The Unique Tax Status of First Nations in Canada

A “Band” as defined in the Indian Act is a public body performing a function of government in Canada and thus exempt from tax under Section 149(1) of the Income Tax Act. The s.149(1) exemption applies to income earned both domestically (on and off reserve) and internationally. Currently, there are minimal to no restrictions on commercial activity that can be undertaken by First Nations on a tax-exempt basis. 

Leasing and the Income Tax Act

Leasing has been used effectively as an alternative to conventional purchasing and borrowing where a lower after-tax cost of financing can be provided. The Government of Canada, however, has moved at various times and in various ways to eliminate these after-tax benefits. 

Leasing and First Nations

Current rules in the Income Tax Act that restrict the after-tax financing advantages of leasing are, however, largely irrelevant where First Nations can act as lessors. First Nations thus stand in a unique position to facilitate lower cost financing options to industry partners by way of commercial leasing opportunities that can monetize or finance against existing assets (via sale-leaseback structures) and/or reduce the after-tax costs of new asset acquisitions (via purchase-lease structures).

Security Against Potential Challenge

Distinctive to the IWF Group solution, tax liability insurance is available to industry partners to secure against any challenge to the tax treatment of a transaction, including by consequence of retroactive changes in law and any implementation of expanded mandatory disclosure rules respecting “reportable transactions” contemplated in Budget 2021.