TAX ISSUES AND FIRST NATIONS

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Section 87. Narrow ExemptionExempts from taxation the personal property of an Indian or a Band that is situated on a Reserve. Section 87. The personal property is exempt from all taxation, municipal, provincial and federalNot from a Band under S. 83. Section 87. The personal property can be tangib

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TAX ISSUES AND FIRST NATIONS

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1. TAX ISSUES AND FIRST NATIONS

2. Section 87 Narrow Exemption Exempts from taxation the personal property of an Indian or a Band that is situated on a Reserve

3. Section 87 The personal property is exempt from all taxation, municipal, provincial and federal Not from a Band under S. 83

4. Section 87 The personal property can be tangible or intangible personal property Income can be exempt from taxation by virtue of S. 87

5. Section 87 The exemption only applies to Indians and Bands as defined under the Indian Act Metis, Corporations, Tribal Councils not applicable

6. Section 87 The personal property must be situated on a reserve Reserve is as defined in the Indian Act Includes designated lands

7. Section 87 Reserve does not generally include historical territories or claimed lands unless they have been set aside as reserves

8. Section 87 Where is personal property situated? Easy for tangible personal property. Very difficult for income and intangibles

9. Section 87 Mitchell v. Peguis Indian Band SCC S. 90 case Commercial Mainstream

10. Section 90 Deems property to be situated on a reserve if provided to an Indian or Band pursuant to an agreement or treaty with the Federal Crown Very narrow

11. Section 87 Williams, SCC Connecting factors test Examine all connecting factors and taking into account the purpose of S. 87

12. Section 87 Determine where is the property located Would the taxation infringe on the Indian’s rights qua Indian

13. Section 87 Very flexible test Very difficult to apply Has broadened the taxation of Indian people, Not Bands as yet

14. Employment Income Post Williams, CRA developed guidelines for assessing Guidelines broader than cases CRA still assessing based on the guidelines

15. Employment Income Court cases generally focus on where the employment is exercised, where is the work done

16. Employment Income Clarke v. MNR (TCC) Bell v. The Queen (FCA) (Walkus) Shilling v. MNR (FCA) Folster v. MNR (FCA)

17. Employment Income Monias, (FCA) Amos, (FCA)

18. Business Income Southwind, (FCA) Logging Income Taxpayer resided on reserve but work done off reserve Income taxable

19. Business Income CRA takes the view the primary factors are the place where the work is performed and where the customers are located

20. Business Income Trucking Fishing, T4F crew share income E commerce The commercial mainstream

21. Investment Income Recalma, FCA Mutual Funds and bankers acceptances, CRA did not assess income from bank accounts

22. Investment Income Commercial mainstream Where did the income generating activity take place to pay the return on the investments?

23. Investment Income The income generating activity takes place off reserve in the commercial mainstream where the issuer of the investments operates

24. Investment Income Sero, Frazer Lewin, Hill, Apply same test to bank accounts

25. Investment Income All investment income is subject to tax unless invested in instruments where the issuer earns income from on reserve activities

26. Conclusion S. 87 is very narrow Really limited to income earned from on reserve activities Almost useless for many Indians

27. Conclusion Future Government is negotiating S. 87 away in most treaties Bands have better exemptions

28. Conclusion S. 87 will be gone Bands will take over taxation powers on Reserve lands for both income and commodity taxation

29. Treaty/Aboriginal Rights Very difficult to prove Mitchell, SCC, GST, Customs Benoit Could assist in the application of S. 87 Aboriginal Right could be a connecting factor pointing to a reserve

30. Other Exemptions Paragraph 149(1)(c) of the Income Tax Act (“ITA”) Paragraph 149(1)(d) and (d.5) of the ITA Paragraph 149(1)(l) of the ITA What does the future hold

31. Other Exemptions Section 87 is shrinking Comprehensive land claims and self-government agreements Section 87 being placed on the table Federal and provincial governments are pushing for a phase out 1993 Department of Finance Working Draft

32. Paragraph 149(1)(c) of the ITA “Public body performing a function of government in Canada” CRA’s position By-laws under Sections 81 & 83 of the Indian Act Factual determinations

33. 149(1)(c) of the ITA (cont) Evidence of negotiations or settlements of specific claims, comprehensive claims or treaty land entitlements CRA appears to be more comfortable with this exemption and is willing to rule No restrictions to reserve

34. 149(1)(c) of the ITA (cont) Can be used in connection with 75(2) in respect of treaty land entitlement settlements, specific claims and perhaps commercial agreements First nation should be able to demonstrate that it acts as a government

35. 149(1)(c) of the ITA (cont) Available only to First Nations directly and not to corporations owned by First Nations May not be of great benefit to First Nations that cannot carry on business directly (ie. Bands subject to the Cree-Naskapi (of Quebec) Act

36. 149(1)(c) of the ITA (cont) This exemption is being retained post-treaty and comprehensive claim See Nisga’a agreement as an example

