2025 Ruling 2024-1042991R3 - Ruling - XXXXXXXXXX Agreement Payments

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: 1.Whether subsection 75(2) of the Act will apply to any income or loss from the First Milestone Payment received by the Trust, or from property substituted therefor, and any taxable capital gain or allowable capital loss from the disposition of the First Milestone Payment, or property substituted therefor.

2.Whether any Annual Income from the Trust Property in a Fiscal Year to which subsection 75(2) of the Act does not apply, will be considered to have become payable in the Fiscal Year to the First Nation and may be deducted in computing the income of the Trust for the Fiscal Year pursuant to paragraph 104(6)(b) of the Act.

3. Will the payment of per capita distributions, which includes an accrued income portion, from the First Nation to its members be taxable?

Position: 1.Yes, such income shall be deemed to be income or a loss, as the case may be, or a taxable capital gain or allowable capital loss, as the case may be, of the First Nation, pursuant to subsection 75(2) of the Act.

2. Such income will be considered to have become payable in the Fiscal Year to the First Nation and may be deducted in computing the taxable income of the Trust for the Fiscal Year pursuant to 104(6)(b) of the Act.

3. No.

Reasons: 1. The First Nation will be the settlor and the sole beneficiary of the Trust.

2. The terms of the trust are such that paragraph 104(6)(b) of the Act applies.

3. The payment of the per capita distributions, including the accrued income portion, is not considered income from a source within the meaning of paragraph 3(a) of the Act, another source of income under subdivision d, or a disposition of property. Therefore, it is our view that the initial per capita distributions received by the members of the First Nation would not be included in calculating their income under Part I of the Act.

XXXXXXXXXX									2024-104299

XXXXXXXXXX, 2025

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your email of XXXXXXXXXX, in which you requested an advance income tax ruling (Ruling) on behalf of the above-named taxpayers. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the Proposed Transactions (as defined below) or issues involved in the Ruling request are the same as or substantially similar to transactions or issues that are:

(i) in a previously filed tax return of the taxpayers or a related person and:

a. being considered by the CRA in connection with such return;

b. under objection by the taxpayers or a related person; or
c. the subject of a current or completed court process involving the taxpayers or a related person; or

(ii) the subject of a Ruling request previously considered by the Income Tax Rulings Directorate.

This document is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and Proposed Transactions (as defined below) except as expressly referred to herein, and any references thereto are provided solely for the convenience of the reader.

DEFINITIONS

Unless otherwise stated:

i. all references to a statute are to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended, (the Act), or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended, (the Regulations);

ii. all terms and conditions used in this Ruling request that are defined in the Act (or in the Regulations) have the meaning given in such definition;

iii. all references to monetary amounts are in Canadian dollars; and

iv. the singular should be read as plural and vice versa where the circumstances so require.

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions (as defined below) will be referred to, as follows:

a) “Annual Income” from the Trust Property means all income for Canadian federal income tax purposes arising from the Trust Property in any Fiscal Year as determined in accordance with the Act, but without reference to subsection 75(2), paragraph 82(1)(b) and subsection 104(6) of the Act;

b) “Authorized Investments” means investments purchased with funds from the Trust Accounts selected from investments listed in Schedule “A” of the Trust Agreement or in accordance with an investment policy, as amended from time to time;

c) “Beneficiary” means the First Nation;

d) “CRA” means the Canada Revenue Agency;

e) “Chief” means the Chief of the First Nation;

f) “Council” means the duly elected council of the First Nation, which consists of the Chief and Councillors;

g) “Councillor” means a member of the Council;

h) “Council Resolution” means a decision of the Council consented to by a majority of the Councillors at a duly convened meeting of the Council;

i) “Financial Benefits” means all monies to be paid by the XXXXXXXXXX to the First Nation under the XXXXXXXXXX Agreement in respect of the Project;

j) “First Milestone Payment” means the First Milestone Payment deposited to the Trust Account specified by the First Nation pursuant to Section 1.1.1(a) of Schedule B of the XXXXXXXXXX Agreement;

k) “First Nation” means the XXXXXXXXXX;

l) “Fiscal Year” means the calendar year;

m) “XXXXXXXXXX Agreement” means the agreement between the First Nation and the XXXXXXXXXX. This agreement between the parties includes commitments from the XXXXXXXXXX regarding training and education, employment and business opportunities, environmental management, social and cultural issues and financial compensation in consideration of First Nation support for the Project;

n) “Indian Act” means the Indian Act, R.S.C. 1985, c. I-5, as amended, and the regulations made pursuant to that Act;

o) “Member” means a person who is registered as a member of the First Nation and whose name appears on the First Nation membership list maintained by Indigenous Services Canada;

p) “Minor Qualifying Member” means a person, who was alive and a Member during any of the days of the Voting Period, and who was under the age of eighteen (18) during the Voting Period;

