AN UPDATE ON TAX EXEMPTIONS

Transcription

1 AN UPDATE ON TAX EXEMPTIONS FOR FIRST NATIONS AND RELATED MATTERS Bill Maclagan, Q.C. Blake, Cassels & Graydon LLP Vancouver 2016 British Columbia Tax Conference

2 A. INTRODUCTION... 2 B. SECTION 87 PRE AND POST BASTIEN AND DUBÉ BACKGROUND REQUIREMENTS FOR THE SECTION 87 EXEMPTION SITUS OF PROPERTY THE NOWEGIJICK PRINCIPLE THE COMMERCIAL MAINSTREAM THE WILLIAMS DECISION: THE CONNECTING FACTORS TEST (I) OVERVIEW (II) THE SITUS TEST POST WILLIAMS/PRE BASTIEN AND DUBÉ (I) INTRODUCTION (II) EMPLOYMENT INCOME (III) BUSINESS INCOME (IV) INVESTMENT INCOME BASTIEN AND DUBÉ: A SHIFTING TIDE? MORE OF THE SAME? POST BASTIEN AND DUBÉ (I) EMPLOYMENT INCOME (II) BUSINESS INCOME (III) INVESTMENT INCOME/INCOME FROM PROPERTY (IV) SUMMARY C. OTHER POTENTIAL INCOME TAX ACT EXEMPTIONS PUBLIC BODY PERFORMING A FUNCTION OF GOVERNMENT... 42

3 ENTITIES OWNED BY PUBLIC BODIES PERFORMING A FUNCTION OF GOVERNMENT NON-PROFIT ORGANIZATIONS D. BASIC STRUCTURES FOR BUSINESS ACTIVITY PROPRIETORSHIP CORPORATIONS PARTNERSHIPS JOINT VENTURES TRUSTS E. GST AND PST GOODS AND SERVICES TAX ( GST ) (I) COLLECTION (II) PAYMENT B.C. PROVINCIAL SALES TAX (I) COLLECTION (II) PAYMENT F. OWN SOURCE REVENUE ISSUES... 66

4 - 2 - A. INTRODUCTION This paper is an overview and update with respect to the tax exemptions available to Indian people pursuant to Section 87 of the Indian Act ( Section 87 ) and other sections of the Income Tax Act ( ITA ) 1. The beginning of the paper focuses on the historical development of the connecting factors test and then moves on to its recent incarnation after the 2011 Supreme Court of Canada decisions in Bastien and Dubé and their impact on case law and CRA technical interpretations since that time. The paper also reviews (i) other exemptions under the ITA that are available to First Nations (ii) GST and PST issues including the British Columbia Ministry of Finance position with respect to tangible personal property purchased through a partnership and (iii) own source revenue issues. In this paper in order to follow the definitions and wording in the Indian Act, I will generally refer to First Nations people and First Nations as Indians and Bands respectively. B. SECTION 87 PRE AND POST BASTIEN AND DUBÉ 1. Background Section 87 of the Indian Act reads as follows: 87(1) Property Exempt from Taxation - Notwithstanding any other Act of Parliament or any Act of the legislature of a province, but subject to section 83 and section 5 of the First Nations Fiscal Management Act, the following property is exempt from taxation: (a) (b) the interest of an Indian or a band in reserve lands or surrendered lands; and the personal property of an Indian or a band situated on a reserve. (2) Idem - No Indian or band is subject to taxation in respect of the ownership, occupation, possession or use of any property mentioned in paragraph (1)(a) or (b) or is otherwise subject to taxation in respect of any such property. (3) Idem - No succession duty, inheritance tax or estate duty is payable on the death of any Indian in respect of any property mentioned in paragraphs (1)(a) or (b) or the succession thereto if the property passes to an Indian, nor shall any such property be taken 1 A version of this paper was first presented to the Continuing Legal Education Society of British Columbia in Thank you to Matthew Weaver for his assistance in completing this paper. All errors and omissions are mine alone.

5 - 3 - into account in determining the duty payable under the Dominion Succession Duty Act, chapter 89 of the Revised Statutes of Canada, 1952, or the tax payable under the Estate Tax Act, chapter E-9 of the Revised Statutes of Canada, 1970, on or in respect of other property passing to an Indian c. 9, s. 150; 2012, c. 19, s. 677 Section 90 of the Indian Act deems personal property provided to an Indian or a Band, pursuant to a treaty or agreement with the Crown, to always be situate on a reserve. Paragraph 81(1)(a) of the ITA explicitly recognizes the exemption provided in Section 87 as follows: 81(1) There shall not be included in computing the income of a taxpayer for a taxation year, (a) an amount that is declared to be exempt from income tax by any other enactment of Parliament, other than an amount received or receivable by an individual that is exempt by virtue of a provision contained in a tax convention or agreement with another country that has the force of law in Canada; Over many years, various Canadian courts have analyzed the policy of the special tax treatment of Indian property situated on reserve lands. The Federal Court of Appeal and the Supreme Court of Canada continue to affirm the view that the purpose of the exemption is not to confer a general economic benefit upon Indians, but is rather to preserve the entitlement of Indians to their reserve lands and to ensure that the ownership and use of their property on reserve lands is not eroded by government taxation. 2 This generally leads to a narrow interpretation of the exemption. 2. Requirements for the Section 87 Exemption In order to benefit from the exemption from taxation under Section 87, the following requirements must be met: (i) the government levy, from which exemption is sought, must be a tax; 2 Boubard v. Her Majesty the Queen, 2008 DTC 3015, (TCC), aff d, 2009 DTC 5035 (F.C.A.); Mitchell v. Sandy Bay Indian Band, (sub. nom. Mitchell v. Peguis Indian Band) (1990), 71 D.L.R. (4th) 193 (S.C.C.); and Bastien v. The Queen 2011 S.C.C. 38; and Dubé v. The Queen 2011 S.C.C. 39.

6 - 4 - (ii) the person claiming the exemption must be an Indian or a Band; and (iii) the tax must be levied in respect of an Indian s or Band s interest in either (1) reserve or surrendered land or (2) personal property situated on a reserve. For property to be exempt from tax under Section 87, it must be situated on a reserve. Any reserve is acceptable, it need not be the Indian s home reserve. 3 Only an Indian or Band can claim the exemption from taxation. Under subsection 2(1) of the Indian Act, an Indian is defined as a person who pursuant to this Act is registered as an Indian or entitled to be registered as an Indian. Thus, under this definition, some Aboriginal persons such as non-status Indians, Métis and Inuit are not eligible for the Section 87 exemption. 4 Under subsection 2(1) of the Indian Act, a Band is defined as a body of Indians (a) (b) (c) for whose use and benefit in common, lands, the legal title to which is vested in Her Majesty, have been set apart before, on or after September 4, 1951, for whose use and benefit in common, moneys are held by Her Majesty, or declared by the Governor in Council to be a band for the purposes of this Act. The Courts have held that a corporation is not an Indian or a Band and thus not entitled to any Section 87 exemption, even if all its shareholders are Indians or a Band. Pursuant to Section 87, both real and personal (tangible and intangible) property may be eligible for exemption from taxation if they are situated on a reserve. Specifically, subsection 87(1) exempts from taxation: the interest of an Indian or a Band in reserve lands or surrendered lands; and 3 Bastien and Dubé, ibid. 4 Whether or not such persons are entitled to any other form of exemption, for constitutional or other reasons, or whether the definition of Indian Act is too narrow, may still be to be determined: Daniels v. The Queen, 2016 SCC 12.

7 - 5 - the personal property of an Indian or Band situated on a reserve. In Nowegijick v. R. 5, the Supreme Court of Canada held that personal property includes income and taxable income. Income or taxable income of an Indian or Band will be exempt from taxation if it is situated on a reserve. 3. Situs of Property The requirement that the personal property of an Indian or a Band be situated on a reserve is perhaps the most contentious issue with respect to the Section 87 exemption. Determining where tangible personal property is situated is generally fairly simple. With respect to Goods and Services Tax ( GST ) and British Columbia Provincial Sales Tax ( PST ), there are specific administrative positions to deal with the issue of tangible goods. The situs of intangible property (i.e., debts, wages and business income) is a different issue. Due to its non-physical nature, the location of intangible property can be difficult to determine. For example, with a loan contract, the situs of the interest income received could be the residence of the debtor or the recipient or perhaps where payment is made or the place where the parties entered into the contract. As a result of the complexities of determining situs, Canadian courts have had many opportunities to comment with respect to the taxation of intangible personal property. 4. The Nowegijick Principle Prior to the decision in Williams v. The Queen, 6 the leading case in Canada on the taxation of intangible personal property payable to an Indian was the Supreme Court of Canada s decision in Nowegijick. In Nowegijick, the taxpayer was a status Indian living on a reserve. He performed work off the reserve as a logger for a corporation which had its head office on a reserve and which paid him by cheque from the head office. The Canada Revenue Agency (the CRA ) 5 Nowegijick v. R., [1983] D.T.C. 5041(SCC). 6 Williams v. The Queen, [1992] D.T.C (S.C.C.).

8 - 6 - considered that the wages the taxpayer received were taxable income and thus proceeded to assess the taxpayer accordingly. The Supreme Court of Canada held that for the purposes of Section 87, salary or wages are personal property of an Indian. Furthermore, the Court went on to state that the inclusion of personal property in the calculation of an Indian s income would give rise to a tax in respect of the personal property of that Indian within the meaning of the Indian Act. Nowegijick was also the leading decision with respect to the situs of intangible personal property. In that case, a simple test taken from conflicts of law principles was applied. The Supreme Court of Canada held that wages or salaries are normally situated for conflicts of law purposes where the debtor (i.e., employer) is to be found, because that is the place where the debt can be enforced. Hence, if the payer (i.e., employer) was resident on a reserve, the debt was situated on the reserve and thus the income was not subject to tax. Prior to Williams, wages of an Indian were tax exempt no matter where the work was carried out and no matter where the Indian resided, provided the payor of the wages resided on the reserve. This test also applied to other forms of debt and allowed most Indians to know, with some certainty, when they would be taxed in respect of any remuneration they received. Furthermore, the test allowed an Indian to set up a tax structure whereby he/she lived and worked off the reserve but was at law employed through a company located on a reserve, and therefore, avoided income taxation under Section 87. However, in 1992 (some 24 years ago), the Supreme Court of Canada s decision in Williams reversed many of the earlier principles with respect to the situs of intangible property. In Williams, the Court developed a connecting factors test. 5. The Commercial Mainstream The connecting factors test, which I will discuss later in this paper, and the decision in Williams which appeared to perhaps narrow the application of Section 87, stem from the case of Mitchell v. Peguis Indian Bank, [1990] 71 D.L.R. (4th) 193 (S.C.C.), which opened the door to the proposition that Section 87 may not apply to income earned in the commercial mainstream. Since Bastien and Dubé, this position has been discredited, but how it arose is important for a thorough understanding of Section 87 and section 90.

9 - 7 - In Mitchell, a law firm acted for a Band to recover sales taxes improperly paid to the Government of Manitoba. The firm was successful but the Band did not pay its legal bill. The firm sued the Band and attempted to garnish the funds held by the Government of Manitoba. The Band argued the funds were deemed situated on a reserve by virtue of section 90 and, therefore, exempt from garnishment due to section 89 of the Indian Act, even though the funds were actually situated off the reserve. Section 90 of the Indian Act deems personal property which is given to Indians or a Band under a treaty or agreement with the Crown to be situated on a reserve irrespective of where it in fact is situated. The Court of Appeal and the trial judge accepted this reasoning. However, the Supreme Court of Canada, in a very split decision, did not accept this reasoning. The Supreme Court of Canada was concerned with giving section 90 a broad interpretation and discussed Section 87 and section 89 in the context of same. La Forest J. stated the following often quoted words, at 226: In summary, the historical record makes it clear that ss. 87 and 89 of the Indian Act, the sections to which the deeming provision of s. 90 applies, constitute part of a legislative package which bears the impress of an obligation to native peoples which the Crown has recognized at least since the signing of the Royal Proclamation of From that time on, the Crown has always acknowledged that it is honour-bound to shield Indians from any efforts by non-natives to dispossess Indians of the property which they hold qua Indians, i.e., their land base and the chattels on that land base. It is also important to underscore the corollary to the conclusion I have just drawn. The fact that the modern-day legislation, like its historical counterparts, is so careful to underline that exemptions from taxation and distrain apply only in respect of personal property situated on reserves demonstrates that the purpose of the legislation is not to remedy the economically disadvantaged position of Indians by ensuring that Indians may acquire, hold, and deal with property in the commercial mainstream on different terms than their fellow citizens. An examination of the decisions bearing on these sections confirms that Indians who acquire and deal in property outside lands reserved for their use, deal with it on the same basis as all other Canadians. La Forest J. went on to state, at 227 and 233: Reference should also be made to the decision of the British Columbia Court of Appeal in Re Leonard and The Queen in right of B.C. (1984), 11 D.L.R. (4th) 226, 52 B.C.L.R. 389, [1984] 4 W.W.R. 37, leave to appeal to this court refused, D.L.R. loc. cit., [1984] 2 S.C.R. viii, 57 N.R. 161n. There it was held that Indians could be assessed provincial sales tax in respect of purchases made on portions of their lands that they had conditionally surrendered to Her Majesty in right of Canada for the purpose of attracting commercial leases. I find myself in respectful agreement with the following observation of Macfarlane J.A. as to the limits of s. 87(b), at p. 232:

