2012-0473041R3 First Nation - Limited Partnership

Principal Issues: Is the income allocated to the First Nation from a limited partnership exempt from tax because the First Nation is a public body performing a function of government?

Position: yes

Reasons: The First Nation is government by an elected chief and band council and has demonstrated that they perform several functions of government. Therefore, the income allocated from the limited partnership is exempt.

Author: XXXXXXXXXX
Section: 149(1)(c)

XXXXXXXXXX
                                                                                                                                                              2012-047304

XXXXXXXXXX, 2014

Dear XXXXXXXXXX:

Re:  Advance Income Tax Ruling – XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-named taxpayer.  We acknowledge your additional submissions of XXXXXXXXXX, as well as various telephone conversations (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request are:

(i)   in an earlier return of the taxpayer or a related person;
(ii)  being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;
(iii) under objection by the taxpayer or a related person;
(iv)  before the courts, or if a judgment has been issued, the time limit for appeal to a higher court has expired; or
(v)   the subject of a ruling previously considered by the Directorate to the taxpayer or a related person.
Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C.  1985, c.1 (5th Supp.), as amended to the date of this letter, (the “Act”), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the relevant definitions, the facts, proposed transactions and the purposes of the proposed transactions is as follows:

DEFINITIONS:

In this letter, the following terms have the following meanings:
a)    “Band” has the meaning provided under section 2 of the Indian Act;
b)    “First Nation” means the XXXXXXXXXX;
c)    “General Partner” means XXXXXXXXXX, whose shares are owned XXXXXXXXXX% by XXXXXXXXXX and XXXXXXXXXX% by the First Nation. 
d)    “Indian Act” means the Indian Act R.S.C. 1985, c.I-5, as amended;
e)    “Limited Partner 1” means XXXXXXXXXX, which was incorporated by the First Nation to act as nominee, bare trustee and agent for the First Nation; 
f)    “Limited Partner 2” means XXXXXXXXXX, a corporation owned by XXXXXXXXXX and not connected to the First Nation;
g)    “Limited Partnership” means the XXXXXXXXXX;
h)    XXXXXXXXXX;
i)    “Members” means members of the First Nation who are Indians as defined in section 2 of the Indian Act; and
j)    “Reserves” means the reserve lands of the First Nation for purposes of the Indian Act.
FACTS:

1.    The First Nation’s mailing address is XXXXXXXXXX.  The First Nation is served by the XXXXXXXXXX Tax Services Office.|
2.    The First Nation is a Band.
3.    The First Nation’s Reserves are located in XXXXXXXXXX and comprise XXXXXXXXXX hectares of land. The Reserves are:
XXXXXXXXXX

4.    The First Nation has XXXXXXXXXX registered Members, of whom XXXXXXXXXX currently live on the First Nation’s Reserves. 
5.    The First Nation is governed by a democratically elected chief and band council, elected by the Members of the First Nation pursuant to Section II of the Indian Act, which are responsible for the governance of the First Nation and represent the First Nation in all matters. Both on-reserve and off-reserve Members of the First Nation are eligible to vote for the chief and band council.
6.    The First Nation is involved in the following land claims against Canada on behalf of its Members:
XXXXXXXXXX
7.    The First Nation has passed the following by-laws pursuant to section 81 of the Indian Act:
*     By-Law No. XXXXXXXXXX – (zoning, building and business)
*     By-Law No XXXXXXXXXX – (health of residents on the Reserves)
*     By-Law No. XXXXXXXXXX – (emergency measures organization and emergency measures plan) 
8.    The First Nation has funding contribution agreements with the Government of Canada and the Province of XXXXXXXXXX for the delivery of various programs and services to its members. The First Nation is responsible for the delivery of these programs and services that includes the following:
a)    The First Nation operates its own health center, staffed by XXXXXXXXXX nurse practitioners, and provides community programming in areas such as: diabetes, HIV, nutrition, pre-natal care, suicide prevention, and anti-tobacco campaigns.
b)    The First Nation is responsible for the delivery and administration of the XXXXXXXXXX program to its Members, which includes verification of eligibility, housing allowances, employment, training, and emergency services.  The First Nation employs an administrator, case workers, and employment officers to administer this program.
c)    The First Nation is responsible for all aspects of housing on the Reserves including the administration of the housing portfolio, construction of new homes, and the housing policies and procedures. The First Nation’s housing department manages XXXXXXXXXX houses on-reserve. The First Nation employs a registered professional planner that is responsible for all aspects of community planning, including the community master plan, the development of space allocations and the creation of sub-divisions.  In addition, the First Nation is responsible for a major sub-division development and housing initiative that has been underway at XXXXXXXXXX over the past XXXXXXXXXX years; this initiative was supported by funds from Aboriginal Affairs and Northern Development Canada.
d)    The First Nation is responsible for adult education and provides training courses to its members at a surplus school purchased from the XXXXXXXXXX, which is not located on-reserve.  The courses and programs offered by the First Nation include: native language studies, general education diplomas, computer training, basic technical courses, truck driving programs, and heavy equipment operator programs.
9.    The First Nation has entered into an agreement with the XXXXXXXXXX whereby it is the responsibility of the First Nation to provide assisted living services to its Members. The First Nation operates XXXXXXXXXX for the delivery of assisted living services and long term care to the elders of the First Nation.  The First Nation is responsible for hiring qualified personnel including Personal Support Workers, Nurse Practitioners and Registered Nurses to deliver these services.

10.   The First Nation employs approximately XXXXXXXXXX full- and part-time staff to ensure the delivery of the services and programs to its Members, including the following:
*     Chief Executive Officer, CEO
*     Chief Administration Officer, CAO
*     Public Utilities Manager
*     Housing Manager
*     Director of Social Services
*     Economic Development Officer
*     Lands Manager
*     Acting Negotiations Coordinator
*     Director of Children's Service
*     XXXXXXXXXX/Daycare Manager
*     Director of Health
*     Job Connect Manager
*     Fire Chief
*     Education Administrator
*     Communication Officer
*     School Principal
11.   The First Nation has undertaken to manage its own economic development. The Economic Development Officer designs, manages and delivers training to promote economic development and employment for Members.
12.   The First Nation employs a Communication Officer who is responsible for media enquiries, computer technology requirements, the website, and the publication of a monthly newsletter.
13.   The First Nation is responsible for fire protection services on the Reserves.  The Fire Chief is responsible for ensuring fire protection and prevention services are effective.  The XXXXXXXXXX reserves are serviced by XXXXXXXXXX volunteer fire service departments that includes First Nation Members. The fire protection services for the XXXXXXXXXX are provided by the XXXXXXXXXX through an agreement with the First Nation.  The Fire Chief coordinates local training and certification. There is currently no fire protection service XXXXXXXXXX. \
14.   The First Nation has a local police force on the XXXXXXXXXX.  If required, the First Nation relies on the XXXXXXXXXX for tactical and emergency assistance.
15.   The First Nation owns, operates and maintains the following facilities on its Reserve:

*     Police Station (for the management and administration of police services)
*     Daycare Centre (early childhood education and child care services)
*     Medical Centre (for delivery of local health care programs)
*     XXXXXXXXXX (seniors/elders residence with assisted living)
*     Women’s Shelter
*     First Nation Administration Office
*     Public Work Facilities (facilities and storage for equipment)
*     Arena and Community Centres (general recreational programming, ice rentals, community centre)
16.   The First Nation is responsible for the contracting process involved in securing utility services, garbage collection and electricity for delivery to its Members living on-reserve.  The First Nation regularly reviews the agreements with service providers, meets with Members who have concerns about the quality of the services, and liaisons with the third party service providers. The First Nation has policies and procedures established to ensure that these services are provided in a prompt, efficient, and economic manner.
17.   Water services are the responsibility of the First Nation.  Water is supplied to the XXXXXXXXXX under contract with the XXXXXXXXXX; the other reserves are serviced by wells and septic.
18.   Garbage collection is the responsibility of the First Nation and is contracted to a third party.   
19.   Electricity is provided to the XXXXXXXXXX location under contract with the XXXXXXXXXX.  The other Reserves are provided with electricity under contract by XXXXXXXXXX.

PROPOSED TRANSACTIONS
20.   Limited Partner 1 has subscribed for XXXXXXXXXX units of the Limited Partnership and will own XXXXXXXXXX% of the Limited Partnership. 

21.   Limited Partner 1 does not carry on any operations or activities except as nominee, bare trustee and agent for and on behalf of the First Nation.  The First Nation is the beneficial owner of all assets owned by Limited Partner 1.
22.   Limited Partner 2 has subscribed for XXXXXXXXXX units of the Limited Partnership and will be the beneficial owner of XXXXXXXXXX% of the Limited Partnership. 
23.   The General Partner will be the beneficial owner of XXXXXXXXXX% of the Limited Partnership.
24.   The Limited Partnership agreement will provide that no new partnership units will be authorized and the only units authorized are the ones that are currently issued to Limited Partner 1, Limited Partner 2 and General Partner.
25.   The Limited Partnership agreement will not contain a provision for the admission of new partners.
26.   The Limited Partnership agreement will provide that the General Partner will receive fair market value compensation for management and other services it performs for the Limited Partnership.
27.   The Limited Partnership will own and operate a XXXXXXXXXX in the area of the XXXXXXXXXX. The estimated capital expenditure for the project is $XXXXXXXXXX.
28.   The Limited Partnership will have a contract with the XXXXXXXXXX that provides a fixed return to the Limited Partnership based on the rate effective with the issuing of the XXXXXXXXXX contract. 

PURPOSES OF PROPOSED TRANSACTIONS
29. The purposes of the proposed transactions are as follows:

a)    To generate a long-term source of income for the First Nation to support the governance, public works and infrastructure needs of each community and to promote economic development such that the First Nation will become economically self-sufficient while maintaining a stewardship role over its lands.
b)    To protect the First Nation from liability arising from activities related to the XXXXXXXXXX.
c)    To provide employment and job training for Members of the First Nation.
d)    To support projects and activities for the general benefit of the First Nation.

RULING GIVEN:
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purposes of the proposed transactions, we rule as follows:
Because the First Nation is, and as long as it continues to be, a public body performing a function of government in Canada within the meaning of paragraph 149(1)(c) of the Act, and therefore exempt from tax under Part I of the Act,  no tax will be payable under Part I of the Act by the First Nation on income allocated to the First Nation by the Limited Partnership, in respect of the XXXXXXXXXX operated by the Limited Partnership, as a result of the proposed transactions described above.
The above advance income tax ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R5, “Advance Income Tax Rulings”, dated May 17, 2002, and is binding on the Canada Revenue Agency provided that the proposed transactions are entered into by XXXXXXXXXX.

CAVEAT:
Nothing in this letter should be construed as implying that the CRA has reviewed or agreed:
*     that the partnership agreement creates a legal partnership for income tax purposes;
*     that any nominee, agency, or bare trust agreement creates a nominee, agency, or bare trustee relationship for income tax purposes;
*     to the determination of the adjusted cost base, paid-up capital or fair market value of any shares or other property referred to herein;
*     to the tax treatment of Limited Partner1 as nominee, bare trustee and agent for the First Nation; or
*     to any tax consequences relating to the facts and the Proposed Transactions described herein other than those described in the rulings given above.
This letter is based solely on the facts and the proposed transactions described above.  The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.  A copy of this letter will be forwarded to the Charities Directorate of the CRA.

Yours truly,

XXXXXXXXXX
For Director
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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