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:
General discussion of paragraph 149(1)(d.5). How does paragraph 149(1)(d.5) apply in various examples.
1) Would corporations filing tax returns in Quebec be exempt from tax pursuant to 149(1)(c)?
2) Would a First Nations geographical boundary be limited to its own reserve?
3) Can a Tribal Council be considered a municipality in Canada?
Position:
1) No,
2) Yes
3) No position given.
Reasons: 1) The Tawich position disagreed with the Otineka case and concluded that an Indian Band could not be considered a municipality for purposes of paragraph 149(1)(c) of the Act.
2) In the case of a First Nation that is a municipality, the geographical boundaries would encompass the First Nation's reserve lands and would not include other reserves
3) This issue has not been addressed by the Agency. We have not been provided sufficient information on which to make a determination.
2000-002055
XXXXXXXXXX Karen Power, CA
(613) 957-8953
Attention: XXXXXXXXXX
May 11, 2000
Dear Sir/Madam:
Re: First Nation Owned Municipal Corporations
We are writing further to the April 14, 2000 meeting between XXXXXXXXXX, Canada Customs and Revenue Agency ("CCRA") and the Department of Finance, in which the CCRA agreed to provide you with written comments on seven separate municipal-owned corporation examples.
For taxation years and fiscal periods that begin after 1998, a corporation may be exempt from Part I tax on its taxable income for a particular period under paragraph 149(1)(d.5) of the Income Tax Act (the "Act") if not less than 90% of its capital is owned by one or more municipalities in Canada and the income of the corporation from activities carried on outside the geographical boundaries of the municipalities does not exceed 10% of its income for the period.
In our view, in the case of an Indian band that is a municipality, geographical boundaries would encompass reserve lands. Reserve lands are defined for purposes of the Indian Act to include any settlements deemed to be reserves for purposes of the Indian Settlements Remission Order and any other areas given similar treatment under federal legislation.
Paragraph 149(1)(d.5) of the Act is subject to subsections 149(1.2) and (1.3) of the Act. Subsection 149(1.2) of the Act excludes certain income from the determination of whether more than 10% of the income of a corporation is derived from activities carried on outside the geographical boundaries of the municipality or municipalities that own the corporation. Specifically, income derived from activities carried on pursuant to an agreement in writing with Canada, a province, or a municipality, within its geographical boundaries, is not included in the determination. Subsection 149(1.3) of the Act provides that 90% of the capital of a corporation that has issued share capital is to be considered to be owned by one or more municipalities only if the municipalities are entitled to at least 90% of the votes associated with the shares of the corporation.
As indicated above, in order for a corporation owned by an Indian band to qualify for the exemption under paragraph 149(1)(d.5) of the Act, the Indian band would have to qualify as a municipality in Canada. In our view, having passed bylaws under sections 81 and 83 of the Indian Act would not be sufficient to have the Indian band considered to be a municipality for purposes of paragraph 149(1)(d.5) of the Act.
In the 1994 case of Otineka Development Corporation Limited and 72902 Manitoba Limited v. Her Majesty the Queen (94 DTC 1234), the Tax Court of Canada concluded that, since there is no definition of a "Canadian municipality" in the Act, the term must be given its ordinary meaning and is not to be solely determined by the provincial legislation governing municipalities. In the Court's views, the powers conferred under the Indian Act and their exercise by The Pas Indian Band created a form of self-government that is an essential attribute of a municipality. In that case, the band had passed by-laws to regulate water, garbage disposal, weed control, domestic animal control, law and order, the provision of housing and other by-laws. It also provided services to band members in areas such as education, health care, social services, employment and training services, counselling and economic development. In the end, the Court concluded that the band was a municipality for the purposes of former paragraph 149(1)(d) of the Act (the relevant section prior to the enactment of paragraph 149(1)(d.5) of the Act) and that corporations owned by the band were exempt from taxation as municipally-owned corporations. In our view, for an Indian band to be considered a municipality in Canada, it would have to demonstrate that it fits within the facts of the Otineka case. (The Supreme Court of Quebec in a 1996 capital tax decision of Tawich disagreed with this position but until, and if, a higher Federal Court looks at this issue, the Agency will follow the Otineka decision.)
Case #1 & #2
- A First Nation 100% owned-entity
- Federally or provincially registered
- Operates 100% on-reserve
- Generates a surplus or profit
Provided that the First Nation is itself exempt under paragraph 149(1)(c) of the Act as a municipality in Canada, based on the facts presented the 100% owned-entity would likely be exempt from taxation pursuant to paragraph 149(1)(d.5) of the Act.
It is also likely that a 100% owned-entity would be exempt from provincial income taxes in all provinces other than Quebec. Corporations filing income tax returns in the province of Quebec would likely not be exempt from provincial income taxes due to the Tawich decision discussed above. Corporations which are filing tax returns in provinces which collect their own taxes (i.e. Ontario & Alberta) should contact the province to determine whether they are following the Otineka or Tawich decision.
When a corporation's tax status changes from exempt to non-exempt (or vice versa), the corporation is treated as if it had begun a new existence. A year-end is deemed to occur at the time of the change. At that time, the corporation is deemed to have disposed of all its property at fair market value and immediately reacquired it at that fair market value. In the above example, in certain situations, the entity's Federal tax status may be different from its tax status in Quebec (and perhaps in other provinces which collect their own taxes).
Case #3 (a)
- A First Nation owned entity
- Provincially registered
- Operates a milk run on and off reserve in a proportion of 10%-90%
- The entity may have the following structures:
i. The entity is a not-for-profit entity and any surplus generated is reinvested in new entities owned by the community or in the housing program.
ii. The entity is a for profit entity and any profit is reinvested at 60% and re-distributed in community program.
In order for a corporation to be exempt from taxation pursuant to paragraph 149(1)(d.5) the income of the corporation from activities carried on outside the geographical boundaries of the municipality must not exceed 10% of its income for the period. In the above examples (both i. & ii.), it is likely that more than 10% of the corporation's profits are related to activities carried on outside the reserve boundaries as 90% of the milk run takes place off reserve.
Paragraph 149(1)(d.5) does not contain an object or purpose requirement, as a result, whether the entity operates for profit or as a non profit entity and how the profit is distributed will not bear any relevance in the determination of whether the entity may be exempt from taxation under this paragraph.
However, these factors may be relevant in determining whether the entity may be exempt from taxation pursuant to paragraph 149(1)(l) of the Act. In order for a corporation to be exempt under paragraph 149(1)(l), inter alia, it must be organized as well as operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit and no part of its income may be payable to or otherwise available for the personal benefit of any of its members or shareholders. To establish the purpose for which a corporation was organized, the CCRA will normally look to the instruments by which it was created such as letters patent and articles of incorporation. Whether or not a corporation was operated for such purposes is a question of fact that can only be determined retrospectively based on a review of its operations in the period concerned.
Paragraph 149(1)(l) contemplates that an organization may carry on income generating activities and earn income and still qualify for exempt status provided that there is a causal relationship between the profit making activity and the exempt purpose of the organization. That is, the income generating activity cannot be the principal activity of the corporation and must be carried on, and the resulting income must be used, by the corporation to achieve its declared exempt objectives. It is a question of fact whether such a relationship exists. In this regard, we refer you to the case of Gull Bay Development Corporation v. Her Majesty the Queen (84 DTC 6040).
When an organization that otherwise qualifies as a non-profit organization proposes to engage in an unrelated profit making enterprise, in our view, if the organization were to carry out this unrelated activity in a taxable, wholly-owned corporation and this corporation were to pay dividends out of its after-tax profits to the organization to enable the organization to carry out its non-profit activities, the organization may qualify as a non-profit organization as set-out in paragraph 149(1)(l) of the Act.
Case #3 (b)
- A First Nation owned entity
- Provincially registered
- Provides garbage collection for another municipality (100% of activities carried on outside of the reserve)
As discussed above, subsection 149(1.2) of the Act excludes certain income from the determination of whether more than 10% of the income of a corporation is derived from activities carried on outside the geographical boundaries of the municipality or municipalities that own the corporation. Specifically, income derived from activities carried on pursuant to an agreement in writing with Canada, a province, or a municipality, within the geographical boundaries of Canada, the province or the municipality, respectively, is not included in the determination.
Provided that the First Nation is considered a municipality in Canada pursuant to paragraph 149(1)(c) of the Act and the First Nation has entered into an agreement in writing with the other municipality regarding the garbage collection activities such that the exemption in subsection 149(1.2) applies, paragraph 149(1)(d.5) may exempt the First Nation owned entity from income tax.
Case #4
- A corporation jointly owned by the provincial gaming authority and a First Nation, or several First Nations or a Tribal Council.
- Operates 100% on reserve
- Generates a surplus or profits
- Promotional activities are taking place off reserve to create the traffic necessary for the gaming authority.
- A satellite site is located off reserve.
The above corporation may be exempt from taxation pursuant to paragraph 149(1)(d.3) of the Act. Subparagraph 149(1)(d.3)(ii) provides a tax exemption where 90% of the corporation's capital is owned by one or more municipalities in Canada in combination with one or more persons each of which is Her Majesty in right of Canada or a province or a person to which paragraph 149(1)(d) or (d.2) applies. Paragraph 149(1)(d) of the Act exempts corporations owned by Her Majesty in right of Canada or a province from tax payable under Part 1 of the Act, while paragraph 149(1)(d.2) will exempt a corporation which is wholly-owned by a corporation, commission or association to which paragraph 149(1)(d) or (d.2) applies. Paragraph 149(1)(d.3) of the Act does not contain a geographical boundaries test. Thus provided the provincial gaming authority is exempt from taxation by virtue of paragraph 149(1)(d) or (d.2) and the First Nation or First Nations are considered municipalities pursuant to paragraph 149(1)(c), the corporation would be exempt from taxation by virtue of paragraph 149(1)(d.3) regardless of the income earned from activities carried on outside the geographical boundaries.
As discussed in our earlier meeting, the CCRA has not published an opinion on whether a Tribal Council, on its own, may be considered a municipality in Canada. We have not been provided with sufficient documentation at this time to provide our comments on whether a Tribal Council may be a municipality exempt from tax under paragraph 149(1)(c) of the Act. In order to make such a determination, the CCRA would require information on the organization of the Tribal Council and indications that it provides substantially the same services to its members as any municipality in Canada of comparable size. A review must be made of all the relevant facts and circumstances.
Should you wish to provide us with a written submission relating to an existing Tribal Council, we would be pleased to provide you with our comments.
Case #5
- A First Nation 100% owned entity
- Operating 100% on reserve, but not the First Nation's reserve
- Would the answer change if the entity was a non profit entity?
- Would the answer change if the object of the corporation is to support the economic and social development of the community by reinvesting all the surplus in the housing program, the economic development program or in training for individuals?
In order for a corporation to be exempt from taxation pursuant to paragraph 149(1)(d.5), the income of the corporation from activities carried on outside the geographical boundaries of the municipality must not exceed 10% of its income for the period. In the case of a First Nation that is a municipality, the geographical boundaries would encompass the First Nation's reserve lands and would not include other reserves. However, if the First Nation has entered into an agreement in writing with the other municipality regarding the activities carried out on the other reserve, such that the exemption in subsection 149(1.2) applies, paragraph 149(1)(d.5) may exempt the entity from income tax.
As mentioned in case #3 (a) paragraph 149(1)(d.5) does not contain an object or purpose requirement; as a result, whether the entity operates for profit or as a non profit entity and how the profit is distributed will not bear any relevance in the determination of whether the entity may be exempt from taxation under this paragraph.
Case #6
- A corporation jointly owned by a First Nation and a private entrepreneur
- The private entrepreneur owns 10% of the corporation
- The operation is on and off reserve
- 95% of the corporation's net income originates from on reserve activities while the remaining net income is generated from off reserve activities
Paragraph 149(1)(d.5) of the Act requires that not less than 90% of the corporation's capital be owned by one or more municipalities in Canada. This requirement would appear to be met in the above example. In addition, the 10% income requirement appears to have been met since 95% of the corporation's net income is generated from on reserve activities. Thus, provided the First Nation is considered a municipality in Canada, it is likely that the corporation would be exempt pursuant to paragraph 149(1)(d.5) of the Act.
Case #7
- A corporation jointly owned by many First Nations.
- The corporation invests in and operates multiple investments on and off reserve.
- The corporation's head office is on reserve.
- Active management of different corporations is taking place from head offices and director's meetings which are held on reserve.
- Operation results are as follows:
i. Revenues from off reserve activities account for 55% of the corporation's activities, but generate a net loss. Overall, the company is profitable.
ii. Revenues from on reserve activities account for 90% of the company's activities, but generate only 5% of net income. Overall, the company is profitable.
Example 7 (i) would appear to meet the 10% income test; thus, provided that 90% of the corporation's capital is owned by one or more First Nations which are considered municipalities in Canada, the corporation would be exempt from taxation pursuant to paragraph 149(1)(d.5) of the Act.
In example 7 (ii), the 10% income requirement has not been met and, as a result, the corporation would not be exempt from taxation pursuant to paragraph 149(1)(d.5) of the Act. In such a situation, the corporation may consider incorporating the off reserve activities into a separate entity to ensure that the on reserve activities maintain their tax exemption.
We trust our comments will be of assistance to you.
Yours truly,
Roberta Albert, CA
For Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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