Finance

Taxation

The authority for First Nation governments to collect monies from taxpayers is through an approved rates bylaw. The revenue that can be generated from property taxation depends directly on the two main components of a property tax: the tax base (assessed value of real property interests on reserve) and the tax rate. The rate of taxation is applied to the assessed value of real property to arrive at the amount of tax levied. The rates bylaw determines the rate at which each class of interests on reserve is to be taxed. In order for a First Nation property taxation regime to be valid, enforceable and recognized by the courts, a rates bylaw must be enacted annually.

The Board's policy with respect to the establishment of rates is based on the need to recognize a balance between First Nations' and taxpayers' rights. The challenge facing the Board is to ensure that taxpayers are treated with fairness, justice and equity, while First Nation governments, as taxing authorities, are free to assert their jurisdiction.

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Income Tax Offices in India

The Indian Taxation Advisory Board's Rates Policy specifies:

17. Notwithstanding the budget, written justification and evidence of notification of tax payers is required to allow a rate increase of more than 5% over the previous year for any class of property. The criteria for justification includes identification of special projects, incremental growth, and increases in the consumer price index and any fundamental change to the system of assessment for any class of property. The level of taxation acceptable to the tax payer must also be considered.

The tax rate evaluation guidelines are the criteria adopted by the Board as the basis for the evaluation of tax rates. Applied within the context of the Rates Policy, these guidelines set out the circumstances under which the Board would accept year-over-year increases in tax rates greater than 5%.

Purpose

The purpose of the tax rate evaluation guidelines is to establish criteria to protect the integrity of the First Nation taxation system by ensuring that tax rate increases greater than 5% are:

• Fiscally feasible
• Justifiable, and
• Acceptable

Accordingly, these guidelines provide information or explanations regarding:

• What is expected from First Nations in establishing their taxation rates; and
• The principles and requirements which govern the manner in which rates are evaluated and recommended for ministerial approval.

Definitions

• First Nation" means a band as it is defined in the Indian Act.
• "Bylaw" means a bylaw as defined and enacted pursuant to section 83 of the Indian Act.
• "Tax Rate" means the amount of tax payable, expressed as a percentage of the assessed value of land, interest in land or improvement.
• "Board or ITAB" means the Indian Taxation Advisory Board.
• "Special Projects" means any expenditure for local purposes that can be attributable to a distinct project to be completed within a fixed time frame.
• "Incremental Growth" means an increase in the demand, by taxpayers, for local services arising from increases in the population base in or around the First Nation's jurisdiction.
• "Extraordinary Increases in the Costs of Local Services" means the increases in the costs of contracted services due to the effects of general inflation, or changes to property tax policy or legislation in other jurisdictions, that lead to increases in required taxation revenue to maintain local services which can not be recovered in a commensurate increase in assessed values.
• "Changes in Assessment Methods" means the utilization of an assessment or valuation method that differs from past practice which leads to a decrease in assessed values, but must be adopted by a First Nation in order to maintain a fair and equitable taxation regime.
• "Fiscally Feasible" refers to the ability of the tax base to absorb a given tax rate increase.
• "Acceptable" rate increase means:
• " No evidence of tax rate increases greater than 5% within the last 3 taxation years; and/or
• " Evidence of consent by a majority of taxpayers to a proposed tax rate increase.

Evaluation Criteria

The evaluation of tax rates increases greater than 5% will based on the consideration of the following factors:

A. Special Projects
B. Incremental Growth
C. Extraordinary Increases in the Costs of Local Services
D. Changes in Assessment Methods


A. Special Projects

Special Projects are any expenditure for local purposes than can be attributable to a distinct project to be completed within a fixed time frame. These special projects could include:

• Capital Infrastructure Projects; and
• Public Works

Tax rate increases greater than 5% attributable to special projects will be evaluated on the basis of their fiscal feasibility.

A special project will be considered fiscally feasible if the proportion of the total cost secured from property tax revenues does not exceed 15% of the average assessed taxable value for the last three years plus the value of any revenue generating utilities.

The Board will consider the composition of the tax base with respect to the concentration of residential as opposed to non-residential properties.

Projects must be foreseen in a multi-year expenditure planning program which would comprise the current year and four planning years. The project time line must be sufficiently long to permit a fiscally feasible increase in the tax burden. A First Nation's ability to finance and complete the project must be demonstrated.

Reporting Requirements

The reporting and data requirements to support a First Nation's submission of increased tax rates include:

• A description of the project and a project time line outlining the planned phases for the completion of the project;
• A multi-year project financing plan detailing the funding requirements to complete the project covering planned expenditures for the current taxation year and each subsequent year over the life of the project; the project financing plan should cover a minimum of four planning years;
• Adoption of a financial administration bylaw or similar instrument demonstrating generally accepted financial management practices; and
• A summary report of total assessed values for the past three years and current and future years covering the life of the project prepared on an annual basis.

B. Incremental Growth:

Incremental growth is the effect on tax rates from increases in the population base in or around the First Nation's jurisdiction leading to increased demand, by tax payers, for local services.

Tax rate increases greater than 5% attributable to incremental growth will be evaluated on whether increases are justifiable and acceptable.

In order to clearly demonstrate the effect of population increases on the demand for local services and the resulting requirements for increased tax revenue and tax rates, the First Nation must show that tax rates are acceptable and justifiable. The First Nation must provide evidence of significant growth, within the past taxation year, in at least one of the following:

• Number of taxation folios; and
• Population on reserve and/or in surrounding communities as evaluated by the Board

Reporting Requirement:

The First Nation must submit assessment roll summaries for the past four years.

The Board will evaluate the best available public population statistics along with any past, current, and forecasted population figures that the First Nation may wish to submit.



C. Extraordinary Increases in the Costs of Local Services:

Extraordinary increases in the cost of local services can be attributable to the effects of general inflation and changes to property tax policy or legislation in other jurisdictions.

Tax rate increases greater than 5% attributable to extraordinary cost increases will be evaluated on whether tax increases are justifiable.

The First Nation must provide evidence of significant increase in financial pressures due to inflation and detail increases in the cost of contracted local services. Furthermore, the First Nation must demonstrate that these increased costs cannot be met by increased tax revenue generated by a commensurate increase in assessed values.

Reporting Requirements: The reporting and data requirements to support a First Nation's submission of increased tax rates include:

• % increase in contracted services cost; and
• % change in assessed values

The Board will evaluate the best available price index applicable to the First Nation.



D. Changes in Assessment Methods

Changes in assessment practices resulting in lower assessed values can legitimately lead to significant tax rate increases provided that the First Nation is bound to adopt these different assessment methods in order to maintain a fair and equitable taxation regime vis-à-vis adjacent taxation jurisdictions.

Tax rate increases greater than 5% will be evaluated on the basis of justified changes in assessment methods.

In order to justify an appropriate tax rate increase First Nations must provide evidence of decreases in assessed values with a maintenance of service delivery standards. These costs would include debt servicing and contracted local services.

Reporting Requirements

The reporting and data requirements to support a First Nation's submission of increased tax rates include:

• Description of changes in assessment practices;
• % change in assessed values; and
• Service delivery costs

The Board may require other information such as the number of folios in default in its evaluation of submitted tax rates.

Find out more

• CBEC (Central Board of Excise and Customs) - http://www.cbec.gov.in/
• CBDT (Central Board of Direct Taxes) - http://incometaxindia.gov.in/