q) “Minors’ Trust Account” means the XXXXXXXXXX Minors’ Trust Account as defined in the Trust Agreement;

r) “XXXXXXXXXX” means the XXXXXXXXXX;

s) “Paragraph” refers to a numbered paragraph in this letter;

t) “Per Capita Distribution” means the amount calculated by dividing (1) the portion of the First Milestone Payment which is to be distributed to Qualifying Members and Minor Qualifying Members, as determined by a Council Resolution, by the (2) number of known Qualifying Members and Minor Qualifying Members, and paid in one or more payments;

u) “Per Capita Distribution Trust Account” means the Per Capita Distribution Trust Account as defined in the Trust Agreement;

v) “Project” means XXXXXXXXXX in the vicinity of the Reserve;

w) “Project Area” means the location of the Project, which will be located approximately XXXXXXXXXX, and for XXXXXXXXXX phase of the Project;

x) “Proposed Transactions” means the transactions described in Paragraphs 7 to 17;

y) “Qualifying Member” means a person, who was alive and a Member during any of the days of the Voting Period, and who had reached the age of eighteen (18) during the Voting Period;

z) “Remaining First Milestone Payment Trust Account” means the Remaining First Milestone Payment Account as defined in the Trust Agreement;

aa) “Reserve” means XXXXXXXXXX, which is a reserve as defined in subsection 2(1) of the Indian Act;

bb) “Sovereign Wealth Fund” means the XXXXXXXXXX Sovereign Wealth Fund as defined in the Trust Agreement;

cc) “Trust” means the XXXXXXXXXX established by the Trust Agreement;

dd) “Trust Account” means a trust account opened by the Trustees pursuant to the Trust Agreement which will, unless otherwise provided for in the Trust Agreement, be an interest-bearing account whose operation is subject to the terms of the Trust Agreement, and “Trust Accounts” may refer to any Trust Account opened by the Trustees pursuant to the Trust Agreement, including but not limited to, the Minors’ Trust Account, the Per Capita Distribution Trust Account, and the Remaining First Milestone Payment Trust Account. The Trust Accounts may be established at a financial institution;

ee) “Trust Agreement” means the XXXXXXXXXX Agreement between the First Nation and the Trustees;

ff) “Trust Property” means all property which the First Nation or any other person or entity may pay, donate, sell or otherwise transfer, cause to be transferred to, vest or cause to be vested in the Trust and includes any substituted or additional property, together with all accretion thereto and all income derived therefrom, but excluding all amounts which have been paid or disbursed therefrom (whether out of capital or income) in the normal course of the administration of or pursuant to the provision of the Trust. For greater clarity, it does not include funds once paid out of the Trust pursuant to the provisions of the Trust Agreement;

gg) “Trustees” means the three individual Members that are appointed by the Council to act as trustees for the Trust; and

hh) “Voting Period” means the dates between and including XXXXXXXXXX.

FACTS

A complete description of all the relevant facts is as follows:

1. The First Nation is a “band” within the meaning of this term as defined under subsection 2(1) of the Indian Act. The CRA’s position is that all bands within the meaning of the Indian Act meet the criteria to qualify for the income tax exemption provided under paragraph 149(1)(c) of the Act.

2. The First Nation’s mailing address is: XXXXXXXXXX.

3. The First Nation has approximately XXXXXXXXXX. Each Member of the First Nation is registered as an Indian under the Indian Act.

4. XXXXXXXXXX.

5. XXXXXXXXXX.

6. The Trust Agreement was reviewed and approved by Council Resolution and ratified by the Members of the First Nation on XXXXXXXXXX and the First Nation and the Trustees executed the Trust Agreement on the same date.

PROPOSED TRANSACTIONS

7. Pursuant to section 1.1.1(a) of Schedule B of the XXXXXXXXXX Agreement, the XXXXXXXXXX shall pay to the First Nation the First Milestone Payment within sixty (60) days of the XXXXXXXXXX delivery of a notice that the Project Area has been selected as the site for the Project. The First Milestone Payment is partial consideration to compensate the First Nation for reasonably foreseeable impacts (direct or indirect) associated with the Project and to compensate the First Nation for all costs and expenses incurred by the First Nation, directly or indirectly, in fulfilling its obligations under the XXXXXXXXXX Agreement.

8. Under Article 12 of the XXXXXXXXXX Agreement, the XXXXXXXXXX will pay to the First Nation the Financial Benefits in accordance with Schedule B of the XXXXXXXXXX Agreement, which include but are not limited to, the First Milestone Payment.

9. The First Nation, in its capacity as settlor of the Trust, will contribute the First Milestone Payment to the Trustees to settle the Trust by irrevocably authorizing and directing the XXXXXXXXXX to make the First Milestone Payment owing to the First Nation to the Trust Account established pursuant to the Trust Agreement.

