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: Various questions related to the taxation of Yukon Indians after the comprehensive land claim settlement.
Position: Generally they lose the section 87 exemption and are taxable on income after 1998.
Reasons: There is no exemption without section 87 of the Indian Act. Property does not retain any exempt status if it is otherwise taxable.
April 29, 1998
Federal Provincial Relations HEADQUARTERS
& First Nations D. Duff
Regional Operations, Pacific Region 957-8953
Attention: Charmaine Martin
Regional Coordinator
980685
Income Tax Exemptions for Yukon First Nations
This is in reply to your memorandum of March 16, 1998 requesting our position on the various questions listed therein regarding the Income Tax status of the Yukon First Nations after the implementation of the Umbrella Final Agreement ("UFA"). We are also responding to the additional questions which arose as a result of the Native Outreach sessions held on March 24 and 25, 1998.
It is our understanding of the UFA that section 87 of the Indian Act will not apply to the personal property of an Indian or band situated on a reserve in the Yukon after December 31, 1998. Also, the remission order which deems lands set aside in the Yukon to be considered reserves for the purpose of the Indian Act, is no longer effective after December 31, 1998.
Our response to the first set of questions is as follows.
1. How does the Department intend to handle the non-taxable portion of pension payments once the land claims in the Yukon are settled?
By virtue of subparagraph 56(1)(a)(i) of the Income Tax Act, a taxpayer is required to include pension payments in income in the year of receipt. Accordingly, pension income is taxable to a taxpayer in the year of receipt and the tax status of the taxpayer while the benefits were accrued is generally irrelevant.
Pursuant to section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act an Indian is exempt on certain income, which can include pension income. However, once section 87 of the Indian Act no longer applies to an Indian, any pension income received after that date would have to be included in income.
2. Will the non-taxable portion remain non-taxable in accordance with the legislation in place currently?
Where an Indian is eligible for an exemption under section 87 of the Indian Act, the Department's present position is that pension payments related to exempt income is usually exempt when received. However, as stated in 1, where an Indian is no longer eligible for an exemption under section 87 of the Indian Act, the full amount of the pension received in the year must be included in income.
If an Indian commutes the pension prior to losing the exemption under section 87 of the Indian Act, the lump sum commutation amount will be taxed in accordance with the position above. The amount remaining after tax will no longer be a pension and would be after tax capital of the Indian.
3. Will the pension become taxable regardless of the years of pensionable service contributions were made from exempt income?
As stated in 1, pension income is generally included in income in the year of receipt regardless of the tax status of the beneficiary when the benefits were earned. Where the beneficiary has no exemption per section 87 of the Indian Act, there is nothing to exempt the pension income from tax in the year of receipt.
4. How does the Department intend to handle investments and RRSPs?
Presently the Department taxes investment income in accordance with the guidelines provided by the case of Arnold Recalma v. Her Majesty the Queen (96 DTC 1520), the Tax Court of Canada, the decision of which was recently upheld in the Federal Court of Appeal. The case dealt with investments purchased from an on reserve branch of a bank. It was noted by the Court that the income stream for such financial instruments started with companies that were located off reserve, and it was held that the investment income of the taxpayer was not personal property situated on a reserve. Rather, the income was earned in the economic mainstream. Consequently, unless the income can be identified as exclusively generated on the reserve, it is our position that the income is not exempt.
Where the exemption under section 87 of the Indian Act is no longer available all of the investment income of the taxpayer will be taxable in accordance with the Income Tax Act regardless of the previous status of the investments.
Income earned in an RRSP generally accumulates tax free and any payment from an RRSP is generally included in income. Where the annuitant of an RRSP is eligible for exemption under section 87 of the Indian Act, the Department takes the same position as with pensions, as described in 2 above, in that payments from an RRSP that relate to exempt income are also exempt. However, where the annuitant loses the exempt status all payments from the RRSP will be included in income in the year of receipt. As with pensions, the annuitants would be advised to withdraw funds in 1998 from those RRSPs that would be exempt.
5. Will RRSP and investment income remain non-taxable once the land claims are settled?
See 4.
6. How will First Nations communities be advised well ahead of time of the new rules so that they may withdraw the funds with no tax implications?
We understand that the local offices are in the process of planning for the dissemination of information to, and the education of, the Yukon First Nations regarding their new taxation status.
Following are responses to the additional questions arising from the Native Outreach sessions held on March 24 and 25, 1998.
1. Will other First Nation members working on reserves or land set aside in the Yukon be entitled to the Section 87 exemption?
It appears that the intent of the UFA is to disallow any exemption for any Indian working on Yukon reserves. Subsection 20.6.1.2 of the UFA states "As of the effective date of Settlement Legislation, section 87 of the Indian Act...shall not apply to...the personal property situated on a reserve in the Yukon of any Indian, Yukon First Nation or Band...". Also, 20.2.4 of the UFA provides that "The Income Tax Act shall be amended as required to provide for the implementation and enforcement of the provisions of this chapter." Section 20.6.3 provides that the Government may make such amendments to statutes or regulations as are necessary for the purpose of giving effect to and enforcing provisions of 20.6.1.
2. Will individual members of Yukon First Nations living on reserves outside of the Yukon be entitled to section 87 exemption?
Subsection 20.6.1.3 of the UFA provides that "Section 87 of the Indian Act ... shall not apply to ... the personal property situated on a Reserve outside the Yukon of a Yukon First Nation or a Yukon Indian Person resident in the Yukon". It is our understanding that some Yukon First Nations have reserves both in the Yukon and in British Columbia. Section 20.6.1 of the UFA does not remove the section 87 exemption for members of those bands that reside on reserves in British Columbia.
