2014-0528511I7 First Nation's Land Claim Settlement Trust Income

Principal Issues: Whether a First Nation’s land claim settlement trust income received by an individual member of the First Nation is taxable?

Position: Question of fact.

Reasons: See details in the reply.

Author: Mahendran, Anandavally
Section: 75(2), 149(1)(c), 104(13), 81(1)(a) of the Income Tax Act and section 87 of the Indian Act

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                                                2014-05285
                                                Ananthy Mahendran
                                                (905) 721-5204

July 22, 2015

Dear XXXXXXXXXX:

Re: XXXXXXXXXX First Nation’s Land Claim Settlement Trust Income

Thank you for your correspondence wherein you ask for our comments on whether interest income received by an individual from a First Nation’s land claim settlement trust is taxable. Unless otherwise stated, all statutory references herein are to the Income Tax Act (the “Act”).

It is our understanding that the individual, who is a registered member of XXXXXXXXXX (the “First Nation”), received several per-capita distributions from XXXXXXXXXX(the “Trust”), including compound interest on these funds, in XXXXXXXXXX. According to the terms of the Trust, since the individual was a minor at the time the distributions were declared (XXXXXXXXXX), the amounts of the distributions were held in the Trust for the individual until the individual attained the age of XXXXXXXXXX. The amount of interest payment consists of both interest income earned on property contributed to the trust (“first generation income”) and interest income earned on first generation income (“second generation income).   

Whether or not any income of the Trust received by an individual member of the First Nation is taxable is a question of fact. In making this determination, we must first consider the terms of the Trust agreement, specifically, whether the individual is the beneficiary of the Trust or whether the First Nation is the beneficiary who then distributes money to the individual member of the First Nation.

If the individual member of the First Nation is the beneficiary of the Trust

Any income that is paid or payable to an individual member of the First Nation as a beneficiary of the Trust will be included in the member’s income under subsection 104(13) and will be taxable. However, where this income is property situated on a reserve within the meaning of section 87 of the Indian Act and the member is an Indian as that term is defined in subsection 2(1) of the Indian Act, the income may be exempt from tax by virtue of section 87 of the Indian Act and paragraph 81(1)(a) of the Act.

Where an individual is a member or a citizen of a First Nation that has entered into an agreement with the Government of Canada in respect of self-governance, the provisions of the agreement and the ratifying instrument must first be reviewed in order to ascertain whether section 87 of the Indian Act would apply to the income earned by that individual.

It is always a question of fact whether particular income is property situated on a reserve. In the case of income from a trust, several factors are taken into account, including how and where the trust generates its income, the residence of the trustees (or those controlling the trust property), and the residence of the beneficiaries, to determine whether there is sufficient connection between the income earned by the individual and the reserve. The first of these factors is usually given the most weight.

If the First Nation is the beneficiary who then distributes money to the individual member

Any income that is paid or payable to the First Nation as a beneficiary of the Trust will be included in the First Nation’s income under subsection 104(13) and will be taxable. However, if the First Nation is determined to be a “public body performing a function of government in Canada” within the meaning of paragraph 149(1)(c), the income of the First Nation may be exempt from tax under subsection 149(1).

Generally, if the members of the First Nation do not have an exclusive or legally enforceable claim to the distributions, but it is merely the choice of the First Nation to make such distributions, it is our view that payments received by the members of the First Nation, including interest income earned on these distributions, would not be included in calculating their income under Part I of the Act.  

Attribution of income earned on property held in a trust

Under subsection 75(2), in specified circumstances, income earned on property held in a trust will be attributed to the person who contributed the property to the trust. The definition of “person” in subsection 248(1) includes any corporation and any entity exempt from tax under Part I of the Act because of subsection 149(1) of the Act. If the First Nation is exempt from tax pursuant to subsection 149(1), it is a person in accordance with subsection 248(1), and is therefore a person for the purpose of subsection 75(2).

The determination of whether income from a trust would be included in the person’s (i.e., the First Nation’s) income under subsection 75(2) is dependent on whether the income is first generation income or second generation income.  

First generation income

Subsection 75(2) only applies to first generation income. Specifically, subparagraph 75(2)(a)(i) provides that where the terms of a trust are such that the property held by the trust may revert to a person who directed or contributed the property to the trust, any income or loss from that property, and any taxable capital gains or allowable capital losses from the disposition of any of the property contributed by that person to the trust, will be deemed to be the income or loss, or the capital gain or capital loss, as the case may be, of this person and not of the trust. In our view, where subsection 75(2) attributes income to a person who has directed or contributed property to a trust, that income was never income of the trust for tax purposes. Accordingly, it is neither taxable in the trust nor included in a beneficiary’s income under subsection 104(13) when paid or payable to the beneficiary in the year. In this case, if the First Nation contributed the property to the Trust, the income would be attributed to the First Nation under subsection 75(2).

Second generation income

Subsection 75(2) does not apply to second generation income, as this income is not earned on property contributed by a person to the trust. Thus, second generation income will not be attributable to the person who contributed the property to the trust and will generally be taxable in the trust to the extent that it is not paid or payable to the beneficiaries of the trust. Where an amount is paid or payable in the year to a beneficiary, such income would be included in the beneficiary’s income under subsection 104(13). Accordingly, second generation income is taxable in the trust unless it is paid or payable to a beneficiary in the year.

Generally, to the extent that the income of a trust is not distributed in a particular year, it forms part of the capital of the trust for the following year. Accordingly, any remaining (after-tax) income left in the trust would be available to be paid out to beneficiaries free of tax in future years.

We trust that these comments will be of assistance.

Yours truly,

Roger Filion, CPA, CA
Manager
Non-Profit Organizations and Aboriginal Issues
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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