Today’s blog was written by Kelsey Buchmayer, Gowling WLG

Trusts have become an increasingly popular way for Indigenous entities such as First Nations and Self-Governing Nations to manage their wealth. Depending on how they are drafted, they can fund a community’s short-term needs while also providing for the continued wealth of future generations, the latter often referred to as a “legacy trust.”

For context, the settling of a trust by an Indigenous entity is often prompted by the anticipated receipt of a large amount of funds (usually in the tens if not hundreds of millions of dollars), for example from the government for the settlement of a claim or historic grievance, or from an impact benefit agreement with a mining or oil company.

So what makes an Indigenous trust unique from other inter vivos trusts? While there are a number of nuanced differences one could discuss, for the purposes of this post I will focus on two: (1) the nature and involvement of the beneficiaries of the trust, and (2) the manner in which Indigenous entities as settlors can utilize the income attribution rule under s 75(2) and their tax-exempt status under s 149(1)(c) of the Income Tax Act (the “Act”).

(1) Indigenous entities and their members/citizens as beneficiaries

The beneficiaries of Indigenous trusts are usually the Indigenous entity itself, as well as those individuals who are under and belong to it (such as a First Nation’s members or Self-Governing Nation’s citizens).

Many Indigenous trusts are set up as legacy trusts and in such trusts, there are typically strict limits on income and capital that can be paid out to the Indigenous entity for specified uses annually. Some trusts, however, are drafted with more flexibility in that they anticipate and allow for funding in the short-term and may even allow for capital encroachment. Usually such trusts do still have a legacy aspect. Regardless of the trust structure, the use of a trust as a vehicle to hold and manage assets ensures there is oversight of such assets by trustees while the governing body (such as a governing Council or the Nation’s government) remains at arms-length. This can provide the Indigenous entity’s members/citizens with a level of comfort and transparency, especially given the political nature of governing Council/government.

Though the drafting of a trust deed will dictate the decision-making processes, it is common in Indigenous trusts that beneficiaries, through open community participation, will become quite involved in its management, even so far as voting on the direction of funds and programs over a certain period of time. Rarely will this level of participation be afforded to the beneficiaries of the inter vivos or testamentary trusts in other contexts.

The amending provisions of an Indigenous trust will also usually contemplate significant involvement and approval of the members/citizens. Substantive amendments can typically only be done by way of referendum, with a minimum threshold of members/citizens approving such amendment. Again, this is intended to provide adequate checks and balances, transparency and control to members/citizens as beneficiaries over their and their future generations’ financial wealth, which is not likely to be found in most other inter vivos trusts.

(2) Income attribution to a settlor-Indigenous entity that is tax-exempt

An Indigenous trust is not tax-exempt by virtue of having an Indigenous entity as a settlor or an Indigenous entity and its members/citizens as beneficiaries. In fact, it is quite the opposite: like all trusts, Indigenous trusts are taxable at the top marginal tax rate as applicable in the province or territory in which the trust is resident. This flows from s 104(2) of the Act which holds that trusts are deemed to be individuals for the purpose of taxation.

The difference with Indigenous trusts is that while income is attributable to the settlor (normally the Indigenous entity) pursuant to s 75(2) of the Act, which in most inter vivos trusts would prevent tax avoidance, the Indigenous entity is able to take advantage of its tax-exempt status under s 149(1)(c) of the Act and not have to pay any tax on that attributed income. The reason First Nation bands can rely on the s 149(1)(c) tax exemption is because the Canada Revenue Agency treats an Indian band as a public body that performs a function of government. For Self-Governing Nations, this s 149(1)(c) tax exemption has been brought into overarching and nation-specific self-government agreements between the Government of Canada and Self-Governing Nations.

The advantage of having income attributed under s 75(2) is that such income (first generation income) does not actually have to be paid out and can remain in the trust. This is not the same as future income earned on that income (second generation income) which is not attributed and must be paid out to avoid taxation at trust level.

There is a strong argument to be made as to whether trusts established for the benefit of Indigenous entities should be taxed differently or have some other exemption so that they do not have to rely on s 149(1)(c) to deal with income attributed by s 75(2) to the Indigenous entity but not paid, or to avoid being forced to pay non-attributed income (being second generation income) to the Indigenous entity to avoid tax liability at trust level.