2015-0574241E5 Payments to First Nation (XXXXXXXXXX) Elders

Principal Issues: Whether monthly payments made by XXXXXXXXXX to its citizens who are over the age of 65 years are taxable or non-taxable under the Act?

Position: The payments are taxable as pension benefit under paragraph 56(1)(a) of the Act.

Reasons: According to the ordinary meaning, where a payment is a regular payment and is made by a government to people above a specified age, the payment is considered to be a pension payment. The payment in the present situation is more likely an old age pension benefit and therefore be included in the elders’ income under 56(1)(a)(i) of the Act.

Author: Mahendran, Anandavally
Section: 56(1)(a), 56(1)(d), 56(1)(u), 81(1)(a)

XXXXXXXXXX                                                                                                                   2015-057424
                                                                                                                                           Ananthy Mahendran
                                                                                                                                           (905) 721-5204
October 20, 2015

Dear XXXXXXXXXX:

Re: Tax Treatment of Monthly Payments to XXXXXXXXXX Elders

This is in response to your correspondence of February 27, 2015, asking for our views on the income tax implications of the monthly payments made by XXXXXXXXXX to its citizens who are over 65 years of age (“Elders”). Specifically, you would like to confirm that the monthly payments made to the Elders will not be considered as pension benefits, annuity payments, or social assistance payments under the Income Tax Act (the “Act”), and therefore be treated as a non-taxable receipt by the Elders.

Our understanding of the facts is as follows:
*     XXXXXXXXXX is a Self-Governing First Nation and is a public body performing a function of government in Canada pursuant to paragraph 149(1)(c) of the Act.
*     When XXXXXXXXXX became a self-governing body in XXXXXXXXXX, XXXXXXXXXX commenced a monthly payment to its eligible citizens who are Elders within the meaning of the XXXXXXXXXX (“Final Agreement”). In XXXXXXXXXX, the monthly payment amount was $XXXXXXXXXX per month and this amount was subject to an annual cost of living adjustment. The payment continues until the Elder passes away.
*     The purpose of the monthly payment is to assist the Elders. Any XXXXXXXXXX citizen who is ordinarily resident in Canada and is over 65 years of age will qualify for the monthly payment. There is no requirement to perform any work or to provide any services to receive this amount.
*     The monthly payments are funded by the Government of Canada in accordance with the XXXXXXXXXX.
*     Since XXXXXXXXXX, the payments to the Elders have been treated as pension income and T4A slips were issued to the recipients.

This technical interpretation provides general comments about the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R6, Advance Income Tax Rulings and Technical Interpretation.

Generally, the income tax treatment of the monthly payments received by an elder will depend on the facts, including the type and mechanism of funding for these payments. Based on your review of the relevant legislation, you believe that the monthly payments made to the Elders will not be considered pension benefits, annuity payments, or social assistance payments and therefore, the payments are non-taxable to the Elders under paragraphs 56(1)(a), 56(1)(u), or 56(1)(d) of the Act. However, based on the information you submitted, we are of the view that the payments would be considered pension benefits and therefore, be included in the Elders’ income under paragraph 56(1)(a) of the Act.

Pursuant to subparagraph 56(1)(a)(i) of the Act, amounts received by a taxpayer in the year as, on account of, in lieu of payment of, or in satisfaction of, a “superannuation or pension benefit” are included in the taxpayer’s income. The expression “superannuation or pension benefit” is defined in subsection 248(1) of the Act to include “any amount received out of or under a superannuation or pension fund or plan.”

The expression “superannuation or pension fund or plan” is not defined in the Act. However, in MNR v. Eastern Abattoirs Ltd., 63 DTC 1023 (Ex.Ct.), the court noted that the word “superannuation” means the amounts paid as a result of reaching the age limit. Also, in MNR v. Burke, 76 DTC 6075 (FCTD), the judge noted that

“… the expression ‘superannuation fund or plan’ is broad enough to include any fund or plan for providing payments to persons who have by reason of age or disability ceased to be employed either entirely or in a particular position and whether or not the fund or the payments are provided at the expense of the employer or former employer.”

In the present situation, the monthly payments are made to the Elders as a result of reaching the specified age limit and therefore, the payments can reasonably be considered a superannuation payment.

With respect to the meaning of the word “pension”, the Concise Canadian Oxford Dictionary defines it as “a regular payment made by a government to people above a specified age.” According to the ordinary meaning, where a payment is a regular payment and is made by a government to people above a specified age, the payment is considered a pension payment. In the present situation, the payment is a monthly payment and is made by a self-governing First Nation to its citizens who are over 65 years of age and are ordinarily resident in Canada. Therefore, the payments can be considered a pension payment.

Based on the above analysis, the monthly payments made by XXXXXXXXXX to its Elders would fall within the definition of “superannuation or pension benefit” as this term is defined in subsection 248(1) of the Act and, as a result, would be included in the Elders’ income under subparagraph 56(1)(a)(i) of the Act. However, this income may still be exempt from tax by virtue of paragraph 81(1)(a) of the Act together with paragraph 87(1)(b) of the Indian Act, if it is considered to be “personal property of an Indian situated on a reserve.”

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. In accordance with sections XXXXXXXXXX and XXXXXXXXXX of the XXXXXXXXXX Self-Government Agreement and section XXXXXXXXXX of the Final Agreement, effective XXXXXXXXXX, section 87 of the Indian Act does not apply to exempt the citizens of XXXXXXXXXX from tax under the Act.

We also note that section XXXXXXXXXX of the Final Agreement applies to exempt certain amounts from income taxation. This section provides that there will be no federal, territorial, or municipal tax payable by XXXXXXXXXX Indian Person (as defined for purposes of the Final Agreement) on amounts distributed by a settlement corporation to a recipient in accordance with XXXXXXXXXX. Accordingly, amounts that are distributed to a recipient in accordance with section XXXXXXXXXX of the Final Agreement are excluded from the tax exemptions provided for in the Final Agreement. Section XXXXXXXXXX specifically deals with payments made pursuant to an elders’ assistance program which provides for the payment to XXXXXXXXXX Indian People (as defined for purposes of the Final Agreement) who are at least 65 years of age, provided such benefits do not exceed $XXXXXXXXXX per individual per year in XXXXXXXXXX dollars indexed in the same manner as Canada old age security.

In the situation you described, the purpose of the monthly payment is to assist the Elders who are over the age of 65 years and are ordinarily resident in Canada. The benefit amount does not exceed $XXXXXXXXXX per individual per year and is subject to an annual cost of living adjustment. The monthly payment continues until the Elder passes away. Based on the information provided, the monthly payments appear to be payments made under section XXXXXXXXXX of the Final Agreement and therefore, would not be exempt from tax under the Final Agreement. As such, the payments would be included in the Elder’s income for purposes of the Act, if the amounts are otherwise taxable under the Act.

Based on our prior interpretation (E2011-0399461) wherein the Income Tax Rulings Directorate commented on the taxation of a payment made to a secularized nun, you believe that the payments to the Elders are non-taxable gifts and should not be included in the Elders’ income. As stated in paragraph 1.3 of Income Tax Folio S3-F9-C1: Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime, the term “gift” is not defined in the Act. In common law jurisdictions, the courts have said that a bona fide gift exists when there is a voluntary transfer of property without consideration. Whether a transfer of property has been made voluntarily is a question of fact. In the present situation, it is not clear that there is a gift within the above-noted meaning or that there is otherwise no source of income, but the legislative framework of the Act suggests that paragraph 56(1)(a) would still apply to include these payments in the Elder’s income.

For the purposes of Part I, section 3 provides basic rules for determining a taxpayer’s income for a taxation year from various sources (office, employment, business, and property). Even if income is not attributable to one of these sources, it can still be included under another provision (e.g., section 56) of the Act, if the requirements are determined to be met. The purpose of section 56 is to include in income amounts that are required to be included in computing the income of a taxpayer under paragraph 3(a) of the Act from sources other than an office, employment, business, or property. For example, a social assistance payment or a scholarship payment might arguably be a gift, but they are still required to be included in income under subsection 56(1) of the Act. Accordingly, the monthly payments to the Elders would likely be included in income under paragraph 56(1)(a) as superannuation or pension benefit.

In summary, the monthly payments to the Elders would likely be taxable under paragraph 56(1)(a) of the Act for the reasons noted below:

1.    Based on the ordinary and judicial meaning of the words “superannuation” and “pension,” the monthly payments would be considered a superannuation or pension benefit.

2.    Paragraph 56(1)(d) of the Act does not apply to this particular situation because even if the payment is considered to be both a pension and an annuity payment, treatment as pension takes precedence over treatment as annuity. In other words, paragraph 56(1)(a) takes precedence over paragraph 56(1)(d).

3.    Paragraph 56(1)(u) of the Act does not apply as the payments are not made on the basis of a means, needs, or income test, but are made on the basis of the recipient’s age and his or her residential status.

4.    In accordance with sections XXXXXXXXXX and XXXXXXXXXX of the XXXXXXXXXX Self-Government Agreement and section XXXXXXXXXX of the Final Agreement, effective XXXXXXXXXX, section 87 of the Indian Act does not apply to exempt the citizens of XXXXXXXXXX from tax under the Act.

5.    In accordance with section XXXXXXXXXX of the Final Agreement, amounts that are distributed to a recipient in accordance with section XXXXXXXXXX of the Final Agreement are excluded from the income tax exemption.

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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