2005 Ruling 2004-0094531R3 - Paragraph 149(1)(c) ruling.

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: Whether paragraph 149(1)(c) will apply to exempt the business income earned by a First Nation from its limited partnership interest.

Position: Yes.

Reasons: The First Nation can be considered a public body performing a function of government in Canada within the meaning of paragraph 149(1)(c).

XXXXXXXXXX 2004-009453

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "First Nation")

We are writing in response your letter dated XXXXXXXXXX , in which you requested an advance income tax ruling on behalf of the First Nation. We also acknowledge receipt of your correspondence dated XXXXXXXXXX, and our various telephone conversations (XXXXXXXXXX).

To the best of your knowledge and that of the First Nation, none of the issues involved in the ruling request is:

(i) in an earlier return of the First Nation or a related person;
(ii) being considered by a tax services office or a tax centre in connection with a tax return already filed by the First Nation or a related person;
(iii) under objection by the First Nation or a related person;
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and
(v) the subject of a ruling previously issued by the Directorate to the First Nation or a related person.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.

Our understanding of the facts, the proposed transactions and the purpose of the proposed transactions is as follows:

Facts

1. The First Nation is an "Indian Band" as defined under section 2 of the Indian Act. Its mailing address is XXXXXXXXXX.

2. The First Nation is served by the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Tax Centre.

3. The First Nation has lands near XXXXXXXXXX consisting of XXXXXXXXXX Reserves within the meaning of the Indian Act (hereinafter referred to collectively as the "Reserve"), known individually as XXXXXXXXXX.

4. The First Nation is comprised of approximately XXXXXXXXXX members (the "Members"), approximately XXXXXXXXXX of which live on the Reserve.

5. The First Nation's Chief and Band Council are elected by the Members by custom elections pursuant to the Indian Act. Several of the governing functions of the Band Council are carried out through committees of the Band Council, including the following committees:

a) the Housing Authority;
b) the Economic Development Committee;
c) the Social Services Review Committee;
d) the Day Care Committee;
e) the Elections Review Committee; and
f) the Wellness Committee.

6. The First Nation has signed a First Nation Funding Agreement with Indian and Northern Affairs Canada ("INAC") providing for the transfer of funds from INAC to the First Nation in order that the First Nation may provide specific services and programs to its Members and be accountable for the provision of these services and programs.

7. The First Nation has passed bylaws for property assessment and taxation and for property tax expenditure pursuant to section 83 of the Indian Act. It has also passed a disorderly conduct and nuisance bylaw pursuant to section 81 of the Indian Act.

8. Pursuant to its bylaws, the First Nation levies property taxes on non-members of the First Nation who lease land on the Reserve.

9. The First Nation has completed a physical development plan and is in the process of developing a comprehensive community plan that will require approval from the Members and which encompasses zoning of the Reserve.

10. The First Nation has built houses for most of the Members who live on the Reserve ("Resident Members"). Resident Members may construct their own houses if the location and plans are approved by the Band Council. The First Nation is in the process of developing a plan of subdivision for the area to be used for the construction of additional residences.

11. The First Nation is responsible for providing potable water on the Reserve. Currently, the First Nation has two small community water systems on the Reserve complete with water filtration systems. The remaining housing units on the Reserve are fed by individual wells or lake water intake systems, which the First Nation is required to test on the required basis to ensure they remain potable. Within two years, the First Nation will install a new water system in one of its Reserves, complete with a reservoir which will be gravity fed from wells.

12. The First Nation is responsible for providing sewer services on the Reserve. Currently, the First Nation provides septic systems to its residents and is responsible for pumping them out as required.

13. All areas of the Reserve are serviced with electricity supplied by XXXXXXXXXX.

14. The First Nation owns and maintains several buildings and facilities on the Reserve for the Members, including the following:

a) an administrative and council office;
b) a public works building;
c) a fire hall;
d) a community centre;
e) a children's playground;
f) a baseball field; and
g) a day care facility.

15. The First Nation has had its own fire department since XXXXXXXXXX, including a fire hall, fire-fighting equipment and a pumper truck. The Fire Department consists of XXXXXXXXXX volunteer firefighters who receive upgrade training on an annual basis. The fire department services part of the Reserve while other parts are serviced under a municipal services agreement that the First Nation has made with the XXXXXXXXXX.

16. The First Nation receives its policing services from the XXXXXXXXXX detachments of the RCMP.

17. The elementary school and secondary school students of the First Nation are bussed to schools in XXXXXXXXXX. The First Nation pays fees to XXXXXXXXXX for the education provided to its children.

18. The First Nation has entered into a Health Services Contribution Agreement with the Government of Canada whereby the First Nation has accepted responsibility to provide specific health programs and services to the Members. The services to be provided include community health programs (addiction counseling, pre- and post-natal counseling, health education workshops, etc.), immunization programs, health inspection, an environmental health and drinking water safety program, home and community care programs, an HIV/AIDS awareness program, and a medical transportation program. The First Nation delivers these health services as part of its Wellness Plan.

19. The First Nation provides other public works, social services and infrastructure programs to its Members, including those related to:

a) social assistance;
b) education funding for primary and secondary school education;
c) certain post-secondary education programs;
d) road repairs and maintenance;
e) snow removal for its residents;
f) water and sewer services;
g) garbage collection on the Reserve;
h) social housing;
i) employment training;
j) sports and recreation;
k) arts and culture; and
l) assistance to Members who are senior citizens.

20. The First Nation provides educational programs and services to Resident Members including computer training, academic skills upgrading, wellness and life skills programs, and professional development.

21. The First Nation employs several individuals for the purpose of carrying out its programs, including the following:

a) a First Nation administrator;
b) an operations manager;
c) a housing manager;
d) a social services administrator;
e) an education counselor;
f) a community health manager;
g) an economic development officer;
h) a financial officer;
i) a Native Alcohol and Drug Abuse Program worker; and
j) a public works officer.

22. The largest sources of employment for Resident Members are the Band Council and a XXXXXXXXXX.

23. The First Nation is attempting to advance the economic development on the Reserve. For example, a company wholly owned by the First Nation constructed a XXXXXXXXXX on the Reserve.

Proposed Transactions

24. Upon receipt of a favourable ruling, the First Nation will incorporate a corporation ("the Corporation") pursuant to the XXXXXXXXXX Business Corporations Act. All issued shares of the Corporation will be owned by the First Nation.

25. The First Nation will enter into an agreement (the "Lease Agreement") to lease a portion of the Reserve land ("the Leased Land") to the Corporation.

26. The Corporation will enter into an agreement with an arm's length party (the "Co-Venturer") to form a joint venture (the "Joint Venture") to develop and operate a XXXXXXXXXX and to develop housing on the Leased Land. The Corporation will provide the Leased Land as its contribution to the Joint Venture, and the Co-Venturer will contribute cash and expertise in XXXXXXXXXX development.

27. The Corporation's profits from the Joint Venture will be distributed to the First Nation in the form of dividends.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to promote economic development within the First Nation. The goal is to assist in developing a sustainable, economically self-sufficient community by helping to establish a business that will be owned by the First Nation, to provide employment and job training for Members of the First Nation, and to support projects and activities for the general benefit of the First Nation. A corporation will be used to carry on this business in order to separate the business risks related to its operation from the First Nation.

Ruling

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, we rule as follows:

The First Nation is a public body performing a function of government in Canada within the meaning of paragraph 149(1)(c) of the Act, and thus no Part I tax will be payable by the First Nation with respect to any rental income received from the Lease Agreement described in paragraph 25 above or from dividends received in accordance with paragraph 27 above.

The above advance income tax ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular IC 70-6R5, dated May 17, 2002, and is binding on the Canada Revenue Agency provided the proposed transactions are implemented before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate

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