d) $XXXXXXXXXX per year for each of the XXXXXXXXXX years of operation of the Project (to a total of $XXXXXXXXXX); and

(e) $XXXXXXXXXX per year for XXXXXXXXXX years for environmental monitoring of the Project.

14. The Company will make additional payments to the First Nation under the IBA if the Company's cash flow from the Project reaches certain levels.

15. The Trust Agreement will be reviewed and approved by Council Resolution and ratified by the Members of the First Nation. Once approved, the First Nation and the Trustee will execute the Trust Agreement. The First Nation, in its capacity as settlor of the Trust, will contribute the sum of $XXXXXXXXXX to the Trustees to settle the Trust.

16. Under the terms of the Trust Agreement, the First Nation will irrevocably authorize and direct the Company to deposit the Impact Benefit Monies, as described in 13 and 14 above, into the Trust Account for, and on, its behalf (in its capacity as sole Beneficiary of the Trust).

17. Impact Benefit Monies deposited in the Trust Account will be invested by the Trustee in Authorized Investments, subject to certain distributions to the First Nation and other terms and conditions of the Trust Agreement. The Trustee will be empowered to manage the Authorized Investments such that it is anticipated that taxable capital gains or allowable capital losses on the actual or deemed disposition of the property will arise.

18. All beneficial right, title, interest and benefit in and to the Trust Property shall vest to the Beneficiary.

19. The Trust Agreement requires that during the existence of the Trust the value of Trust Property be maintained at no less than a minimum amount that is $XXXXXXXXXX. Any income for trust purposes that forms the basis for determining Primary Income not distributed in the Taxation Year of the Trust in which it arises, or within XXXXXXXXXX days of the end of that year, shall be added to the capital of the Trust Property.

20. The Trust Property is available for use by, and at the discretion of, the First Nation subject to Council Resolution and according to the Trust Agreement, for the following purposes:

(a) for the transfer to the First Nation of up to $XXXXXXXXXX for the purposes of paying expenses in relation to the implementation, enforcement and compliance of the Project under the terms of the IBA;

(b) for the transfer to the First Nation for the purposes of Band and Community Development;

(c) for the investment of the Trust Property in Authorized Investments;

(d) for the payment of certain expenses including accounting fees, legal expenses, investment fees and other administrative costs as defined in the Trust Agreement;

(e) for the transfer to the First Nation for purposes of the initial and annual per capita distributions to Members; and

(f) for the investment of Trust Property in debt financing to qualifying business entities owned and/or controlled by Members or the First Nation.

21. The terms of the Trust provide that the Income of the Trust for each Taxation Year of the Trust shall be determined not later than XXXXXXXXXX days after the end of the Taxation Year.

22. All Secondary Income earned in a particular Taxation Year of the Trust that has not been paid to the First Nation earlier in the Taxation Year of the Trust, shall be payable to the First Nation on the last day of that year. The First Nation shall have the right to enforce the payment of the balance of the Secondary Income earned in that Taxation Year of the Trust on that day and thereafter until such amount has been distributed to the First Nation. This Secondary Income will be paid within XXXXXXXXXX days after the end of each Taxation Year in cash, in kind, or by issuing a non-interest bearing demand promissory note.

23. The ability of the First Nation to demand payment of such promissory note and the ability of the Trustee to honour such a demand are not restricted in any way.

24. For purposes of per capita distributions from the Trust to the First Nation, payments to Members will be made annually as follows:

(a) for the first XXXXXXXXXX years, equal payments will be made to Members aged XXXXXXXXXX or older, to a maximum of XXXXXXXXXX% of the total payments received under the IBA in each of the XXXXXXXXXX years;

(b) after XXXXXXXXXX years, payments will be made equally to all Members to a maximum of XXXXXXXXXX% of the total payments received each year under the IBA. After the final payment is made from the Company under the IBA, not more than XXXXXXXXXX% of all investment income earned by the Trust in any year may be paid as a per capita distribution.

25. Per capita distributions to Members under 18 years of age will be made to a trust for the benefit of such Member and payment of the per capita amount, plus accrued interest, will be payable to each Member upon attaining 18 years of age.

26. The Trustee of the Trust will be empowered to manage the property of the Trust and, specifically, will have the power and responsibility to invest the capital of the Trust, to exercise voting privileges, make distributions or pay the amount owing under promissory notes to the First Nation, to settle and adjust any claim or demand on the Trust Property within the parameters set forth in Schedule 3 of the Trust Agreement.

27. Upon termination of the Trust, the Trust Property will be distributed by the Trustee to the First Nation absolutely.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to:

(a) compensate the First Nation for the right to open, operate, and close the Project in their territorial lands and on the Reserve;

(b) ensure funds with respect to this compensation are available for the future benefit of the First Nation, including all its Members; and

(c) establish a trust to administer the Impact Benefit Monies and to facilitate the objectives set out in the Trust Agreement.

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. Primary Income or loss from the Impact Benefit Monies received by the Trust, or from property substituted therefor, and any taxable capital gain or allowable capital loss from the actual or deemed disposition of the Impact Benefit Monies, or property substituted therefor, shall be deemed to be income or a loss, or a taxable capital gain or allowable capital loss, as the case may be, of the First Nation pursuant to subsection 75(2) of the Act.

B. Any income from the property of the Trust in a taxation year in respect of which subsection 75(2) of the Act does not apply, including, in particular, Secondary Income on reinvested income from property of the Trust, will be considered to have become payable in the taxation year to the First Nation and may be deducted in computing the income of the Trust for the taxation year pursuant to paragraph 104(6)(b) of the Act.

C. Because the First Nation is 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 by the First Nation on any amounts included in its income as a result of the transactions described above, which, for greater certainty, may include amounts described in Rulings A and B above.

D. The per capita distributions to be made by the First Nation to the Members, as described in 24 and 25 above, will not be income from a source to the Members within the meaning of paragraph 3(a) of the Act.

The above advance income tax rulings, which are based on the Act in its 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 IC 70-6R5, dated May 17, 2002, and are binding on the Canada Revenue Agency provided the proposed transactions are implemented before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch