FNs’ Business Revenue: When you Should Distrust the Trust

National Aboriginal Business Opportunities Conference

Osoyoos, BCSeptember 14-15, 2010

Facilitator:

Merle Alexander

mca@bht.com

W: +16046414935

C:+16043158569

Overview

1. Introductory Comments

2. Trust primer in the FNs context

3. Advantages to using a trust for FNs

4. Disadvantages to using a trust for FNs

5. An innovative solution: not-for-profit society

6. Questions

Introductory CommentsIntroductory Comments

FN Trusts have at minimum three drivers: (1) Paternal Crown Fiduciary relationship; (2) Preservation of Property for Future Generations;

and, (3) Revenue Flow-Through Potential. As anything, there are positive and negative,

advantages and disadvantages to any instrument or vehicle designed with such purposes.

A well-drafted trust instrument can achieve all three purposes and facilitate community real investment.

Introductory CommentsIntroductory Comments FNs have key intended uses for property or monies

held in a trust. Purposes are socio-economic, community

investment and cultural preservation oriented. Too often the trust instrument is not drafted to allow

for the FNs intended uses and only the interest, not principal, is available.

These types of trust hand cuff the FN in a key settlement.

These types of trusts do not respect the FNs right to self determine.

Trust Primer In a trust, the trustee holds property for the benefit of

other persons known as beneficiaries Trusts can be used to operate businesses directly or to

hold investment assets such as units in a limited partnership

It is popular vehicle due to its: flexibility in managing assets; allocating distributions; and, accounting for the different interests among beneficiaries.

Trust Primer (cont.)

Trustees are fiduciaries and are held to a very high standard of responsibility

Trustees can be held personally liable to the beneficiaries

Trusts are taxable entities

FN TrustsFN Trusts

Examples of FN trusts:

Gwaii Trust Society

Trust Advantages

Trust have the advantage of isolating the business or investment assets from the FN

Trusts can mandate forms of investment which ensure long term capital growth

Trusts can provide for centralized control of all long-term investment and distribution decisions for all the business activities of a FN

Trust Advantages (cont.)Trust Advantages (cont.) FNs’ trusts are commonly structured to ensure that all

income is taxed: in the tax-exempt FN or, in the case of distributions, in the hands of primarily

tax-exempt beneficiaries (i.e., Status Indians) Income from FNs businesses or investments owned

by the trust flow into the trust structure where they are either reinvested into new or existing businesses or distributed to the FN for its community needs These decisions are based on the discretion given

to the trustees based on guidelines described in the trusts

FNs’ Use of TrustsFNs’ Use of Trusts In some structures, the trust allows FN leadership to

apply for payments from the trustees. The trustees then review the application and ensure

that the request complies with the terms of the trust. Trusts are also drafted to provide for certain restrictions

on uses of trust funds (i.e., member distributions or loans).

Trusts may allow the leadership to appoint the trustees or alternatively, a process, such as an election or referendum, may be developed to allow FN members, Elders or Family Heads to appoint trustees.

FNs’ Use of Trusts (cont.)FNs’ Use of Trusts (cont.) Some FNs use a business corporation or a society as

the trustee. This structure has the advantage of providing limited

liability protection to the individuals serving as the directors.

This also allows a board of directors consisting of both community citizens and business/investment appointees from outside the community to collaborate and provide expertise relating to decisions governing the business and investment activities of the trust .

FNs’ Use of Trusts (cont.)FNs’ Use of Trusts (cont.)

Trusts are also used to allow FNs to effect a separation of governance duties from business and investment activities.

The power to appoint the directors of the corporate trustee can be placed in the hands of a different group (i.e., Family Heads, Clans, etc.) other than the FN’s leadership.

Disadvantages - Why Trusts Fail Poor legal drafting:

inappropriate reliance on precedents; failure to consult the First Nation effectively

to identify current and future needs; and, the drafter lacks expertise in trust and tax

law and/or fails to understand FNs governance models

Disadvantages – Why Trusts Fail (cont.) Examples of trusts not serving the FN because of

drafting

Faulty Amending Provision Necessitating Trust Variation McLeod Lake Indian Band Trust Agreement

(Re), 2010 BCSC 1158

Difficulties With Respect to Successorship Gitga'at Development Corp. et al v. Hill et al,

2007 BCCA 158

Disadvantages – Why Trusts Fail (cont.)

Trusts are taxable In order to ensure that no trust is actually

payable, FN trusts can be structured in complicated ways

The structure, particularly with respect to distributions, can make such trusts: difficult to understand difficult to administer

Disadvantages – Why Trusts Fail (cont.) Potential divisiveness of trust structure

relationship between Band Council and Trustees

community disagreement and/or lack of understanding with respect to terms of trust and decisions made by Trustees

Why Consider a Society?

Many problems which create complexity in a trust can be resolved relatively easily using a society a society will generally be tax-exempt eliminating

the need for complex structuring such as distributions and loan-backs

there is limited liability protection for directors the governance model is generally easier for both

the directors and the members of the FN to understand

Why Consider a Society? (cont.)

Drafting errors that cause the most dramatic problems with trusts can be virtually eliminated

Ownership by the society of businesses, property and other ventures is more straight-forward

Why Consider a Society? (cont.)

Arguably more effective ability of society members to oversee directors and ensure responsiveness to community concerns members can remove directors for any reason

(requires a 75% vote in favour) by contrast, a court application is required to

remove a trustee and the threshold is very high – malfeasance/fraud

members control all amendments to the Constitution and Bylaws

Societies – Not a Magic Bullet

Problems can still arise failure to communicate with members failure to act in an accountable way

The only answer is adherence to rigorous governance standards and education/training/understanding of the legal and community requirements

Closing CommentsClosing Comments

Trusts too commonly have a paternalistic hierarchy between Trustees and beneficiaries.

FN should consult their appropriate community, departments and professional advisor in the careful drafting of Trust instruments.

Consideration of corporate or societies as the trustee itself or society alone should also be considered.

Use of a society can be tremendously less expensive than the process of drafting a detailed trust document.

If in doubt, ask us.