10. The First Milestone Payment deposited in the Trust Account will be invested by the Trustees in Authorized Investments, subject to certain distributions to the First Nation and other terms and conditions of the Trust Agreement.

11. Pursuant to section 3.1 of the Trust Agreement, the settlor and beneficiary of the Trust is the First Nation, as represented by its duly elected Council. Pursuant to section 3.3, subject to the terms of the Trust Agreement, all beneficial right, title, interest and benefit in and to the Trust Property shall vest to the Beneficiary.

12. Pursuant to the Trust Agreement, the Trust Property will be utilized for the following purposes:

a) to distribute a portion of the First Milestone Payment to the First Nation in order to fund a Per Capita Distribution to Qualifying Members of the First Nation;

b) to establish the Minors’ Trust Account to hold a portion of the First Milestone Payment prior to a distribution of these funds to the First Nation in order to fund a Per Capita Distribution to Minor Qualifying Members of the First Nation, upon each Minor Qualifying Member attaining the age of 18 years;

c) to manage any remaining portion of the First Milestone Payment that will not be distributed by way of a Per Capita Distribution prior to its transfer to the First Nation or the Sovereign Wealth Fund, once such fund is established by the First Nation with respect to the remaining financial benefits of the XXXXXXXXXX Agreement;

d) for the investment by the Trust of the Trust Property in Authorized Investments;

e) for the payment of certain expenses including accounting fees, legal expenses, investment fees and other administrative costs as defined in the Trust Agreement;

13. The Annual Income from the Trust Property shall be due and irrevocably payable in its entirety to the First Nation as at XXXXXXXXXX of each Fiscal Year. The First Nation shall have the right to enforce the payment of the Annual Income from the Trust Property as at XXXXXXXXXX of each Fiscal Year and until such amount has been paid to the First Nation. The Trustees shall promptly execute and deliver to the First Nation on behalf of the Trust a non-interest bearing demand promissory note evidencing the Annual Income from the Trust Property owing to the First Nation to the extent such amount has not been paid to the First Nation during the Fiscal Year. All amounts paid from the Trust to the First Nation pursuant to the Trust Agreement shall be payments of Annual Income to the extent that any portion of the Annual Income arising in any prior Fiscal Year or arising in the current Fiscal Year has not previously been paid to the First Nation.

14. Distributions from the Trust to the First Nation and all payments by the First Nation to Members or Per Capita Distributions to Members will be made in accordance with the terms of the Trust Agreement.

15. Amounts in respect of Per Capita Distributions to Minor Qualifying Members will be held by the Trust and the Per Capita Distribution amount, plus the income accrued thereon, will be distributed by the Trust to the First Nation and will be payable by the First Nation to each such Member upon the Member attaining the age of 18 years.

16. The Trustees will manage the Trust Property in accordance with the terms of the Trust Agreement.

17. Pursuant to section 18.4 of the Trust Agreement, upon termination of the Trust, the Trust Property will be distributed by the Trustees to the First Nation absolutely.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to:

a) compensate the First Nation for reasonably foreseeable impacts (direct or indirect) associated with the Project in its traditional territory and to compensate the First Nation for all costs and expenses incurred by the First Nation, directly or indirectly, in fulfilling its obligations under the XXXXXXXXXX Agreement; and

b) ensure funds with respect to this compensation are available for the benefit of the First Nation, including all its Members;

RULINGS GIVEN

A. Any income or loss from the First Milestone Payment received by the Trust as described in Paragraph 9 above, or from property substituted therefor, and any taxable capital gain or allowable capital loss from disposition of the First Milestone Payment, or property substituted therefor, shall be deemed to be income or a loss, as the case may be, or a taxable capital gain or allowable capital loss, as the case may be, of the First Nation pursuant to subsection 75(2) of the Act.

B. Any Annual Income from the Trust Property in a Fiscal Year to which subsection 75(2) of the Act does not apply, including income on reinvested income, will be considered to have become payable in the Fiscal Year to the First Nation and may be deducted in computing the income of the Trust for the Fiscal Year pursuant to paragraph 104(6)(b) of the Act.

C. The Per Capita Distributions to be made by the First Nation to the Qualifying Members or Minor Qualifying Members, as described in Paragraphs 12(a), 12(b), and 15 above, will not be proceeds from the disposition of those Members’ property and will not be income from a source to those Members within the meaning of paragraph 3(a) of the Act.

The above advance income tax rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular IC 70-6R12 Advance Income Tax Rulings and Technical Interpretations, dated April 1, 2022, and are binding on the CRA provided that the Proposed Transactions are implemented before XXXXXXXXXX.

COMMENTS

Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed, made any determination, or accepted any method for the determination in respect of any other tax consequences relating to the facts, Proposed Transactions, or events taking place either prior to or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above.

An invoice for our fees in connection with this Ruling will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
for Division Director
Speciality Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch