11 September 2002 Internal T.I. 2002-0160977 - INDIAN BAND, XXXXXXXXXX

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: Various questions concerning payments to Indian bands.

Position: General responses provided to the questions.

Reasons: Cannot deal with specific questions because they involve a specific taxpayer and there is no approval from the taxpayer to discuss tax related information.

Reply sent by Electronic Mail

Questions:

Tax Status of XXXXXXXXXX

Question 1

Is the XXXXXXXXXX presently exempt from income tax (e.g. section 149 of the Income Tax Act (the "Act")), prior to being recognized as a reserve?

Response

We are not at liberty to discuss the tax status of any specific taxpayer. Consequently, we cannot discuss the specifics relating to the XXXXXXXXXX without its consent.

Section 149 of the Act provides exemptions from taxation for certain corporations, trusts, individuals and other entities.

The provision that is most likely to apply to an Indian band is paragraph 149(1)(c) of the Act. Generally, Indian bands, as defined in subsection 2(1) of the Indian Act that perform a function of government may be exempt from taxation under paragraph 149(1)(c) of the Act. Previously, the CCRA would only consider an Indian band as a public body performing a function of government when one of the following conditions was met:

· the Band had passed by-laws under both sections 81 and 83 of the Indian Act; or

· the Band had reached an advanced stage of development as was formerly required by section 83 of the Indian Act.

More recently, the CCRA has taken the position that Indian bands that do not meet either of these requirements can be considered on a case-by-case basis to determine whether the band performs a function of government such as negotiating and implementing Treaty Land Entitlements. Whether a particular entity would qualify as an Indian band and whether the particular entity would be exempt from tax under section 149 of the Act are questions of fact.

Under subsection 2(1) of the Indian Act, a band is defined as a body of Indians

(a) for whose use and benefit in common, lands, the legal title to which is vested in Her Majesty, have been set apart before, on or after September 4, 1951,

(b) for whose use and benefit in common, moneys are held by Her Majesty, or

(c) declared by the Governor in Council to be a band for the purposes of this Act.

Question 2

If the XXXXXXXXXX eventually received reserve status, what effect would that have on the answer to the first question ?

Response

Again, we are not at liberty to discuss the tax status of any specific taxpayer. Consequently, we cannot discuss the specifics relating to the XXXXXXXXXX without its consent.

A "reserve" is defined in subsection 2(1) of the Indian Act to mean

(a) a tract of land, the legal title to which is vested in Her Majesty, that has been set apart by Her Majesty for the use and benefit of a band, and

(b) except in subsection 18(2), sections 20 to 25, 28, 36 to 38, 42, 44, 46, 48 to 51, 58 to 60 and the regulations made under any of those provisions includes designated lands.

Where a tract of land receives reserve status, the Indian band for which the tract of land has been set apart by Her Majesty would have to qualify as a band as defined in subsection 2(1) of the Indian Act. If this is the case, the general comments provided in our response to Question 1 would apply.

Tax Status of XXXXXXXXXX Payments

Question 3

Are payments under an XXXXXXXXXX generally taxable or exempt? What are the considerations (e.g. capital vs. income)?

Response

The determination of whether payments under an XXXXXXXXXX would constitute capital or income payments or whether the payments would be taxable or exempt would require a review of all of the facts, including the terms of the particular agreement.

Generally, when payments are made to an Indian band, the payments are exempt from income taxes because the band is exempt from taxation under paragraph 149(1)(c) (as discussed in our response to Question 1 above). In these situations, there is no need to determine whether the payments would constitute capital or income.

Question 4

Would the location of the resource covered under the XXXXXXXXXX (i.e., on or off reserve) affect the taxation of payments received under an XXXXXXXXXX?

Response

Where the Indian band is exempt from taxation under paragraph 149(1)(c) of the Act, the location of the resource covered under the XXXXXXXXXX would not affect the taxation of the payments.

Where the Indian band is not exempt from taxation under paragraph 149(1)(c) of the Act and the band is relying on the exemption under section 87 of the Indian Act, the location of the resource covered under the XXXXXXXXXX will affect the taxation of amounts received. Under paragraph 87(b) of the Indian Act, the personal property of an Indian or a band situated on a reserve is exempt from taxation. The location of the resource would have to be on the reserve to qualify for this tax exemption. We note that the courts have previously determined that, for purposes of section 87 of the Indian Act, personal property includes income.

Question 5

Are there ways for an Indian Band to transfer payments received under an XXXXXXXXXX to the members of the band on a tax-exempt basis?

Response

The determination of whether amounts paid to members of an Indian band by the Indian band would be tax exempt is a question of fact. However, payments received by an Indian band under an XXXXXXXXXX would become capital of the Indian band and this could be distributed to the Indian band members on a tax-exempt basis.

General

Question 6

What would be the parameters and or detail (checklist?) necessary for us to provide CCRA in order to receive an advance ruling respecting such payments? How long would such a ruling take to obtain?

Response

Written confirmation of the tax implications inherent in particular transactions is given by the Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. A copy of the Information Circular is available on the CCRA website at - http://www.ccra-adrc.gc.ca/formspubs/menu-e.html.

The time that it will take to process an advance income tax return will depend on the adequacy of the submission, the complexity of the issues involved and the number of advance rulings that are being processed at the time of the submission. Rulings are given priority over other files and the Directorate tries to issue rulings within 60 days of the receipt of the ruling request.

Question 7

Outside of section 149 of the Act, are there other sections that may allow for tax free payments under an XXXXXXXXXX?

Response

As noted in our response to Question 4 above, paragraph 81(1)(a) of the Act and section 87 of the Indian Act provide an exemption for an Indian or an Indian bands' personal property situated on a reserve. Whether payments under an XXXXXXXXXX would constitute personal property situated on a reserve is a question of fact. We would have to review all of the connecting factors to determine whether the payments would be connected to a reserve. In this regard, you may want to review the Supreme Court of Canada decision in Williams v. The Queen (92 DTC 6320) wherein it was determined that the proper approach in determining the situs of personal property is to evaluate the various connecting factors that tie the property to one location or another. The taxation of an Indian's business income is dealt with in the case of Henry Southwind v. Her Majesty the Queen (98 DTC 6084) and the taxation of investment income is dealt with in the case of Recalma v. Her Majesty the Queen (98 DTC 6238).

Question 8

Are there any policy or administrative precedents that would allow for payments under an XXXXXXXXXX to be tax exempt?

Response

We have only provided one ruling in respect of an XXXXXXXXXX and we are unable to discuss the particular ruling without the consent of the taxpayer. Consequently, we are unable to provide any comments.

Question 9

Are there any CCRA interpretations, or other information which may help us to understand the above issues?

Response

Interpretations involving the application of the various provisions described in our responses above will be provided by electronic mail by our Access to Information group. This will be done separately.