First Nation Settlement Trusts establish a fiduciary relationship amongst aboriginal communities (First Nations) as the settlors, the trustees of the trust property and the trust’s beneficiaries, typically comprised of a first nation(s) and their peoples. Much the same as the aboriginal peoples were custodians of their lands and territories for the benefit of future generations, the settlement trust records the fiduciary relationship amongst the aboriginal peoples and the settlement funds which have been settled on the trust to compensate for losses in respect of aboriginal lands and other damages suffered by aboriginal peoples.
These settlements are typically paid by provincial and/or federal governmental bodies or commercial resource interests in settlement of past, present and future impacts, grievances and claims in respect of impacted aboriginal lands and peoples. Rather than transfer such funds to the political bodies of the day, such as an Indian Band represented by Chief and Council, governments and commercial enterprises, as well as First Nation leaders, themselves, are insisting that settlements paid under a particular impact benefit agreement be settled on trusts. The purpose of such trust is to form a legacy to benefit those impacted aboriginals alive today as well as future generations of aboriginal peoples. Indian Bands with their constant political upheavals every two or three years have in most cases been recognized to be a poor vehicle to manage these settlement funds over the long term.
What is a First Nation Settlement Trust?
As a result, First Nation Settlement Trusts have become the legal vehicle of choice to protect these types of legacy settlements. But what exactly is a “First Nation Settlement Trust”? Clearly these settlement trusts are intended to act as a form of treasury for the impacted first nations; a place where significant financial settlements can be wisely managed, invested and applied to community needs, now and in the future. As such, these trusts are structured, to the greatest extent possible, to ensure that a minimum legacy balance is protected and preserved for future generations.
Taxation of Settlement Trusts
One of the most important features of any such financial arrangement is to ensure that the income earned on the settlement funds is not taxable; much the same as any other government treasury. Because of the lack of formal legislation generally exempting first nation investment trusts from taxation, in a manner similar to municipal, provincial or federal treasury funds, it is necessary to establish settlement trusts which divert taxable income to tax exempt First Nations without forcing a distribution of the settlement funds or the income earned on them.
Tax structured settlement trusts must address the fact that all inter vivos trusts, that is trusts formed during the lifetime of the settlor, are taxable at the top marginal tax rate applicable in the province or territory in which the Trust is a resident – that is where the Trust’s central management and control is located.
Many aboriginal people are of the view that such First Nation Aboriginal Trusts are tax exempt. Nothing could be further from the truth! First Nation Settlement Trusts are taxable at the highest tax rates in the country ranging in the area of 45% – which given that these funds are being used for desperately needed community services is unacceptable!
However, no regime has been legislated to set this situation right and there is no general tax exemption for First Nation Trusts. This is a matter which requires our politicians’ immediate attention. First Nation Settlement Trusts should be designated to be tax free public bodies performing the functions of a public body and exempt from income taxation under s. 149(1)(a) of the Tax Act! And in this author’s view, in exchange for such blanket tax exemption, such Trusts should be regulated in a manner like any other tax exempt pension fund.
Because First Nation trust settlements are typically intended to benefit generations to come, provincial governments should also suspend the Rule against Perpetuities as it applies to such trusts. With the exception of Manitoba, every other jurisdiction in which the Rule Against Perpetuities applies, such trusts forced to wind up every 80 years. This area of the law also needs changes.
A Push for Tax Exempt Status on Settlement Trusts
Typically, in order to avoid taxation at top marginal tax rates, trustees of inter vivos trusts will cause to be paid or make payable an amount equal to the trust’s income each year. In the case of a First Nation Settlement Trust, this defeats the very purpose for which the trust has been settled. In order to avoid being forced to pay out all income earned on First Nation Settlement Funds, or to declare such income to be payable each year, such trusts have been forced to rely on a tax avoidance rule – the Reversionary Income Rule applicable to Trusts in accordance with s. 75(2) of the Tax Act. S. 75(2) provides that if you have settled property on a trust and you have the ability to control who receives the funds or you are a beneficiary of the Trust Settlement, then all income from that settled property must be reported by the property’s settlor, whether or not the income is ever received by the settlor. This is, to say the least, an awkward fix for First Nations seeking to get the same tax exempt treatment that applies to every other governmental body, whether it be a municipality , Province or the Federal government. Reliance on this structure could result in CRA choosing at any moment to assess these trusts on the basis they have relied on s.75(2) for tax avoidance purposes and challenge such structures under GAAR – resulting in the income on such settlement funds becoming fully taxable. While favourable income tax rulings have been issued by the Canada Revenue Agency approving such structures, this is not really a satisfactory situation. The responsible governmental bodies are urged to act to set up a proper regulatory arrangement that will assist First Nations in realizing their goal of true self-sufficiency. The tax exempt status of such Trusts is an important step in the right direction.
For a check list of the most important issues governing the establishment of a First Nation Settlement Trust, see the linked power point presented by the author at the February 2014 AFOA AGM in Halifax.
Tags: Article; William Cooper; Tax; First Nation Settlements; First Nation Trusts; First Nation Settlement Trusts; Impact Benefit Agreements; Legacy; Rule Against Perpetuities; Reversionary Income Rule; First Nation Self-Sufficiency