3 June 2004 External T.I. 2004-0061221E5 - Meaning of "activities" in paragraph 149(1)(d.5)

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.

Principal Issues: Is rental income from a property located off-reserve income from "activities carried on outside the geographical boundaries" for purposes of paragraph 149(1)(d.5) of the Act?

Position: Question of Fact, but generally yes.

Reasons: Income from an activity includes passive income.

2004-006122
XXXXXXXXXX Renée Shields
(613) 948-5273
June 3, 2004

Dear XXXXXXXXXX:

Re: Interpretation of paragraph 149(1)(d.5) of the Income Tax Act (the "Act")

This is in response to your letter of February 5, 2004 seeking our comments on the interpretation of paragraph 149(1)(d.5) of the Act with respect to a corporation owned by an Indian Band that qualifies as exempt from tax under paragraph 149(1)(c) of the Act. You have specifically asked whether the income test in paragraph 149(1)(d.5) of the Act would be met in a situation in which such a corporation has no activity other than the owning of real property located off-reserve.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency ("CRA").

Paragraph 149(1)(c) of the Act exempts from tax the income of a municipality or a municipal or public body performing a function of government in Canada. In general terms, paragraph 149(1)(d.5) of the Act provides that the income of certain corporations owned by a municipality may be tax exempt.

The decision of the Quebec Court of Appeal in a case called Tawich Development Corporation v. Deputy Minister of Quebec [2001 D.T.C. 5144] held that an Indian Band cannot attain the status of a municipality by exercising municipal functions. Therefore, based on current legislation, a corporation owned by an Indian Band that is exempt under paragraph 149(1)(c) of the Act as a public body performing a function of government could not be exempt under paragraph 149(1)(d.5) of the Act because is it not owned by a municipality. However, legislative proposals tabled in February 2004 and applicable to taxation years that begin after May 8, 2000 would extend the application of paragraph 149(1)(d.5) of the Act to corporations owned by a public body performing a function of government. Our comments are based on the wording of this proposed legislation.

In all cases, whether an Indian Band qualifies as a public body performing a function of government for purposes of paragraph 149(1)(c) of the Act is a question of fact. If 90% of more of the shares or capital of a corporation are owned by an Indian Band that qualifies under paragraph 149(1)(c) of the Act, then in order for that corporation's income from a particular year to be exempt under paragraph 149(1)(d.5) of the Act, no more than 10% of its income for the year can be from activities carried on outside the Indian Band's geographical boundaries. The Technical Notes to proposed subsection 149(11) of the Act explain that if a particular Indian Band qualifies as a public body performing a function of government, it is intended that for purposes of paragraph 149(1)(d.5) of the Act, its geographical boundaries would be the boundaries of its reserve, as defined in the Indian Act.

The owning and leasing of real property by a corporation would be considered activities within the meaning of paragraph 149(1)(d.5) of the Act. Whether any particular activity takes place within the geographical boundaries of the public body is a question of fact. It is our opinion that in the case of the rental of real property, it is reasonable to consider that notwithstanding incidental administrative activities that may take place at the office of the corporation, the principal activity is the renting of the property, which takes place at the location of the real property. If the real property is located outside the geographical boundaries of the public body, the income will be considered to be from activities outside its geographical boundaries for the purposes of paragraph 149(1)(d.5) of the Act.

Whether or not the corporation has income is a question of fact. Note that if a taxpayer rents property to a non-arm's length party for less than fair market consideration, subsection 69(1) of the Act may be applied to deem the taxpayer to have received fair market value consideration.

We trust that these comments will be of assistance.

Yours truly,

Roxane Brazeau-LeBlond, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch