2013-0478761R3 149(1)(c) Ruling - Indian Band and Partnership

Principal Issues: Is the income allocation by a Limited Partnership to an Indian Band exempt from tax pursuant to 149(1)(c)?

Position: Yes

Reasons: The Indian Band is a public body performing a function of government.

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

XXXXXXXXXX
                                                                                                                                                             2013-047876

XXXXXXXXXX, 2013

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 subsection 2(1) of the Indian Act;
b)    “Eligible Person” as defined in the partnership agreement, means:
(i)   a Band, or;
(ii)  Xco, or;
(iii) any person that is wholly owned, directly or indirectly , by persons described in (i) and (ii);  
c)    “Bare Trustco” means XXXXXXXXXX; 
d)    “FN1” means the XXXXXXXXXX;
e)    “FN2” means the XXXXXXXXXX;
f)    “First Nations” means collectively, FN1 and FN2;
g)    “GP Inc.” means XXXXXXXXXX, an affiliate of Xco that will be the general partner of the Limited Partnership;
h)    “Indian Act” means the Indian Act R.S.C. 1985, c.I-5, as amended;
i)    “Limited Partnership” refers to XXXXXXXXXX;
j)    XXXXXXXXXX;
k)    “LP Inc.” refers to an affiliate of Xco that will be a limited partner of the Limited Partnership;
l)    “Member” means an individual whose name appears on the “Band List” of the FN2, as defined in the Indian Act and maintained by the FN2 in accordance with section 10 of the Indian Act (collectively, members);
m)    “Reserve” means the FN2’s reserves as described in paragraph 4 of this letter and that are “reserves” as defined in subsection 2(1) of the Indian Act;
n)    “Xco” means XXXXXXXXXX;
o)    “Yco” means XXXXXXXXXX, a wholly owned subsidiary of Xco, which itself is owned by the Province of XXXXXXXXXX.
FACTS:

1.    The FN2's mailing address is:

XXXXXXXXXX

2.    The FN2 files any tax documentation with the XXXXXXXXXX Tax Centre.  The FN2’s business identification number is XXXXXXXXXX.

3.    The FN2 is a Band.

4.    The FN2's reserves are: XXXXXXXXXX. 

5.    The FN2 has approximately XXXXXXXXXX Members, of whom approximately XXXXXXXXXX 1ive on the Reserve.

6.    The FN2 is governed by a democratically elected chief and XXXXXXXXXX elected councillors who were elected pursuant to the Indian Act. The chief and band council are responsible for the governance of the FN2 and have the power to make by-laws in accordance with the Indian Act.

7.    The FN2 employs a First Nation Administrator who, under the direction of the chief and band council, is responsible for administrative management of the FN2.

8.    The FN2 is one of the listed bands that are authorized pursuant to the Indian Band Revenue Moneys Order, # SOR/90-297, to control, manage, and expend in whole their revenue money under subsection 69(1) of the Indian Act.

9.    The FN2 has enacted various by-laws pursuant to section 81 of the Indian Act concerning:

a.    Animal Control
b.    Ancillary Powers (i.e.: promote the enforcement of band by-laws)
c.    Traffic
d.    Fishing and Hunting

10.   The FN2 has enacted by-laws pursuant to section 85.1 of the Indian Act.

11.   The FN2 has entered into a XXXXXXXXXX whereby the FN2 has accepted responsibility to provide certain health programs and services to its Members. The FN2 maintains a health department and hires nurses to provide these health services. The services provided are set out in the XXXXXXXXXX and include: prenatal care, infant development, health education, substance abuse and addiction services, mental health, home care and other community health issues. XXXXXXXXXX.

12.   The FN2 has a comprehensive funding arrangement with the Aboriginal Affairs and Northern Development Canada (“AANDC”) to assist the FN2 in providing services to its Members including: education (funding for the FN2 school and tuition support for off-reserve education); social assistance (funding for home care, employment training, income support and day care); infrastructure (funding for roads, bridges, water and waste water facilities).

13.   The FN2 owns and maintains a school for junior kindergarten to grade 8. The FN2 hires the principal and teachers for this school and oversees the school board.   Members of the FN2 attend secondary school at high schools operated by XXXXXXXXXX as a result of memorandum of understanding with these school boards under which the FN2 pays tuition for the FN2 students. The FN2 also provides adult education services to its Members including: computer training, an entrepreneurship course, academic upgrading, professional development, and wellness and health promotion.

14.   The FN2 administers a welfare program on the Reserve.  It has an agreement with the province of XXXXXXXXXX under which the FN2 administers welfare payments in accordance with provincial guidelines.  The FN2 employs XXXXXXXXXX people to administer these programs, which review applications for welfare and arrange for payments.  Eligibility for welfare and the amount paid are administered by the FN2, based on the criteria established by the province of XXXXXXXXXX.  Where necessary, the FN2 employees also visit the homes of welfare applicants.   As part of the welfare program, the FN2 also administers an addiction services initiative.  Under this initiative, individuals in need of treatment for addiction may qualify for welfare payments by obtaining addiction treatment instead of looking for work or engaging in work training.

15.   The FN2 provides and administers the public works services on the Reserve, which includes road maintenance, water supply, garbage services and XXXXXXXXXX services. The FN2 owns the equipment and hires the employees to provide these services. The FN2 is responsible for the maintenance of the roads and the removal of snow on the Reserve.  The FN2 receives a subsidy through the XXXXXXXXXX Ministry of Transportation for the maintenance of the roads.

16.   The FN2 is responsible for the water supply for most Members living on the Reserve.  The FN2 hires operators to ensure the efficient running of the water treatment and distribution system.

