21 November 1990 Income Tax Severed Letter

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.

Gregor MacIntosh
Director General
Registration, Revenues and              5-903147
Band Governance                         W.P. Guglich
Indian and Northern Affairs Canada      (613) 957-2102
Ottawa, Ontario
K1A 0H4

November 21, 1990

Dear Mr. MacIntosh:

This is in reply to your letter of November 16, 1990, concerning the income tax treatment of moneys held, pursuant to section 51 of the Indian Act by the Minister in the Consolidated Revenue Fund (CRF), on behalf of mentally incompetent Indians who are ordinarily resident on a reserve.

Section 51 of the Indian Act vests exclusively in the Minister all jurisdiction and authority in relation to the property of the mentally incompetent Indian. However, we understand that the properly itself is not vested in the Minister. The incompetent Indian would appear to retain beneficial title to the property (even though it is held and administered by the Minister in the CRF). As a result any moneys held by the Minister in the CRF pursuant to section 51 of the Indian Act would not be considered "public money" as defined in section 2 of the Financial Administration Act in that it does not belong to Canada. Such moneys could, however, be considered "Indian moneys" as defined in section 2 of the Indian Act in that the moneys are held by Her Majesty for the use and benefit of the incompetent Indian.

It is our view that section 51 does not establish a common law trust in that the Minister would not be a true trustee, especially since specific legislation provides for the vesting of all jurisdiction and authority in relation to the property and there is no mutual consent necessary to establish a trust. In the Guerin v. R. case the majority decision held that although the Crown's fiduciary obligations to the Indian Band as set out in subsection 18(1) of the Indian Act were trust like in character the arrangement was not a trust. The Crown's fiduciary obligations set out in subsections 18(1) and 61(1) of the Indian Act respecting reserves and Indian moneys are identical.

We understand you are dealing with a case

          24(1)

Our Department's position regarding the tax treatment of amounts received as damages in respect of personal injury is contained in paragraph 2 of Interpretation Bulletin IT-365R2 . In our view all amounts received by the incompetent minor child that qualify as special or general damages for personal injury will be excluded from income regardless of whether the moneys are held by the Minister in the CRF, or by the child's parents for the use and benefit of the child. Examples of special damages are compensation for: (i) out-of-pocket expenses such as medical and hospital expenses, and (ii) accrued or future loss of earnings. Examples of general expenses are, compensation for: (i) pain and suffering, (ii) the loss of the amenities of life, (iii) the loss of earning capacity, (iv) the shortened expectation of life, and (v) the loss of financial support caused by the death of the supporting, individual. A copy of IT-365R2 is enclosed.

The tax treatment of the interest subsequently earned in respect of the above insurance moneys (held in the CRF by the Minister or by the child's parents) is dependent on the provisions of section 87 of the Indian Act. Since paragraph 87(b) of the Indian Act exempts from taxation "the personal property of an Indian or band situated on a reserve", the key factor in determining whether or not interest income relating to the moneys held in the CRF is taxable or exempt is the location where the income is earned. If the CRF is located on the reserve the income would be considered to be earned on a reserve and would not be taxable. However, if the CRF is located off the reserve the income would be considered, to be earned away from the reserve and would be taxable. It is our understanding that

          24(1)

although you may wish to ------ --- ------------ regarding this point. It follows that if the child's parents hold the insurance moneys on deposit at a financial institution situated on the reserve the interest thereon would be considered earned on the reserve and therefore would be exempt. On the other hand if they were to hold it on deposit at a financial institution situated off the reserve any interest earned would be taxable.

There is an exception to the general position described above in that if the insurance moneys are received as an award of, or pursuant to an action for, damages in respect of physical or mental injury to the child the interest income thereon would be exempt, under paragraphs 81(1)(g.1)

and 81(1)(g.2) of the Income Tax Act, up to the and of the taxation year in which the child attains the age of 21 years regardless of whether the income is earned on or off the reserve. This is discussed in paragraph 6 of IT-365R2 .

We trust this will be of assistance to you.

Yours truly,

R.J.L. Read Director General Rulings Directorate Legislative and Intergovernmental Affairs Branch