10 - 8 - It is a reasonable interpretation of the section to say that a tax exemption on the personal property of an Indian will be confined to the place where the holder of such property is expected to have it, namely on the lands which an Indian occupies as an Indian, the reserve. Indians who surrender their lands to non-indians on lease give up the right to occupation, and when they own or possess personal property on those surrendered lands I think that they are in no different position than any other citizen. (Emphasis in original.) But I would reiterate that in the absence of a discernible nexus between the property concerned and the occupancy of reserve lands by the owner of that property, the protections and privileges of ss. 87 and 89 have no application.... It would follow that if an Indian Band concluded a purely commercial business agreement with a private concern, the protections of ss. 87 and 89 would have no application in respect of the assets acquired pursuant to that agreement, except, of course, if the property was situated on a reserve. It must be remembered that the protections of ss. 87 and 89 will always apply to property situated on a reserve. But the protections of ss. 87 and 89 would attach, regardless of situs, if the same band concluded a similar commercial agreement and acquired the same property for the same business ends, but happened to conclude the agreement with a provincial Crown acting in a purely commercial capacity. In other words, the statutory notional situs of s. 90(1)(b) would apply or not apply according as to whether an Indian band concluded a purely commercial agreement with one party as opposed to another. This result, in my respectful view, defies plausible explanation. (Emphasis added.) This language and the Mitchell decision, have been used by many, including lower courts, to support the proposition that once an Indian or Band enters the commercial mainstream any income it earns will be subject to tax. This is not what La Forest J. stated. What La Forest J. said was if a Band entered into the commercial mainstream and acquired property it could not expect to avail itself of the deemed situs rules in section 90. If, however, the property was in fact situated on the reserve, the protection of Section 87 and section 89 would apply irrespective of whether or not the Band or Indian had entered the commercial mainstream. Section 87 always applies to personal property situated on a reserve no matter where such property comes from: see Bastien 7 at paragraph 22. In my view, to say that intangible or tangible personal property that is acquired in the commercial mainstream is never situated on a reserve is to add words to Section 87 which do not exist and is inconsistent with Mitchell. 7 Bastien, supra note 2.

11 - 9 - However, I would suggest this is exactly what most of the post-williams decisions pre Bastien and Dubé do. In the Federal Court of Appeal decision in Recalma v. The Queen, [1998] D.T.C. 6238, the issue of a separate economic or commercial mainstream test was placed squarely before the Court. Unfortunately, the taxpayer was unsuccessful in Recalma. The Court confirmed there was no separate commercial mainstream test to determine the application of Section 87. However, the Court stated that entering the commercial mainstream was to be a guide to be taken into account in determining situs and weighing the relevant connecting factors. Practically speaking, this amounts to a test. In the Tax Court of Canada decision of Adams v. The Queen, 2000 D.T.C. 1627, the Court made it clear that income generated from normal commercial mainstream activities carried out within the confines of a reserve is exempt from taxation. This has also been accepted by the Supreme Court of Canada in respect of provincial sales tax in the decision of Union of New Brunswick Indians v. New Brunswick (Minister of Finance), [1998] 1 SCR In a Tax Court of Canada case dealing with fishing income, the Court held that some income earning activity could be in the commercial mainstream but still be so integral to reserve life as to be exempt from tax: Robertson v. The Queen 2010 TCC 552 (T.C.C.). In Bastien 8, the Supreme Court of Canada confirmed that there is no separate commercial mainstream test nor is the commercial mainstream a determinative factor in determining the situs of property: see paragraphs 52 to 63. The Supreme Court of Canada in Bastien also makes it clear that whether income is earned from, or is used in connection with, a traditional Indian way of life is not critical to finding that such income is situate on a reserve. 8 Bastien, supra note 2.

12 The Williams Decision: The Connecting Factors Test (i) Overview In Williams, the taxpayer, a status Indian, had been employed by an Indian Band on a reserve. He had lived on the reserve during his employment and all of his duties were carried out on the reserve. Furthermore, Mr. Williams was paid on the reserve. Thus, based on the decision in Nowegijick, Mr. Williams income from employment was not subject to taxation in Canada due to Section 87. After losing his employment, Mr. Williams applied for and received unemployment insurance benefits and enhanced unemployment insurance benefits. Mr. Williams treated these payments as non-taxable. However, the CRA applied the standard principles from Nowegijick and argued that despite the fact the employment income which gave rise to the unemployment insurance benefits was exempt from tax, the unemployment benefits were taxable because the payor/debtor (the Federal Government of Canada) was not located on a reserve. Therefore, as the debt, or the right to receive the unemployment insurance benefits, was not enforceable on a reserve, the unemployment insurance benefits could not be said to be personal property of an Indian situated on a reserve, and therefore, such benefits were subject to tax. In light of the CRA s position, counsel for Mr. Williams argued that a strict application of the Nowegijick test was not appropriate in this case. Instead, counsel argued that the Court should apply a test which reviewed and applied all of the factors relating to the payment of the unemployment insurance benefits. Furthermore, counsel argued that because all of the work and all of the wages which gave rise to the unemployment insurance benefits related to a reserve and the Indian lived on the reserve, no tax should apply. This so-called connecting factors test was accepted by the Federal Court-Trial Division. However, the Federal Court of Appeal strictly followed Nowegijick and reversed the decision of the Trial Division. The Supreme Court of Canada allowed the taxpayer s appeal and adopted a connecting factors test similar to the one adopted by the Federal Court-Trial Division. The Court held that in order to decide whether or not the income of an Indian was subject to tax, it was

