XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sirs:
RE: Taxation of Status Indians
This is in reply to your facsimiled memorandum of November 6, 1992, requesting a written "ruling" on an article by Robert Strother and Robert A. Brown which appeared in the May 1992 Prairies Regional Conference report of the Canadian Tax Foundation.
Advance Income Tax Rulings provide confirmation of the tax consequences of proposed transactions to specific taxpayers and will only be given by the Department in response to an advance income tax ruling request prepared in accordance with the procedures set out in Information Circular 70-6R2 dated September 28, 1990 and the related Special release dated September 28, 1992. We will however provide you with general comments which should not be construed as relating to a specific fact situation.
The excerpt you requested our views on follows:
"The investment income of a band or an Indian may be sheltered from taxation otherwise than through the use of the section 87 exemption. For example, income may be earned by a trust, the sole beneficiary of which is a non-profit organization established for the general benefit of the band and its members to supplement education benefits, to provide housing grants or loans, to provide low- or no-interest loans or grants for venture capital or economic development, or to provide or supplement old-age assistance payments), neither the accumulating income earned by the trust nor the distributions should be subject to taxation. The trust format also has the potential for sheltering income in the form of interest, dividends, or rent. If such income is received by a trust situated on a reserve, and if the beneficiaries of the trust are Indians or a band, a strong argument can be made that the income is situated on a reserve by virtue of the fact that, pursuant to paragraph 108(5)(a) of the Income Tax Act, the income is income from an interest in a trust, the situs of which is on a reserve."
Our Comments:
Trusts for the Benefit of and Corporations Controlled by Indians or Indian Bands
A trust or a corporation is not an Indian and consequently is not itself exempt from taxation pursuant to section 87 of the Indian Act. A trust or a corporation will be taxable on its income unless otherwise exempt from taxation. If the trust or the corporation is a non-profit organization within the meaning of paragraph 149(1)(l) of the Income Tax Act, it will be exempt from tax except to the extent subsection 149(5) may apply.
Certain trusts or corporations may be exempt from tax (or subject to a special tax regime which generally results in no tax being payable) as a consequence of federal legislation other than the Indian Act. Legislation enacted or to be enacted pursuant to certain Land Settlement Agreements provides an example.
A trust is able to reduce its taxable income to nil if the income of the trust is paid or payable to its beneficiaries.
Investment income earned by an Indian or Indian band directly:
Interest Income
The Department is still of the view expressed in Interpretation bulletin IT-62, that interest on a bank deposit is earned at the location at which the funds are on deposit. Interest other than that earned on a bank deposit is generally considered to be located at the payer's principal place of business.
Dividend Income
Dividends on shares from a company whose head office, principal business activity and share register are on a reserve will generally be exempt.
Capital Gains
A capital gain on an investment of an Indian or an Indian Band will be exempt from tax if the income yielded by the investment would have been considered exempt from tax.
Investment Income Earned by an Indian or Indian Band through a Trust:
Pending further guidance from the Courts, the Department will view the Indian Act exemption (section 87) as applicable to income of an Indian or an Indian Band from a trust where:
(A) the property held by the trust for the benefit of the Indian beneficiary would be exempt from tax if held by the Indian beneficiary directly; or
(B) the trustees of the trust reside on a reserve and a majority of other relevant factors connect the trust to a reserve. Relevant factors could include the residence of the beneficiaries, the source of the capital of the trust (e.g. proceeds of the sale of Indian lands or revenue from resources on Indian lands), or the place where the trust is managed. Other factors may be relevant.
Investment income earned by an Indian band through a non-profit organization:
In order for an organization, owned by an Indian Band, to qualify for exemption under 149(1)(l) of the Act, it must be organized exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit. To establish the purpose for which an organization was organized, the Department will normally look to the instruments by which it was created, such as letters patent, articles of incorporation and so on. For a more complete discussion of this area we refer you to paragraph 5 of Interpretation Bulletin IT-496 (copy enclosed). If a review of these documents reveals that the organization was created for other than one or more of the purposes described above the organization would not qualify as a non-profit organization exempt from tax. Paragraph 149(1)(l) of the Act contemplates that an organization may carry on income generating activities and earn income and still qualify for exempt status. However, the income generating activity must be carried on and the resulting income must be used, by the organization, to achieve its declared exempt objectives. In this regard we refer you to the case of Gull Bay Development Corporation, 84 DTC 6040 where the corporation, in order to achieve the social welfare and civic improvement objectives of the Indian Band Council, operated a logging business. The court held that having the corporation carry on the logging activities was the most efficient way of achieving the Band Council's social welfare and civic improvement objectives.
An organization cannot be exempt from tax pursuant to paragraph 149(1)(l) of the Act if any of the organization's income was payable to or otherwise available for the personal benefit of any proprietor member or shareholder of the organization. The comments in paragraphs 11 and 12 of IT-496 may be relevant.
We trust that the above comments will be of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch