aboriginal business entity tax - afoa canada c... · the courts “in bastien, the court firmly...

Aboriginal Business Entity Tax

Jeremy BouchardAssociateAboriginal Law and Business Law

Overview

1. Intro: Aboriginal Business Entity Tax2. Relevant Statutory Provisions 3. Typical Business Arrangements4. New Developments

Overview

• Business Entities• Sole Proprietorship• Partnerships• Corporations

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Relevant Statutory Provisions

2. Relevant Statutory Provisions

• Section 87, Indian Act• Paragraph 149(1)(c), Income Tax Act• Paragraphs 149(1)(d.5), and (d.6)


Section 87, Indian Act:

(1) ….The following property is exempt from taxation, namely:

(a) the interest of an Indian or a band in reserve or surrendered lands; and

(b) the personal property of an Indian or a band situated on a reserve.

(2) No Indian or band is subject to taxation in respect of the ownership, occupation, possession or use of any property mentioned in paragraph 1(a) or (b) or is otherwise subject to taxation in respect of any such property.


Section 87 of the Indian Act generally:

• Exemption available to “Indians” and Bands• Applies to personal property which includes

taxable income from a business which has situson a reserve

• No specific legislation exists to determine situs, reliance must be placed on the Courts and Revenue Canada’s administrative pronouncements for guidance

Adoption of the “debtor situs” test: Nowegijick v. The Queen, [1983] 1 S.C.R. 29

The Courts

Followed by…

Adoption of the “connecting factors” test:Williams v. Canada, [1992] 1 S.C.R. 877

The Courts

The Courts

“the personal property of an Indian or a band situated on a reserve”

Pre-Bastien:

…that is acquired “Indian qua Indian.”(Mitchell)…that is not in the “commercial mainstream”(Mitchell, Williams, Folster)…that “preserves the traditional way of life in Indian communities. (Folster)…that is “integral to the life of the reserve” (Southwind)

The Courts

…that does not compete with non-Aboriginal Canadians (Meier, Horn & Williams)…that is confined to the status Indian’s own reserve (Kelly, Shilling, Desnomie)…that does not engage economically with non-Aboriginal Canadians (Ballantyne)…that does not participate in Canadian or global capital markets (Bastien/Dube)

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The Courts

• Bastien & Dube: reversal of the tide

• SCC decision – July 22, 2011

• Bastien: 7-0 in favour of tax exemption

• Dube: 5-2 in favour of tax exemption• Deschamps J. and Rothstein J. dissenting

The Courts

Bastien:

Sweeps aside major FCA decisions

“I do not agree that the ‘commercial mainstream’ factor should be given determinative weight in this case”

The Courts

Rejects “Indian qua Indian” filter:

“In determining the location of personal property for the purpose of s. 87, there is no requirement that the personal property be integral to the life of the reserve, or that it, in order to be exempted from taxation, must benefit what the court takes to be the traditional Indian way of life.”

The Courts

Dube:

• “the expression ‘situated on a reserve’ means any reserve, not just a reserve where the Indian taxpayer resides or to which community he or she belongs.”

• Place of residence (off-reserve) given “little weight”

• Source of capital: relevant, but does not weaken connection to reserve

The Courts

Post-Bastien world:

• “Commercial mainstream” will have little significance

• “Indian qua Indian”/”traditional way of life” requirement set aside

• Focus on ascribing location of the property, not its “Indian” vs. “commercial” nature

The Courts

“In Bastien, the Court firmly rejected the ‘false opposition’ between income earned in the ‘commercial mainstream’ and that earned from an activity that was ‘integral to the life of the reserve’… Since the commercial nature of an income-generating activity does not preclude its being situated on a reserve, the Court indicated that property can be both in the commercial mainstream and connected (or even integral) to a reserve at the same time.”


Paragraphs 149(1)(c) and 149(1)(d.5) ITA

• Municipalities or a public body performing a function of government in Canada are tax exempt

• 90% owned corporations tax exempt pursuant to paragraph 149(1)(d.5)

• Fiscal periods beginning after May 8, 2000 have limits on geographical scope and voting shares• 90% ownership• 90% of income earned must be earned on Reserve


• 149(1)(c) Application to Aboriginal Governments• Subsection 149(1)(c) tax exemption to First Nations

and other Aboriginal governments as “public bodies performing a function of government”

• Canada Revenue Agency Rulings accept this status• Results in exemption from income tax for all First

Nations/Aboriginal governments on all income• Subsection 149(1)(d.5) tax exemption specifically

includes corporations owned by “public bodies performing a function of government”


Factors in determining whether Public Body and Performing a Function of Government• By-laws passed under both sections 81 and 83 of IA or

section 5(1) of First Nations Fiscal and Statistical Management Act.

• Performance of functions and provision of services and programs in a manner generally exhibited by a government.