3. (a) How is section 87 applied where a First Nation group is negotiating with the Yukon and with British Columbia?
(b) If a Yukon First Nation member is working and living on a reserve in BC?
(c) If a Yukon First Nation member is working on a reserve in BC and living in the Yukon?
(a) Section 20.6.1 provides that section 87 does not apply to a Yukon First Nation's interest in a reserve in the Yukon or its personal property situated on any reserve, whether inside or outside of the Yukon.
(b) As indicated in question 2, section 20.6.1 did not remove the section 87 exemption for band members living in British Columbia.
(c) Subsection 20.6.1.3 removes the section 87 exemption for a member of a Yukon First Nation living in the Yukon with respect to personal property situated on a reserve outside the Yukon.
4. Prior to the Umbrella Final Agreement (UFA) being in force, a Yukon First Nation was registered as non-profit organization. After the UFA came into force, the Yukon First Nation lost status as non-profit organization. The Yukon First Nation receives funding from DIAND every year and they provide an audited statement to DIAND yearly. Do they need to file an Income Tax Return if they are considered a non-profit commission under the UFA?
We would need more information on the commission regarding the type of legal entity it is. Non-profit organizations are not registered with Revenue Canada. Indian bands may be exempt under paragraphs 149(1)(c) or (l), which refer to public bodies performing a function of government or non-profit organizations.
If an entity is a trust or corporation it must file an income tax return. Also certain organizations that are exempt from income tax are required, depending on their financial status, to file an information return pursuant to subsection 149(12) of the Income Tax Act.
5. A member of the Tr'onDek Hwechin First Nation in Dawson city indicated that she was of the understanding that a percentage of the moneys paid in taxes by the Yukon First Nations would be reimbursed by Revenue Canada and paid back to the Yukon First Nations? If this is so, will special income forms need to be completed?
Pursuant to chapter 24 of the UFA, self-governing agreements can be negotiated with individual Yukon First Nations which will permit those First Nations to levy an income tax. It is our understanding that some of the Yukon First Nations have already concluded such agreements. Where such an income tax is levied it will be done with a specific form filed with the federal income tax return.
6. Will Employment Insurance benefits received in 1999 on income earned in 1998 be taxable?
EI benefits are included in income pursuant to subparagraph 56(1)(a)(iv) of the Income Tax Act in the year they are received. Since none of the Yukon First Nations will be entitled to the section 87 exemption in 1999, the EI benefits will be taxed regardless of the period during which the entitlement to those benefits was earned.
7. Will there be pro-rated adjustments on EI benefits if adjustments after 12/31/98 taxable?
See 6.
8. Will RSP, pension, etc. contributions withdrawn after 12/31/98 be taxable even if contribution made with exempt income?
Amounts received from an RRSP are generally included in income pursuant to section 146 and paragraph 56(1)(h) of the Income Tax Act and amounts received from a pension are included in income pursuant to subparagraph 56(1)(a)(i) of the Income Tax Act in the year in which such amounts are received. Where an Indian is eligible for an exemption under section 87 of the Indian Act, the Department's position is that amounts received from an RRSP or pension that are related to exempt income is usually exempt when received. However, where an Indian is no longer eligible for an exemption under section 87 of the Indian Act, the full amount received in the year from the RRSP or the pension must be included in income in that year. Consequently, after December 31, 1998, all amounts received from a pension or RRSP by Yukon First Nations will generally be included in income regardless of whether the related income was exempt in previous years.
9. If yes to number 6, will contributions made in previous years apply as tax deductions?
Employee contributions under the Employment Insurance Act are not deductible from income, rather a credit against taxes payable is provided by section 118.7 of the Income Tax Act for the year to which the contribution relates. Consequently, EI contributions related to 1998 cannot be used in determining a tax credit in respect of taxes payable for years after 1998.
10. If RSP, pension, etc. becomes taxable after 12/31/98 can First Nation members withdraw their money in these funds prior to this date to avoid paying tax (depending on taxability of money in the funds)?
There is nothing in the Income Tax Act that would prevent someone from withdrawing amounts from a pension or RRSP, although they may be prevented by something else, such as, the terms of the plan or pension legislation. If amounts are withdrawn in 1998, they will be taxed in accordance with the position described in 8 above.
11. How will the RSP contribution limits be set if 1998 income was non-taxable?
Basically RRSP contribution limits are based on the earned income of the preceding year. Earned income is defined in subsection 146(1) of the Income Tax Act to include a taxpayer's income from an office or employment and from a business carried on by the taxpayer. It is the Department's position that where section 87 of the Indian Act exempts an amount from income it is not included in earned income. Consequently, if an Indian's 1998 income was exempt, it would not generate any RRSP deduction room for 1999 and subsequent years. This is similar to a taxpayer entering the workforce for the first time; no RRSP contributions can be deducted against the first year's income.
12. If an individual contributes non-taxable dollars to a severance or retiring fund for 'x' amount a year and then starts to withdraw those funds after 12/31/98 how is this money taxed? Number of years contributed, number of years exempt? All exempt? All taxable? Will a transition period be established? Pro-rated?
There is not sufficient information as to how the funds will be held to respond. Generally, however, the fact that money was put aside while an Indian was eligible for the section 87 exemption and the money was not taxed when earned because of this exemption will have no bearing on any exemptions from tax after 1998.
13, 14, 15 These questions apply to GST so we have not prepared an answer.
Roberta Albert, C.A.
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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