37. Paragraph 149(1)(d.5) of the ITA Up to May 8, 2000 Must meet the definition of a Canadian municipality The Otineka case a Band must be sophisticated must demonstrate a model of governance the creation of a “de facto” municipality

38. 149(1)(d.5) pre-May 8, 2000 (cont.) Most bands may have a difficult time qualifying Tawich case has changed CRA’s position In 2002, CRA took the position that Indian Bands could not meet the definition of a Canadian municipality

39. 149(1)(d.5) post May 8, 2000 (cont.) February 2003 Budget Extended 149(1)(d.5) to corporations owned by a municipal or public body performing a function of government in Canada

40. 149(1)(d.5) (cont.) Only available to corporations wholly-owned by Bands (and subsidiaries in some cases) Band must be very sophisticated Exemption only available where <10% of income is earned outside geographical boundaries

41. 149(1)(d.5) (cont.) Geographical boundaries now defined in 149(11) (a) area over which taxes can be assessed where the authority to tax is authorized by an act of Parliament or an agreement given effect by an act of Parliament

42. 149(1)(d.5) (cont.) (b) if (a) does not apply, the geographical boundaries within which a body is authorized by the laws of Canada or a province to exercise the function of government In short, with rare exceptions this will mean “reserve” for most First Nations

43. 149(1)(d.5) (cont.) SS. 149(1.2) provides exceptions to the 10% rule where income generated from crown land under an agreement with her Majesty Possibly investment income may be excluded in assessing compliance with the 10% test; CRA does not agree

44. 149(1)(d.5) (cont.) Changes to 149(1.3) have been made to curtail abuses of the 90% ownership test: (a) no person other than a municipal or public body can have the ability to cast more than 10% of the votes at a shareholders’ meeting

45. 149(1)(d.5) (cont.) (b) no one other than a public body or a municipality can control directly or indirectly in any manner whatsoever - de facto control must be evaluated (c) changes generally applicable after December 21, 2002 (d) no changes to prevent the unintended impact of 149(10)

46. 149(1)(d.5) (cont.) The 10% test may make this a “high maintenance” exemption Must be very cautious and selective 149(1)(c) ruling should be entertained

47. Paragraph 149(1)(l) of the ITA Non-profit corporations Must closely fit the facts of the Gull Bay Development case Must fit CRA Interpretation Bulletin IT 496R

48. 149(1)(l) of the ITA (cont.) Purpose of corporation must be for benevolence Business activities must be ancillary to main purpose Must spend profits inside the corporation

49. 149(1)(l) of the ITA (cont.) The profits cannot be distributed to the Band Profits cannot be accumulated Band cannot carry out benevolent activities on the corporation’s behalf Causal relationship between non-profit and business activities

50. What Does the Future Hold Limited reliance on Section 87 of the Indian Act 149(1)(c) should be one of the primary considerations for First Nations First Nations should consider unincorporated ventures as a first option 149(1)(d.5) and 149(1)(l) may have limited use. Although 149(1)(d.5) currently on hold

51. First Nation Taxation

52. Overview First Nations as tax collectors Current powers (pre-treaty and self-government) Post-treaty and self-government

53. Overview Taxation to supplement own source revenue First Nations tax incentives First Nations as tax havens

54. First Nations as Tax Collectors Not new Already occurring A controversial issue First Nations are using their taxing powers to encourage investment and economic activity on reserve

55. Current Powers Property taxes, user fees and business licensing fees under the Indian Act Indirectly through vehicles such as First Nations Tax Replaces GST on fuel, alcohol and tobacco (“Taxable Products”) All purchases of taxable products by Status Indians taxable Revenue sharing formula

56. Current Powers (cont.) First Nations Goods and Services Tax Replaces GST/HST on all products Status Indians and Bands taxable on all purchases on participating reserves Self-assessment required where products purchased exempt on other reserves

57. Current Powers (cont.) CRA collects the tax on behalf of the First Nation Revenue sharing Yukon First Nations and personal income taxes

58. Post-Treaty and Self-Govt. Taxes can be expanded to a wide range of taxes, user fees, royalties, stumpage, mining taxes May be applicable to all settlement lands Will need to negotiate revenue sharing

59. Taxation as a Revenue Supplement Indirectly may be used as a form of compensation Can be used to transition pre and post self-government Can supplement other own source revenues

60. Taxation as a Revenue Supplement (cont.) Negotiation points necessary Changes in economic circumstances Changes in demographics Changes in population

61. Taxation as a Revenue Supplement (cont.) Who will be the taxpayers Tax relief in respect of double tax situations Where are First Nations members taxed First Nations owned businesses operating outside traditional territory

62. First Nations Tax Incentives Reduced property tax rates Reduced user fees Specified or focused taxes as opposed to broad base taxes Negotiations and enabling legislation must be accessed

63. First Nations as Tax Havens Tax incentives can be used to encourage development on reserve or on traditional territory Possible sharing of certain exemptions Accessing non-traditional incentives Not inconsistent with fiscal policy A “win-win” situation

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