17.   The FN2 has developed a community XXXXXXXXXX year plan to manage the development of community lots, housing, commercial development and economic development strategies. All land in the Reserve is held in a traditional manner and owned by the membership as a whole. The FN2 allows people and businesses to use the land and make any improvements to the land. Approximately XXXXXXXXXX hectares (XXXXXXXXXX%) of the Reserve are unallocated lands (referred to as “Band lands”), which are controlled by the band council. The use and occupation rights to the remaining lands, approximately XXXXXXXXXX hectares (XXXXXXXXXX%), have been allocated to individual band members and are held under Certificates of Possession.  

18.   The FN2 has a funding arrangement in place with the Canada Mortgage and Housing Corporation (CMHC) to assist the FN2 in providing housing to its Members.  Through the funding provided by CMHC, the FN2 has been able to complete several residential housing projects including a XXXXXXXXXX.  The FN2 currently owns and maintains XXXXXXXXXX separate residential housing units including a XXXXXXXXXX. Allocations of band-provided housing are based on a Housing Policy established by the FN2.

19.   Facilities located on the Reserve that are owned, operated and maintained by the FN2 include:

a)    Administrative Building (This building houses a meeting room for meetings of Chief and Council, the offices for the executive of the FN2 including offices for the Chief, Executive Assistant to the Chief, HR Manager, Band Administrator, Finance Department (XXXXXXXXXX employees), Land and Membership (XXXXXXXXXX employees), and Fisheries (XXXXXXXXXX employees).)  Pump Station (used to pump water to residents of the Reserve)
b)    Adult Education Centre
c)    Health Station (This is a separate building where the FN2 administers its preventative health programs.  The programs are run by XXXXXXXXXX employed by the FN2, whose duties include administering non-insured health benefits for the FN2 members and arranging for transportation for the FN2 members in need of health care services away from the community.)
d)    Landfill
e)    Playgrounds
f)    Tourism facilities (park with campsites)
g)    Recreation centre/community complex
h)    Ice rink (outdoor rink located at XXXXXXXXXX)
i)    XXXXXXXXXX / water infrastructure

20.   Certain buildings including the sports centre are owned, maintained and operated by the FN2 for its Members.  User fees and rental charges are levied for the use of recreational and meeting facilities for certain activities. The FN2 establishes the user fees.

21.   The FN2 owns and maintains a XXXXXXXXXX.

PROPOSED TRANSACTIONS:

22.   The First Nations have reached an agreement with Xco under which the First Nations will acquire an interest in the Limited Partnership.

23.   Yco will transfer the XXXXXXXXXX to the Limited Partnership.

24.   Bare Trustco will agree to hold title to the partnership interest as nominee and agent for and on behalf of the First Nations.  The shares of Bare Trustco will be legally registered in the names of the Chiefs of each of the FN1 and the FN2, whom will hold the shares as nominee and agent for the FN1 and the FN2, respectively.

25.   The proposed relationship between Bare Trustco and the First Nations will be evidenced in writing by the Draft Nominee Agreement.

26.   There will be no transfer of partnership units or the issue of units to any person other than an Eligible Person.

27.   The First Nations will contribute approximately $XXXXXXXXXX to the Limited Partnership for approximately a XXXXXXXXXX% interest in the Limited Partnership based on the expected value of the assets at closing and LP Inc. and GP Inc. will contribute approximately $XXXXXXXXXX to the Limited Partnership for approximately a XXXXXXXXXX% interest in the Limited Partnership based on the expected value of the assets at closing.

28.   GP Inc. will negotiate, on behalf of the Limited Partnership, all contracts and manage all projects and operations to which the Limited Partnership is a party in respect of the XXXXXXXXXX.

29.   The Limited Partnership will commence operations after XXXXXXXXXX approves the transfer of the XXXXXXXXXX to the Limited Partnership, grants the Limited Partnership a XXXXXXXXXX licence and makes a XXXXXXXXXX in favour of the Limited Partnership.  Thereafter, the Limited Partnership will make distributions and allocate income and loss to its partners from time-to-time in accordance with the partnership agreement.

PURPOSES OF PROPOSED TRANSACTIONS

30.   The purposes of the proposed transactions are as follows:

a)    To generate a long-term source of income for the FN2 to support the governance, public works and infrastructure needs of each community and to promote economic development such that the FN2 will become economically self-sufficient while maintaining a stewardship role over their lands.
b)    To protect the FN2 from liability arising from activities related to the XXXXXXXXXX.
c)    To provide employment and job training for Members of the FN2.
d)    To support projects and activities for the general benefit of the FN2.

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 FN2 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 FN2 on income allocated to the FN2 by the Limited Partnership in respect of the operation of the XXXXXXXXXX, carried on 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 (“CRA”) provided that the proposed transactions are completed by XXXXXXXXXX. 

OPINION:

So long as Bare Trustco continues to hold the partnership interest in the Limited Partnership as nominee and agent for the First Nations as described in paragraphs 24 and 25, the income allocated to Bare Trustco by the Limited Partnership on such partnership interest will be the income of the First Nations and not the income of Bare Trustco for purposes of computing income under Part I of the Act.

It is not the practice of the CRA to issue an income tax ruling on an issue related solely to the common law. Therefore, nothing in this letter should be construed as implying that the CRA has reviewed or agreed that the Draft Nominee Agreement creates an agency relationship for income tax purposes.

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;
*     to the determination of the adjusted cost base, paid-up capital or fair market value of any shares or other property referred to herein; 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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