Principal Issues: 1. Is the First Nation a public body performing a function of government pursuant to 149(1)(c)? 2. Is income from the limited partnership exempt from the geographical restrictions of 149(1)(d.5)?
Position: 1. Yes. The First Nation appears to be a public body performing a function of government and is therefore exempt from tax per 149(1)(c). 2. Yes. The geographical restriction on income applies to corporations owned by the public body performing a function of government, but does not apply to partnerships.
Reasons: 1. The FN has negotiated settlements with the government of Canada and provides extensive public works and other services to its members. 2. The geographical restriction on income applies to corporations, commissions or associations owned by a public body performing a function of government per 149(1)(d.5) as proposed, and effective May 8, 2000. Partnerships are not specified as an entity in the provision and are therefore not subject to the restriction. Income earned by partnerships flows to the partners.
September 15, 2009
Audit Division Headquarters XXXXXXXXXX TSO Income Tax Rulings P. Burnley Attention: XXXXXXXXXX (613) 957-2100
2009-031085
Business Income Earned by the XXXXXXXXXX First Nation (the "FN")
This is in response to your memorandum of February 9, 2009, regarding the business income earned by the FN, specifically with respect to the group of companies known as the XXXXXXXXXX The FN earns business income through several limited partnerships, some of which are also involved in joint ventures. Specifically, you have asked if we agree with your conclusions that the FN is a public body performing a function of government pursuant to paragraph 149(1)(c) of the Income Tax Act (the "Act") and that the restrictions imposed by paragraph 149(1)(d.5) do not apply to the income earned by the FN due to the particular business structure.
We have not reviewed, nor are we commenting on all of the Limited Partnership Agreements, the Minute Book Reviews, the Financial Statements of the Companies, the Joint Venture Agreements, or the various other schedules sent with the file.
Paragraph 149(1)(c) - Public Body Performing a Function of Government
As you know, whether an Indian band is a public body performing a function of government for purposes of paragraph 149(1)(c) of the Act is a question of fact.
An Indian band is considered to be a public body performing a function of government if it meets certain conditions:
- The Indian band has passed by-laws under both sections 81 and 83 of the Indian Act, or section 81 of the Indian Act and section 5 of the First Nations Fiscal and Statistical Management Act; or
- The Indian band has reached an advanced stage of development as was formerly required by section 83 of the Indian Act; or
- The Indian band demonstrates that it performs functions and provides services in a manner generally exhibited by a government.
Examples of situations where the Canada Revenue Agency considers an Indian band to be performing a function of government are as follows:
1. The existence of comprehensive Health Services Transfer Agreements, between Her Majesty the Queen in Right of Canada and the Indian band. These agreements provide for the transfer of control of health programs and services and associated resources from the Minister of Health (Health Canada) to the Indian band.
2. The Indian band provides elementary and secondary education in band-operated schools.
3. The Indian band has been involved in the negotiation of a settlement agreement with Canada and will continue to be involved in the administration and implementation of the settlement agreement.
4. The Indian band provides and administers public works, social services and infrastructure programs for its members. Examples of this may include: maintenance and development of capital infrastructure, existence of family support and community services, provision of a water treatment and delivery system, fire and police protection and medical services.
You have stated that the FN is a community of approximately XXXXXXXXXX members. The FN receives a portion of its revenues through funding arrangements with Indian and Northern Affairs Canada, XXXXXXXXXX . As indicated in the XXXXXXXXXX FN financial statements, the FN received $XXXXXXXXXX as a result of the "XXXXXXXXXX ".
The financial statements of the FN indicate expenditures of over $XXXXXXXXXX and $XXXXXXXXXX for fiscal years XXXXXXXXXX and XXXXXXXXXX , respectively, for education, social development, operations and maintenance, housing and capital projects, government support and administration, economic development, land trusts and claims and community health services. You have also indicated that the FN has a large public works department and administration offices on reserve. The administration offices house the FN governance activities, a medical centre, a training facility and fitness gym, the corporate headquarters of several of the FN's businesses and some commercial tenants.
You did not verify whether the FN has approved bylaws under sections 81 and 83 of the Indian Act; however, you have indicated that you are comfortable that for the years in question, the FN meets the criteria to be considered a public body performing a function of government. Based on the facts that you have discussed with us and the amounts reported in the financial statements for the years in question for the FN, we are also of the opinion that the FN is a public body performing a function of government as described in paragraph 149(1)(c) of the Act.
Paragraph 149(1)(d.5)
In Tawich Development Corporation v. Deputy Minister of Revenue of Quebec, [1997] 2 C.N.L.R. 187 (Que. Civil Chamber), aff'd 2001 D.T.C. 5144 (Que. C.A), the court held that the status of "municipality" could only be achieved as a result of statute, letters patent or order. As a result of this decision, it was determined that an Indian band cannot be considered a municipality in Canada for purposes of paragraph 149(1)(c) of the Act solely on the basis of its governance structure and activities. Subsequently, amendments were proposed to paragraphs 149(1)(d.5), (d.6) and subsections 149(1.2) and (1.3) of the Act which would allow those provisions to apply to public bodies performing a function of government, applicable for taxation years beginning after May 8, 2000. These amendments are not yet law.
In general, and subject to proposed subsections 149(1.2) and (1.3) of the Act, if 90% or more of the shares or capital of a corporation are owned by an Indian band that is exempt from tax pursuant to paragraph 149(1)(c) of the Act, then in order for that corporation's income from a particular year to be exempt under proposed paragraph 149(1)(d.5) of the Act, no more than 10% of its income for the year can be from activities carried on outside the Indian band's geographical boundaries. The Technical Notes to proposed subsection 149(11) of the Act explain that if a particular Indian band is a public body performing a function of government for purposes of paragraph 149(1)(c), the geographical boundaries in paragraph 149(1)(d.5) would be the boundaries of its reserve as defined in the Indian Act.
You have indicated in your notes that the majority of the business activities of the FN are not carried out within the geographical boundaries of the reserve. Therefore, we agree with you that income earned by corporations carrying out these business activities would likely not be exempt from tax by virtue of proposed paragraph 149(1)(d.5) of the Act.
Limited Partnerships
In general, income and losses of limited partnerships ("LP's") flow to the partners and are taxed in the hands of the partners in proportion to their ownership in the LP. In the FN structure, the XXXXXXXXXX (the "Trust") is the limited partner of each LP, holding XXXXXXXXXX % of the outstanding units of the LP. The general partner of each LP, owning XXXXXXXXXX % of the outstanding units of the LP, is a corporation owned by the FN.
In 1998, paragraph 149(1)(d) of the Act was amended and split into paragraphs 149(1)(d.1) to 149(1)(d.6). The Department of Finance Press Release 97-117, released on December 8, 1997, explained:
"The income tax rules dealing with the tax exemption granted to municipal corporations are being modified to prevent situations where effective control of such corporations could be in the hands of someone other than the municipality, and to prevent municipally owned corporations from competing in commercial activities on a tax-free basis outside the municipal boundaries."
Currently, partnership income earned by a public body performing a function of government flows directly to the public body and is exempt from tax. This income is not caught by the geographical boundary restrictions in paragraph 149(1)(d.5) of the Act, which appear to be specifically directed toward income earned through corporations, commissions or associations.
The LP agreement (the "XXXXXXXXXX "), specifies that net income is distributed on a per unit basis, and therefore, XXXXXXXXXX % of the net income of the business is allocated to the Trust. It is always a question of fact whether an allocation of partnership income is reasonable and will not trigger the application of subsections 103(1) and (1.1) of the Act. We have not reviewed whether the allocation of partnership income is reasonable in this situation.
Trust Structure, Promissory Notes and Payments
The FN is the settlor and beneficiary of the Trust and the XXXXXXXXXX is the trustee. Paragraph XXXXXXXXXX of the "Trust Deed" specifies that
"XXXXXXXXXX ..."
Paragraph XXXXXXXXXX of the Trust Deed states that the "XXXXXXXXXX ...".
You have stated that the Trust has not made cash distributions of income to the FN. The allocations from the Trust to the FN were made by way of promissory notes and the amounts were then loaned back by the FN to the Trust. A trust is a taxable entity under the Act. Various deductions are available to trusts but net income in the trust is generally taxable in the trust unless it is paid or payable to the beneficiaries as set out in subsections 104(6) and 104(24) of the Act. In the present situation, the Trust has been deducting the allocations to the FN so that the Trust has been reporting no taxable income. It is not clear whether allocations made in the manner described in paragraph XXXXXXXXXX of the Trust Deed are considered to be paid or payable in the calendar year.
XXXXXXXXXX
XXXXXXXXXX
We trust that these comments will be of assistance.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Eliza Erskine
A/Manager
Non-Profit Organizations and Aboriginal Issues
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch