2006 Ruling 2005-0159071R3 - Indian Band as Public Body

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: Does a particular First Nation qualify as a public body performing a function of government for purposes of paragraph 149(1)(c)?

Position: Yes

Reasons: The First Nation has passed bylaws pursuant to section 81 and 83 of the Indian Act and provides extensive programs and services to its members such as social and economic development programs and capital infrastructure. The First Nation also provides educational services at the pre-school and the primary levels, plus financial assistance for post-secondary level education.

XXXXXXXXXX 							2005-015907	

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "First Nation")

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge your subsequent submission 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:

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 XXXXXXXXXX reserves comprising XXXXXXXXXX, located in XXXXXXXXXX (the "Reserve"), within the meaning of reserve under subsection 2(1) of the Indian Act.

3. The First Nation's mailing address is XXXXXXXXXX. It is served by the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Tax Centre.

4. The First Nation has approximately XXXXXXXXXX members (the "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,
• elementary school,
• fire hall,
• adult education centre,
• recreation centre,
• health centre,
• water and sewage treatment plant,
• garbage transfer station, and
• campground.

6. The First Nation's 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:

• economic development;
• fire response services;
• education services;
• tourism services;
• forestry services;
• family support services;
• community services;
• social and education counselling;
• recreational and sporting services;
• employment and training services;
• road and public work maintenance;
• garbage collection;
• child development services;
• health and dental services;
• animal control; and
• social assistance.

8. The First Nation is involved in the following specific business development initiatives for the benefit of the Members, which include the operation of:

• a XXXXXXXXXX recreational campground which has been operational for over XXXXXXXXXX years;
• a local gas-bar, which has employed approximately XXXXXXXXXX Members since it began operation in XXXXXXXXXX;
• XXXXXXXXXX; and
• XXXXXXXXXX

9. The First Nation, through its association with XXXXXXXXXX (a non-profit society comprised of Members whose mandate is to address educational issues of the First Nation) operates an elementary school for primary school-aged children up to grade 7. Secondary school-aged children are provided bus service to a secondary school located in XXXXXXXXXX. In addition, the First Nation offers post-secondary financial assistance to qualifying Members where possible.

10. The First Nation operates a separate educational institution providing education and specific training to adult Members of the community.

11. The First Nation has passed by-laws pursuant to both sections 81 and 83 of the Indian Act. The section 81 by-laws have specific enforcement procedures set out in the by-law themselves and pertain to animal control with respect to the control of dogs and waste management. Pursuant to section 83 of the Indian Act, a financial administration and a property taxation by-law have been enacted.

PROPOSED TRANSACTIONS

12. The First Nation and a band-owned corporation (the "Corporation"), will enter into a limited partnership agreement (the "Agreement") pursuant to the Partnership Act of XXXXXXXXXX, and form the XXXXXXXXXX (the "LP").

13. All issued and outstanding shares of the Corporation will be beneficially held by the First Nation.

14. The First Nation will be the limited partner of the LP subscribing to XXXXXXXXXX partnership units for $XXXXXXXXXX and the Corporation, as the general partner, will subscribe to a nominal partial unit holding.

15. The LP is expected to carry on all business ventures currently carried on by the First Nation as described in 8 above. The operation of these business ventures, specifically the businesses in the areas of forestry, fishing and tourism and any business necessary, proper, convenient, ancillary or incidental to the carrying on of such businesses are expected to be transferred to the LP for future operation.

16. As the general partner under the Agreement, the Corporation will not be required to contribute any capital to the LP and will be allocated XXXXXXXXXX% of the income or losses of the LP.

17. As the only limited partner, the First Nation will be allocated XXXXXXXXXX% of the income or losses of the LP.

18. Income and losses of the LP for income tax purposes will be allocated to the Corporation and the First Nation in the same manner as described in 16 and 17 above.

19. The Agreement stipulates that the general partner may distribute any amounts of net income of the LP, subject only to reasonable holdbacks for future costs and expenses, as to XXXXXXXXXX% to the First Nation as limited partner, and XXXXXXXXXX% to itself as the general partner, provided it has satisfied all monies due and payable to any third party, including any debt servicing costs then due on any loans to the LP.

20. The Corporation, as general partner, has unlimited liability for the undertakings, liabilities and obligations of the LP. The liability of the First Nation, as the limited partner, is limited to its original capital contribution plus its pro-rata share of the undistributed assets of the LP.

PURPOSE OF THE PROSED TRANSACTIONS

21. The purpose of the proposed transactions is to reorganize the business of the First Nation such that all or substantially all business-sourced income of the First Nation is transferred to the proposed LP. The First Nation will continue to benefit from the income and allow it to further its governance obligations and promote economic, social and community development within the community, while minimizing the financial risk of potential liability.

RULING 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:

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 of the Act by the First Nation on income allocated to it by the LP, as described in 17.

The above advance income tax ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular IC 70-6R5, dated May 17, 2002, and is 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
Financial Sector and Exempt Entities Division