In this issue:
- McDonald v. The Queen, 2011 TCC 437
- First Nations To Issue Bonds To Raise Money For Infrastructure Projects
MCDONALD V. THE QUEEN, 2011 TCC 437
By: Scott Robertson
Tax Court Finds Fishing Income and Employment Insurance Benefits exempt from taxation
This was an appeal as to whether the fishing income and employment insurance benefits received by 16 First Nation Appellants were exempt from taxation as they were personal property situated on a reserve within the meaning of s. 87 of the Indian Act. The Court allowed the appeals and found the fishing income and employment insurance benefits generated from the income were exempt from taxation.
The Appellants are members of the Miawpukek First Nation located in Conne River Newfoundland. During the years at issue the Appellants caught fish under communal fishing licenses which had been issued by the Department of Fisheries (DFO) to the First Nation under its Allocation Transfer Program. The First Nation incorporated Netukulimk Fisheries Ltd. (NFL), which was responsible for operating the fishing enterprise and had its office and place of business on the Reserve. All of the crew members of a fishing vessel were paid by cheque issued by NFL based on a share of the catch.
The Court determined that the fishing income at issue was business income. The Court applied the two step analysis set out in the recent Supreme Court of Canada decision in Bastien Estate v. Canada to determine which relevant factors connect the property to a location and what weight should be given to identify the location of the property. The Court also acknowledged the concern raised by the Supreme Court of Canada in elevating the term "commercial mainstream" to one of determinative weight.
The Court found that the Appellants fished in the commercial fishery regulated by the DFO in a manner like other fishermen. However, this was not determinative and the Court found that the Appellants' work was exempt from taxation as it was intimately connected to the reserve on the basis that the Appellants lived on the reserve, fished on vessels owned by the Band using licenses issued to the Band, performed some of their work on the Reserve and were paid on the Reserve by a corporation controlled by the Band.
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FIRST NATIONS TO ISSUE BONDS TO RAISE MONEY FOR INFRASTRUCTURE PROJECTS
By: Jaimie Lickers
As Canada's First Nations move towards a new era of revitalization, self-sufficiency and economic development, they require access to financial instruments and markets to fund infrastructure development. Unlike other orders of government, First Nations largely lack the legislative and institutional means to finance community infrastructure development and often face prohibitive borrowing costs that can be 30-50% higher than those available to other orders of government. Recognizing the need for access to secure and stable funding for long-term development and capacity building projects, a group of First Nations created the First Nations Finance Authority (FNFA) in 1995. This First Nations-led institution managed cash balances for First Nations as it began working towards developing means of securing lower-cost, longer-term private investment capital specifically for First Nations.
On April 1, 2006, the First Nations Fiscal and Statistical Management Act (the Act) came into force to support the activities of FNFA. The Act created a property taxation regime for member First Nations wishing to access revenue streams by securitizing tax revenue. The Act envisioned the creation of a bond financing regime backed by these property tax revenues to create a pool of available long-term private capital for roads, water, sewer and other infrastructure projects in First Nations communities.
The Act also created four First Nation institutions, including the First Nations Finance Authority (the FNFA), the successor organization to FNFA Inc. The FNFA is a non-profit finance authority with the power to issue bonds on behalf of member First Nations and to provide access to capital by pooling revenue from member First Nations. By pooling revenue streams, the FNFA increases the availability of funds for First Nations, diversifies risk for investors and significantly reduces the cost of borrowing for First Nations. Under the current regime, the FNFA can only use First Nations' property tax revenues to back the issuance of its bonds. Currently, such revenue amounts to approximately $3 million which is insufficient for the purpose of issuing financial instruments.
Recognizing this shortcoming, additional regulations under the Act have been proposed to allow for the securitization of additional streams of revenue. The proposed regulations, entitled "Financing Secured by Other Revenues Regulations", would allow for the securitization of revenues from leases and permits authorizing the use of reserve lands, interest earned by First Nations on deposits, investments or loans, oil and gas royalties payable to First Nations, contractual revenues payable to a First Nation, and revenue from qualifying First Nation businesses. By expanding the qualifying revenue streams, the FNFA estimates that its pool of revenue will increase from $3 million to approximately $85 million. This will provide sufficient financing for the issuance of its inaugural bond which is anticipated by March 31, 2012.
In order to participate in FNFA debt issues, First Nations must demonstrate a high degree of fiscal responsibility. Membership in the FNFA borrowing group and approval for borrowing requests is strictly regulated. In order to become a Borrowing Member of the FNFA, the applicant First Nation must undergo a strict review of its financial health and administration. The Financial Management Board (FMB), one of the four institutions created under the Act, acts independently of the FNFA to certify those First Nations deemed to be financially sound and thus eligible for admission as a Borrowing Member. The factors considered by the FMB include the First Nation's financial records, asset management, political structure, audit requirements, and revenue base. In addition to regulating membership, the FMB is also responsible for the ongoing monitoring of member First Nations to ensure that borrowing eligibility is maintained. The FMB is currently evaluating approximately 15 First Nations seeking certification.
Prior to the inaugural bond issue, certified First Nations are eligible to participate in the FNFA's interim loan program. Through this program the FNFA is able to offer participating First Nations interim financing at interest rates below bank prime. The FNFA is currently providing interim financing to a number of approved First Nations at an annual interest rate of 2.6%, 0.4% below the current bank prime. It is anticipated that this rate will drop to 2.35% upon the issuance of its inaugural bond.
The FNFA's process of issuing a debenture will be the same as for any province, territory or local government in Canada; the same marketing plan and the same rating agencies will be used. Investors will be provided with an additional investment product to diversify portfolios. Pension funds and offshore investors have demonstrated a growing appetite for long-term subnational government lending because of its stability. It is anticipated that these debentures will be in high demand and will raise significant revenue for participating First Nations.
These proposed regulations will expand First Nations development power by providing a broad base of revenue available for securitization. The revenue can be used for any purpose that promotes a First Nation's economic or social development, including:
- financing for capital infrastructure projects such as the provision of local services, housing, plants and machinery, buildings and other capital assets;
- land that is to be wholly or partly owned by the First Nation;
- shares or other ownership interest in a corporation whose purpose includes the ownership, operating, management or sale of products of power generating facilities, waste or wastewater treatment facilities or other public service utilities or facilities;
- lease financing of capital assets for the provision of local services; and
- short-term financing to meet cash flow requirements for capital purposes or to refinance short-term debt incurred for capital purposes.
These regulations will create significant opportunities for member First Nations by providing the capacity to strengthen the foundation for economic development in First Nations communities and foster greater self-sufficiency among Canada's First Nations.
The proposed regulations are expected to be passed in the fall of 2011 and are available online at: http://gazette.gc.ca/rp-pr/p1/2010/2010-11-27/pdf/g1-14448.pdf
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