Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
1. Will the XXXXXXXXXX be exempt on any income it may receive from Companies A & B as a municipality in Canada for purposes of paragraph 149(1)(c) of the Act?
2. Will Companies A & B, corporations owned by the XXXXXXXXXX be exempt from tax by virtue of paragraph 149(1)(d.5)?
Position:
1. Yes.
2. Yes.
Reasons:
1. The Band has met tests laid out in Otineka as being a public body exercising powers of self-government and providing services municipalities typically provide and in any period in which they act as described they will be exempt.
2. All of the requirements of paragraph 149(1)(d.5) have been met. Not less that 90% of its capital is owned by the Band. Only the Band has the right to acquire shares or capital of the corporation. The Band Council controls at least 90% of the votes associated with the shares. No more that 10 per cent of its income is earned form activities carried on outside the geographical boundaries of the Band.
XXXXXXXXXX
XXXXXXXXXX 2000-000176
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-named taxpayer. In your letters of XXXXXXXXXX, you provided additional information.
We understand that, to the best of your knowledge, none of the issues raised in this ruling is being considered by a Taxation Services Office or Taxation Centre in connection with an income tax return already filed, is the subject of any notice of objection or is under appeal.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Facts
1. XXXXXXXXXX (the "Band") is a band within the meaning set forth in section 2 of the Indian Act.
2. XXXXXXXXXX (the "Band Council") is a Council of the Band as defined in section 2(1) of the Indian Act.
3.
XXXXXXXXXX
4. The Band's reserve lands include the following reserves; XXXXXXXXXX. These reserves along with designated lands located within these reserves are collectively referred to as the "Reserve".
5. Pursuant to section 74(2) of the Indian Act, the governance structure of the Band consists of:
a) 1 chief; and
b) 1 councillor for every 100 members of the Band (to a maximum of twelve councillors).
6. At present there is an elected chief and XXXXXXXXXX elected councilors.
7. The chief and council hold office for two years, pursuant to section 78(1) of the Indian Act. The Band Council operates pursuant to the Indian Band Council Procedure Regulations of the Indian Act. The powers of the Band Council are set forth in section 81 to 85 of the Indian Act. The Band Council is required to meet within one month of election, and generally meets monthly.
8. The powers of the Band Council include the right to pass by-laws governing the affairs of the Band. Examples of by-laws that have been passed include those governing:
- Taxation (the Band Council raises revenue through the taxation of real property)
- Zoning
- Residency
- Nuisance
- Dog control
9. There is an officer responsible for enforcing by-laws.
10. Some of the governing functions are carried out through committees of the Band Council, including:
- Housing Authority
- Economic Development Committee
- Gaming Commission
- Social Services Review Committee
- Education Committee
11. The Band Council employs a number of administrative staff to carry out its governing functions.
12. As a self-governing body, the Band has passed by-laws for most of the public purposes contemplated by section 81 and 85(1) of the Indian Act. The services are typical of those carried out by municipalities. The following are examples of the services provided by the Band:
a) Taxation of real property
b) Welfare
c) Water supply
d) Street maintenance
e) Sewage infrastructure
f) Education funding
- Contribution to fixed and variable costs
- Engaging of teachers
g) Social housing
h) Health services
i) Employment training
j) Policing
k) Alcohol and drug abuse
l) Sports and recreation
m) Assistance to senior citizen band members
13. Copies of the following by-laws have been submitted:
a) By-law dividing the reserve into zones and regulating the use of the lands (s. 81(1)(g)).
b) By-law to regulate the construction, repair and use of buildings on the reserve (s. 81(1)(h)).
c) By-law for the prevention of disorderly conduct and nuisances on the reserve (s. 81(1)(d)).
d) Land tax by-law (s. 83(1)(a)).
e) Fundraising by-law.
f) By-law governing the residence of band members and other persons on reserve (s. 81(1)(p.1)).
Proposed Transactions
14. Two corporations will be formed under the XXXXXXXXXX (herein referred to as Company A and Company B).
15. The shares of Company A and Company B will be in the name of XXXXXXXXXX band members who comprise the Band Council's Economic Development Committee - XXXXXXXXXX. The XXXXXXXXXX band members will hold the shares in trust for the Band Council. All of the shares of Company A and Company B will be beneficially owned by the XXXXXXXXXX Band. The Band Council will control XXXXXXXXXX% of the shares and there will be a restriction on the right to acquire any further shares.
16. All members of the board of directors will be resident on the Reserve.
17. Company A's activities will be as follows:
a) It will lease from the Crown, designated band lands that are located on XXXXXXXXXX. The designated band lands are located within the Band's Reserve.
b) XXXXXXXXXX.
c) XXXXXXXXXX.
d) It will have the parcels of designated band land serviced, suitable for commercial development.
e) It will then lease the designated band land to third parties for the construction and operation of retail, wholesale, and industrial services, and similar enterprises.
18. Company B will carry out the following transactions:
a) It will lease from the Crown, designated band land in the XXXXXXXXXX area. The designated band land is located within the Band's Reserve.
b) It will service the land in such a way as to be suitable for residential development.
c) It will construct apartment buildings on this land to be leased as residential units.
d) These residential units will be rented to native and non-native tenants.
e) Management of the properties will be by an arm's length management company.
f) In addition, the company will provide some commercial development that will complement the residential development, such as retail outlets, etc.
19. Company A and B expect that it will be several years before they earn annual profits. When earned, it is intended that any net cash generated by Company A and Company B will be distributed by way of dividend to the XXXXXXXXXX Band Council to be used for the benefit of the community.
20. More than 90% of the income of both companies will be derived from within the boundaries of the Reserve.
Purpose of the Proposed Transaction
21. The purpose of carrying out the activities described in paragraphs 14 - 20 is to provide a means to raise the level of social and economic conditions for band members residing on the Reserve. Not only will Company A and Company B provide funds for the improvement of social and economic conditions, but they will provide employment opportunities to all band members, employment opportunities that are normally not available to band members residing on a Reserve.
Rulings Requested and Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, and that there are no other transactions which may be relevant to the rulings requested, we confirm that:
A. Provided the share ownership remains as described in paragraph 15 above, Company A and Company B will be exempt from taxation under Part I of the Act by virtue of paragraph 149(1)(d.5) for any taxation year in which not more than 10% of their income is from activities carried on outside the geographical boundaries of the First Nation's Reserve.
The ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 31, 1996 and is binding on the Department provided that the proposed transactions are commenced by XXXXXXXXXX.
The above ruling is based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
With respect to above ruling, we note that the question of whether not more than 10% of Company A and Company B's income from activities carried on outside the geographical boundaries of the Band's Reserve is a question of fact, the determination of which can only be made retrospectively for each taxation year.
Whether or not the First Nation is a municipality in Canada for purposes of paragraph 149(1)(c) of the Act is also a question of fact, the determination of which can only be made for each taxation year. However, we have provided you with the following comments.
In our view, in any period during which the Band has the authority respecting the geographic area of the Reserve, has acted or previously acted on, the authority to enact by-laws concerning the areas typical of a municipality and continues to provide community services of the type in paragraphs 7 to 13 above, the Band will be considered to be a municipality in Canada within the meaning of paragraph 149(1)(c) of the Act and, accordingly, no tax will be payable under Part I by the Band on any dividends paid by Company A or Company B.
Yours truly,
XXXXXXXXXX
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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