16 January 2002 External T.I. 2001-0116045 - TRUSTS/FIRST NATIONS/T3 RETURNS

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Is a trust required to file a T3 return when subsection 75(2) applies to deem the income/loss or capital gains/capital losses of the trust to be income of a Band which is exempt from tax pursuant to paragraph 149(1)(c)?

Position: A T3 may be required.

Reasons: Subsection 150(1) and regulation 204(1) require a trust to file a T3 return. The T3 guide suggests that the CCRA will not require a T3 return to be filed when certain conditions have been met. The fact that a Band would be the beneficial owner of the property held by the trust will not, in and by itself, exempt the trust from filing a T3 return.

		2001-011604
XXXXXXXXXX 	Karen Power, CA
(613) 957-8953
January 16, 2002

Dear XXXXXXXXXX:

Re: Requirement to File a T3 Return

This is in reply to your letter of December 21, 2001, wherein you requested our views regarding whether a trust would be required to file a T3 return in a particular situation.

A First Nation Band (the "Band") is considered to be a public body performing a function of government in Canada within the meaning of paragraph 149(1)(c) of the Income Tax Act (the "Act") and, accordingly, no tax is payable under Part I of the Act by the Band on its taxable income for any period in which it continues to meet the requirements of this paragraph. The Band may establish a trust (the "Trust") for the future benefit of members of the Band. The Band will settle the Trust with some of its revenues from a business operated on the reserve. The Band will be the Trust's sole contributor, sole beneficiary and will retain the right to cause the property of the Trust to revert back to the Band at any time. The trustees will have no significant powers or responsibilities; their only function will be to hold legal title to the trust assets. You are of the view that subsection 75(2) of the Act would apply to the Trust. You ask whether the Trust would be required to file T3 returns.

Our Comments

As explained in Information Circular 70-6R4, it is not the Canada Customs and Revenue Agency's ("CCRA") practice to comment on proposed transactions other than in the form of an advance income tax ruling. Taxpayers seriously contemplating a proposed transaction are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Consequently, we can only provide you with the following general comments.

Subsection 75(2) of the Act will apply where the terms of a trust are such that the property held by the trust may revert to the person that contributed the property to the trust (the "Contributor"), the property held by the trust may be distributed to beneficiaries determined by the Contributor at a time after the trust was created, or the property held by the trust may only be disposed of with the consent of the Contributor or in accordance with the Contributor's direction. Where subsection 75(2) of the Act applies, any income or loss from the property held by the trust and any taxable capital gains or allowable capital losses from the disposition of any of the property held by the trust will be attributed to the Contributor while the Contributor exists and is resident in Canada.

In our view, where subsection 75(2) of the Act applies to attribute income to a person, that income is never income of the trust for tax purposes and consequently it is not taxable in the hands of the trust nor can it be paid or payable to any beneficiary of the trust for the purposes of subsection 104(13) of the Act. The attributed income becomes capital of the trust and distributions of this capital by the trust are generally not taxable. However, any income earned on this attributed income will not itself be attributable to the individual and will therefore generally be taxable to the trust to the extent that it is not paid or payable to any or all beneficiaries of the trust pursuant to subsection 104(13) of the Act.

A trust is required to file a T3 when it satisfies certain conditions. These conditions are described on page 10 of the T3 Guide. In the situation you describe, it is foreseeable that one or more of the conditions described therein could exist thereby requiring the filing of a T3 Return. This would be the case if the Trust has disposed of a capital property or if the Trust earns income on reinvested attributed income to which subsection 75(2) does not apply. The fact that a Band would be the beneficial owner of the property held by the Trust will not, in and by itself, exempt the Trust from filing a T3 return.

We trust our comments will be of assistance to you. These comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R4 titled Advanced Income Tax Rulings, dated January 29, 2001.

Yours truly,

Mickey Sarazin, CA
Manager, Aboriginal Affairs Section
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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