2014-0533091I7 First Nation - Penalty Exemption

Principal Issues: Are First Nations subject to penalties for failure to withhold tax pursuant to section 105 of the regulations

Position: Yes, however the CRA has an administrative policy to exempt First Nations

Reasons: 149(1)(c) entities are exempt from Part I tax, but not from penalties for failure to withhold taxes.

Author: Townsend, Ann
Section: 149(1)(c)

                                                                                                                                 September 15, 2014

XXXXXXXXXX Tax Services Office                                                                         Income Tax Rulings Directorate
                                                                                                                                 Ann Townsend
                                                                                                                                 905-721-5096

Attention: XXXXXXXXXX                                                                                         2014-053309

      Penalty Exemption – First Nation

This is in response to your email of May 27, 2013, asking for our comments on whether a XXXXXXXXXX operated by a First Nation is exempt from penalties imposed under subsection 227(8) of the Income Tax Act (Act), for failure to withhold taxes as required by section 105 of the Income Tax Regulations (Regulations).  Section 105 of the Regulations requires the withholding of taxes on the payment of fees, commissions, or other amounts to a non-resident person in respect of services rendered in Canada.

Paragraph 149(1)( c) of the Act provides an exemption from Part I tax to “public bodies performing a function of government in Canada”.  Provided all of the criteria are met, a First Nation may qualify for this exemption.  Where the First Nation does qualify, undertaking additional activities, such as the operation of a XXXXXXXXXX, would not preclude the First Nation from being considered a “public body performing a function of government” despite the fact that this particular activity is not considered to be “performing a function of government.” 

Notwithstanding the above, an organization, such as a corporation, wholly-owned by a First Nation would likely not qualify as a “public body performing a function of government in Canada” and as such would not qualify for the exemption provided for under paragraph 149(1)(c) of the Act.  It is not clear to us in this situation whether it is the First Nation, or an organization of the First Nation, that is operating the XXXXXXXXXX.

Although a First Nation is generally exempt from Part I tax because it is a public body performing a function of government in Canada, there is no provision within the Act that exempts these bodies from penalties for failure to withhold tax as required.  Nevertheless, it is our understanding that the CRA has an administrative policy in place that grants a penalty exemption to First Nations that qualify as public bodies performing a function of government.  This administrative policy provides that the penalty exemption can be revoked if the First Nation abuses the exemption privilege.  Thus, the CRA may assess penalties for non-compliance with section 105 of the Regulation where it has determined that the First Nation has abused the penalty exemption privilege. 

The reasons for providing this administrative policy to the First Nations are listed in the guidelines and include:

*     The Indian communities are situated in remote geographical locations that make travel to financial institutions on a regular basis difficult or costly.
*     Funding from Aboriginal Affairs and Northern Development Canada (AANDC) is delayed which subsequently delays remittances.
*     Many bands are experiencing financial hardship and band funding provided by AANDC is being diverted to cover the costs of penalties. 

In our view, a XXXXXXXXXX would generally not be situated in a remote geographical location nor would a XXXXXXXXXX likely experience the financial hardships contemplated by this policy. Where it has been determined that the First Nation has abused the exemption privilege, these factors may also be considered when determining whether to revoke this privilege. In addition, if it is an organization of the First Nation that is operating the XXXXXXXXXX and not the First Nation itself, it is our opinion that this administrative policy should not be extended to the organization.

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA’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 the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity.  Requests for this latter version should be e-mailed to: LPRA-PLAR ITR-DDI Access Team-Équipe d'Accès.  In such cases, a copy will be sent to you for delivery to the taxpayer.

Yours truly,

R. Filion, CPA, CA
Manager
Non-Profit Organizations and Aboriginal Issues Section
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

cc: Mike Warren, Manager Technical Section
320 Queen St,
Tower B, 19th Floor
K1A 0L5

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