• Evidence of negotiations or settlements of specific claims, comprehensive claims, or Treaty Land Entitlement.


• 149(1)(d.5) Income Test• Paragraph 149(1)(d.5) requires that no more than

10% of income be from activities carried on outside the geographical boundaries of the municipality or the Public Body• CRA’s policy is that income means net income or

profit.• “Geographical boundary” of a Public Body defined in

subsection 149(11) to mean the area• in respect of which the Public Body has power to

impose taxes; or in which the Public Body has been authorized to exercise the function of government (i.e., reserve lands).

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Business Arrangements

3. Typical Business Arrangements

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Business Arrangements/First Nation Ownership

• First Nation Limited Partnerships Generally• Band-owned corporation is typically the general

partner and the band is the limited partner.• Liability of the band, as limited partner, is generally

limited to the amount of capital contributed.• Risk of losing limited liability protection if participating in

management of partnership’s business.• Provides flexibility:

• Facilitates ventures with non-First Nations in the future.• Limited partnership may become involved in co-ventures

with non-First Nations.

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• Tax Treatment of First Nation Limited Partnerships• Subject to usual partnership provisions in ITA.• Partnership not a taxpayer.

• Income for tax purposes calculated at partnership level then allocated to partners.

• Income allocated to First Nation band limited partner will be tax-exempt if paragraph 149(1)(c) applies to the band.

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• First Nation Limited Partnerships

Limited Partnership

General Partner Corporation

First Nation band

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Business Arrangements/Non-First Nation Parties

• Overall Objectives of Structuring with Non-First Nation Parties• Establish structures which benefit both parties• Primary tax objective for First Nation Parties is

maintaining tax-exempt status• Primary tax objective for Non-First Nation party is

to reduce income subject to tax• Flow-through entities may achieve this

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• Typical Business Vehicles • Joint ventures• Limited partnerships

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• Joint Ventures Generally• Tax status of parties is separate from each other• Each party owns assets directly and can claim

Capital Cost Allowance on their assets• First Nation may contribute cash or low capital

cost allowance rate assets• Not a legal entity.• Co-venturers maintain separate tax status.

• Can share in profits and retain tax attributes associated with assets.

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• Joint Ventures between First Nations and Non-First Nations• Non-First Nation party normally invests through a

corporation or limited partnership. • First Nation normally invests through a corporation into

a limited partnership if the business venture will involve debt with a financial institution.

• First Nation usually contributes access to lands/lease, labour and possibly capital.

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• Example of Joint Venture

Joint Venture

Taxable Non-First Nation Corporation

Tax-Exempt First NationCorporation

Lender

Cash

Interest

Depreciable assets

Lease of land/mineral

rights

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• Limited Partnerships Generally• Composed of at least one general partner and any

number of limited partners.• General partners manage the affairs of the partnership

and are liable to an unlimited extent to creditors of the partnership.

• Liability of the limited partners limited to the amount of capital contributed.

• Limited partners must not participate in management of the partnership or they risk losing their limited liability.

• Partnership not a taxpayer.• Income for tax purposes calculated at partnership level

then allocated to partners.

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• Limited Partnerships with First Nation and Non-First Nation Parties• Corporation is often the general partner• Shares of the general partner often owned equally by the

First Nation and non-First Nation participants but this is a negotiation point.• Consider modification of control/decision-making through a

unanimous shareholder agreement.• First Nation and non-First Nation parties are limited partners.

• First Nation typically relies on 149(1)(c),(d.5), (d.6) or (l) for tax-exempt status.

• Tax-exemption is possible since partnership income is taxed in the hands of the partners.

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• Example of Limited Partnership

Limited Partnership

Taxable Non-First Nation Corporation

General PartnerFirst Nation Entity

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New Developments

4. New Developments

• Recent Developments in Case Law (2013)• Edenvale Restoration Specialists Ltd. V. British Columbia

(Finance) BCCA• Tron Power Inc., the General Partner of Tron Power

Limited Partnership v. Saskatchewan (Minister of Finance) SKQB

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New Developments

Tron:

“…it is clear from this agreement and from the authorities that purchases and sales of assets conducted by the general partner are transacted by that general partner. It becomes the owner of such assets. For tax purposes, it is treated independently.”

“the mere fact that Tron buys goods and takes delivery on-reserve in its capacity as the general partner of a limited partnership does not allow Tron to shed its corporate mantle and obtain the benefits of an individual while retaining the benefits commensurate with corporate status…”

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montréal • ottawa • toronto • hamilton • waterloo region • calgary • vancouver • beijing • moscow • london

Thank You

Jeremy C. BouchardTel: 613-786-0246Email: [email protected]

aboriginal business entity tax - afoa canada c... · the courts “in bastien, the court firmly...

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