13 necessary to first determine the purpose of the exemption from taxation in Section 87. Furthermore, the Court held that it was always necessary to keep in mind the nature of the benefits in question and the manner in which the taxation fell upon such benefits. The Court went on to examine the nature of unemployment insurance benefits and concurred with the decision of Nowegijick that salary or wages were personal property of an Indian which could be situated on a reserve. Using this reasoning, Gonthier J. concluded that unemployment insurance benefits were personal property of an Indian which, in a given situation, might or might not be situated on a reserve. Therefore, the issue became what is the test for determining the situs of intangible personal property of an Indian, such as unemployment insurance benefits. The Court reviewed the decision in Nowegijick and an earlier decision of the Court in The Queen v. The National Indian Brotherhood, [1978] D.T.C (F.C.T.D.), and expressly declined to follow the simple test set out in these decisions which was that the situs of intangible personal property of an Indian was the situs of the payer (i.e., employer) of the debt. If the debtor resided on the reserve, so did the debt. The Court took the view that this simple test was only applicable for conflicts of law purposes and its use was entirely out of keeping with the scheme and purpose of the Indian Act. Gonthier J. stated, at 6325: In resolving this question, it is readily apparent that to simply adopt general conflicts principles in the present contexts would be entirely out of keeping with the scheme and purpose of the Indian Act and the Income Tax Act. The purposes of the conflict of laws have little or nothing in common with the purposes underlying the Indian Act. It is simply not apparent how the place where a debt may normally be enforced has any relevance to the question whether to tax the receipt of the payment of that debt would amount to the erosion of the entitlements of an Indian qua Indian on a reserve. The test for situs under the Indian Act must be constructed according to its purposes, not the purposes of the conflict of laws. Therefore, the position that the residence of the debtor exclusively determines the situs of the benefits such as those paid in this case must be closely reexamined in light of the purposes of the Indian Act. It may be that the residence of the debtor remains an important factor, or even the exclusive one. However, this conclusion cannot be directly drawn from an analysis of how the conflict of laws deals with such an issue. (Emphasis added) With these words, it appeared clear that the Supreme Court of Canada rejected the Nowegijick test (i.e., the situs of the debtor test) as the relevant test for determining the situs of tangible personal property of an Indian.

14 (ii) The Situs Test Gonthier J. developed his own test for determining the situs of intangible personal property of an Indian. The Court was mindful of the fact that a test which was overly rigid would have the same problem as the test in Nowegijick in that it would probably not take into account the purpose for which the Indian Act exemption arose in the first place. Specifically, it would be open to potential manipulation and abuse in focusing on factors that would miss the entire purpose for which the exemption was given. On the other hand, the Court recognized that a loosely structured test which required a court to balance all of the relevant connecting factors in a given case had the advantage of flexibility but might not provide predictability which taxpayers need in planning their taxation affairs. Gonthier J. then went on to lay out a conceptual framework for the test for determining the situs of intangible personal property of an Indian as follows, at 6326: The first step is to identify the various connecting factors which are potentially relevant. These factors should then be analyzed to determine what weight they should be given in identifying the location of the property, in light of three considerations: (1) the purpose of the exemption under the Indian Act; (2) the type of property in question; and (3) the nature of the taxation of that property. The question with regard to each connecting factor is therefore what weight should be given that factor in answering the question whether to tax that form of property in that manner would amount to the erosion of the entitlement of the Indian qua Indian on a reserve. The Court then went on to apply this conceptual framework to determine the situs of the unemployment insurance benefits. The Court identified the following potentially relevant connecting factors : (i) (ii) (iii) (iv) the place of residence of the employer; the place of residence of the employee; the location of the employment income which gave rise to the benefits; and the place where the income is to be paid to the employee. The Court decided that the most important factor in determining the situs of unemployment insurance benefits was the location of the qualifying employment income. This was due to the fact that for an Indian whose qualifying employment income was on a reserve, the

15 symmetrical tax implications of premiums and benefits breaks down if the benefits are taxable. For such an Indian, the original employment income was tax exempt; therefore, it made sense that no tax should be paid on subsequent benefits but should be tax exempt as well. Applying the above framework to the facts in Williams, the Court held that since his employment was on the reserve (and the employment income was exempt from tax), the unemployment insurance benefits were also situated on the reserve. The Court did not provide any analysis as to what factors gave rise to the decision that the employment income itself was not subject to tax. Rather, the Court simply stated that all potentially relevant factors pointed to a reserve. Based on this analysis, the Supreme Court of Canada concluded that the taxpayer s unemployment insurance benefits were tax exempt under Section Post Williams/Pre Bastien and Dubé (i) Introduction In order to provide the relevant background to an understanding of Bastien and Dubé this portion of the paper reviews some of the post Williams and pre Bastien and Dubé cases. (ii) Employment Income Employment income was the first type of income dealt with after Williams. Primarily, this was because much of tax planning involved Indian taxpayers ensuring that their income was earned as employment income from corporations, or other entities residing upon a reserve, even though they might not reside and their work might not be on a reserve. This was all in accordance with the Nowegijick decision. After Williams, the CRA announced a Remission Order essentially applying the Nowegijick principle to employment arrangements which were already in place for a transitional period to December 31, Further, the CRA developed and released four guidelines with respect to employment income and taxation. These guidelines are as follows:

16 Guideline 1 Employment income of an Indian for duties performed on a reserve will be exempt from income tax. Recognizing that in some cases part of the employment will be performed on the reserve and part off the reserve the CRA provides pro-ration rules as follows: (a) (b) (c) If 90% or more of the employment duties are performed on a reserve all of the employment income will be exempt; If 90% or more of the employment duties are performed off the reserve the whole of the employment income will be taxable; and In any other case, the employment income is to be pro-rated on the basis of the percentage of the employment duties performed on the reserve. Guideline 2 Employment income of an Indian for duties performed off a reserve will normally be exempt from income tax where (a) (b) the employer is resident on a reserve, and the Indian lives on a reserve, except where it can reasonably be considered that one of the main purposes for the existence of the employment relationship is to establish a connecting factor between the income in question and a reserve. This guideline will not apply where one of the main purposes for the existence of the employment relationship is to make the income tax exempt. The Indian cannot plan into the exemption by creating an employer resident on a reserve. Guideline 3 Employment income of an Indian for duties performed off a reserve will normally be exempt from income tax where (a) the duties of the employment are principally performed on a reserve, and either (b) (c) the employer is resident on a reserve, or the Indian lives on a reserve, except where it can reasonably be considered that one of the main purposes for the existence of the employment relationship is to establish a connecting factor between the income in question and a reserve.

17 The residence of the on reserve employer will not be taken into consideration if one of the main purposes for the employment relationship is to make the income exempt from taxation. Guideline 4 Employment income of an Indian for duties performed off a reserve will normally be exempt from income tax where (a) (b) (c) the employer is an Indian band which has a reserve, a tribal council representing one or more Indian bands which have reserves, or an Indian organization controlled by one or more such bands or tribal councils and dedicated exclusively to the social, cultural or economic development of Indians who, for the most part, live on reserves, the duties of employment are part of the non-commercial activities of the band, council or organization, and the band, council or organization is resident on a reserve. It is important to remember that these guidelines are not law and courts may, and indeed do disregard the guidelines. After Williams, a number of cases reviewed and discussed the application of Section 87 to employment income. In Clarke (W.) v. M.N.R., [1992] D.T.C (T.C.C.), seven individual cases were heard dealing with employment income. The taxpayers were successful in three cases and lost in four. In the cases which were lost, all involved fact situations where the duties of employment were performed off reserve. The Tax Court of Canada held the employment income was earned in the commercial mainstream and not exempt from taxation. These decisions can be taken to mean that significant weight will be applied to the place where the actual work is performed and its connection to the reserve. Where there is no connection to the reserve, i.e. the employment is simply off reserve, then the employment income will generally be taxable. Almost all of the cases since Williams have held that the most important connecting factor is the place where employment activities are carried out. Other factors have included the residence of the employee, the residence of the employer, the nature of employment and the connection and benefit of the employment to the reserve as a whole and any other special

18 circumstances. 9 The fact the employment is beneficial to reserve life will not necessarily result in it being exempt from taxation. 10 The mere arranging to have an employer on reserve when all the actual work is done off reserve has not generally assisted in the successful application of Section There have been cases where the place of employment has not been held to be the most significant factor, but these were unusual cases. In these cases, the nature of the employment and its connection to reserve life have overridden the location of employment as the most important faction and off reserve employment has been held to be tax exempt. For example, in the case of Folster v. The Queen, [1997] D.T.C. 5315, the Federal Court of Appeal dealt with employment income. Ms. Folster worked at a hospital which was technically, and just barely, situated off the Norway House Indian Reserve. The hospital had at one time been on the reserve but had been technically relocated off the reserve when a fire had destroyed the original hospital building. Steps were underway to attempt to expand the reserve to include the relocated hospital. In the Tax Court of Canada, the Court held that pursuant to section 90 of the Indian Act, the income of Ms. Folster was deemed to be situated on a reserve. The Federal Court-Trial Division overturned this and applied the connecting factors test. The Court held that because Ms. Folster s duties were performed at a hospital off reserve, the exemption did not apply. The Federal Court of Appeal disagreed and allowed the exemption. In Folster, the Federal Court of Appeal held that the trial judge had placed too much emphasis on the specific geographic location of the employment. The Court held that the geographic location should be given less weight because of the background surrounding the employment 9 See Bell v. The Queen, 2000 D.T.C (F.C.A.), dealing with fishing income; Shilling v. The Queen, 2001 D.T.C (F.C.A.) and The Queen v. Monias, 2001 D.T.C (F.C.A.). 10 See Akiwenzie v. R., 2003 (F.C.A.) 469; also see Desnomie v. Canada, 1998 D.T.C. 2207, aff d C.T.C. 6 (FCA) leave to S.C.C. denied 265 NR See for example cases dealing with Native Leasing Services including Shilling v. The Queen, supra note 8 (this case also relied heavily on the discredited commercial mainstream test but the significant factor was the location of the actual work was off reserve).

19 and the benefits that it provided to the Band as a whole. The Court held that Ms. Folster was not earning her income in the general economic mainstream but rather, at 5324: in her capacity as an employee of the Hospital, she assisted in the provision of health care services to members of the Norway House Indian Band. As such, her employment was an integral part of community life on the Reserve. The Federal Court of Appeal was prepared to hold that the other factors, including the nature and purpose of the employment, its connection to reserve life and the residence of the employee being on reserve overrode the pure geographic location of the employment. The case of Boubard v. The Queen, 2008 DTC 3015, (TCC), aff d, 2009 DTC 5035 (F.C.A.) is a decision similar to Folster. In Boubard, the Sagkeeng First Nation surrendered and then leased and subsequently sold certain reserve land to the Manitoba Pulp and Paper Company so it could operate a pulp mill which would employ Band members. The Appellants were status Indians who lived on reserve and worked in the mill located off reserve. The Court held that the income was not taxable due to Section 87 because the employment was directly related to the surrender and the realization by the Band of its members entitlements and this connected the employment and income to the Band. (iii) Business Income Prior to Bastien and Dubé, Southwind v. The Queen, [1998] D.T.C (F.C.A) was the key case on business income. Mr. Southwind lived on the Sagamok Indian Reserve. He was the sole proprietor of a logging business which provided exclusive logging services to Morrell Logging Ltd., a non-indian business, which was not situated on a reserve. In 1990, Mr. Southwind was paid $42, by Morrell Logging Ltd. for logging work which he performed at three different cutting locations, all of which were off reserve. Mr. Southwind spent about 40 weeks per year logging at the various locations. During the time when he was logging, he would often remain at the cutting location, returning home to the reserve only on weekends. Administrative work connected to his business, including answering and making telephone calls, bookkeeping and the storage of business receipts was carried out at Mr. Southwind s home on a reserve.

20 Mr. Southwind owned his own equipment which, when it was not being used at a logging site, was stored at his home. Finally, Mr. Southwind was paid by cheque drawn on Morrell Loggings Ltd. s off reserve bank accounts. He received his cheque in a number of ways. Most often the cheque would be delivered to him on the reserve. However, at times it would be mailed to him for pick-up at a post office or it would be delivered to him at the work site or it would be picked up by him at Morrell Logging Ltd. After cashing the cheques, Mr. Southwind would keep the money at his home. In applying the test, the Court considered the following connecting factors: (i) (ii) (iii) (iv) the off reserve residence of the debtor (Morrell Logging Ltd.); the Appellant s residence on the reserve; the place where the Appellant s income was paid, which according to the Tax Court of Canada was the bank used by Morrell Logging Ltd.; and the off reserve locations where the Appellant engaged in an income earning process (that is the logging itself). The Tax Court of Canada gave the most weight to the location where the work was performed and where, in effect, the income was earned. The Court held that the income was earned off reserve and that the business activities which did occur on the reserve were merely incidental to the earning of the income off reserve and thus Section 87 did not apply. The Federal Court of Appeal expressed some doubt as to the evaluation of the factors performed by the Tax Court of Canada, however, came to the conclusion that the income was earned off reserve. At the Federal Court of Appeal, the taxpayer argued that factors to be considered and given great weight to by the Court, were the on reserve location of Mr. Southwind s head office, the on reserve residence of Mr. Southwind as the business owner and where the work was performed. The taxpayer also argued that the situation was similar to Nowegijick, and

21 therefore, the factors to be given great weight would show that the income was earned on reserve. The Crown offered a more complex set of factors to consider and said that the Court should consider: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) the location of the business activities; the location of the customers of the business; where decisions affecting the business are made; the type of business and the nature of the work; the place where payment is made; the degree to which the business is in the commercial mainstream; the location of a fixed place of business and location of the books and records; and the residence of the business owner. The Federal Court of Appeal held that Mr. Southwind was engaged not in a business that is integral to the life of the Reserve, but in a business that was in the commercial mainstream. The Federal Court of Appeal placed great weight on the words of the Supreme Court of Canada in Mitchell v. Peguis Indian Band, in which the Supreme Court of Canada stated that where an Indian enters into the commercial mainstream, he must generally do so on the same terms as other Canadians with whom he competes. The Federal Court of Appeal held that although the precise meaning of that phrase was far from clear, it was clear that the phrase sought to differentiate those Indian business activities that deal with people mainly off the reserve, not on it and to isolate those business activities that benefit the individual Indian rather than his community as a whole, while recognizing of course that the person working is indirectly benefiting the community. Thus, because the business activities, being the logging, were carried out off reserve and the only customer of Mr. Southwind was off reserve, it was held that the business was in the commercial mainstream and the income earned from such business was taxable. It is also worth referring to a case called Charleson v. M.N.R., 91 D.T.C. 844 (T.C.C.). Although a pre-williams decision, it may be important because in Southwind it was referred

22 to as a good analysis of the issues in determining where business income is situated. In Charleson, a status Indian was engaged in the professional fishing business. Mr. Charleson did not own his own vessel. He chartered it from Canadian Fish Company to whom he also sold his entire catch. Mr. Charleson, however, provided the nets for the fishing and the other equipment and was responsible for the hiring of his own crew. During the fishing season, Mr. Charleson fished and lived off reserve. During the rest of the year, he lived at his home on reserve in Port Alberni. The Tax Court of Canada held that the fishing income was not exempt from tax as the business was not carried out on a reserve. The Court noted that the single customer for the business was off reserve, never entered the reserve, all transactions between Mr. Charleson and the customer took place off reserve and that the product was obtained off reserve. A more recent case on the matter was Pelletier v. The Queen 2009 TCC 358 TCC, aff d 2010, FCA 300. Pelletier follows the reasoning in Southwind. The case of Ballantyne v. The Queen 2009 TCC 1188 (involving fishing income) ended in the same result considering the same factors. Post Bastien, the Federal Court of Appeal overturned Ballantyne at 2012 FCA 95. However, in Robertson v. The Queen 2010 TCC 52, aff d 2012 FCA 94 (post Bastien) with facts similar to Ballantyne (fishing off reserve and with ultimate customers off reserve) the Court came to the opposite decision as in Charleson and Ballantyne. The Court held that the nature of the activity connected it to the reserve. The Court placed great weight on the historical evidence brought by the taxpayers which showed that members of their band had always fished commercially and this fishing was part of that historical and traditional fishery. Much of the preparatory work for the fishing was done on reserve. Also, the fishers sold their fish to an on reserve Co-op that was intimately connected to the reserve. The fact the fish were caught off reserve, dressed off reserve and delivered off reserve was not determinate. As a result, the Court held this fishing was not in the commercial mainstream and thus, was exempt from tax notwithstanding the fishing was off reserve. The Court also made it clear that even if the fishing and selling activity had been found to have occurred in the commercial mainstream, it was so integral to reserve life that the

23 income was exempt from tax under Section 87. The Court held that the taxpayers connection to the Co-op and their activities, historical, cultural and economic connections to the reserve created a compelling and substantial connection to a reserve. Hence their income was exempt from taxation. Ballantyne and Robertson point out the problem of uncertainty in taxation of Indian people. The facts in Ballantyne and Robertson are basically the same (although in Ballantyne there was less evidence about the traditional nature of the fishery). The fishers fished in the same area, were connected to the same reserve, belonged to the same Co-op and the Co-op sold to the same buyer. Yet in one case in the Tax Court of Canada, the fishers income was held to be taxable and in the other, it was not taxable. (iv) Investment Income Until 2012, the leading case dealing with Section 87 and investment income was Recalma v. The Queen [1998] D.T.C (F.C.A.), (leave to the Supreme Court of Canada denied). It also was the case that really created the commercial mainstream test. In Recalma, the taxpayers purchased Bankers Acceptances and mutual fund units through an on reserve branch of a bank. The taxpayers were residents on reserve, the source of capital was from on reserve activity, investments were purchased on reserve and the taxpayers participated significantly in reserve life. However, the issuers of the investments were off reserve and their income was generated off reserve and these were the connecting factors used by the Court. As a result, the investment income was held to be taxable. The Federal Court of Appeal also held that the most significant factor in the case of investment income earned from bank accounts, guaranteed investment certificates and term deposits is the location of the payor of the investment income and where the payor generated the income used to pay the investment income to the investor: Sero v. The Queen and Frazer v. The Queen, 2001 D.T.C. 575 (T.C.C.) 2004 FCA 6, leave to appeal to S.C.C. refused [2004] S.C.C. No. 89; Dubé c. Canada, 2009 FCA 109 (FCA); also see Lewin v. The Queen 2001 Canlii 502 (TCC) aff d 2002 FCA 161. These cases specifically rejected giving any significant weight to the fact that subsection 461(1) of the Bank Act creates a statutory situs for a bank

24 account. Further, the Court specifically held that the most significant connecting factor for investment income was the place where the income generating activities of the issuer of the investment instrument took place. In all cases the issuing bank was off reserve and, therefore, the investment income was held to be off reserve. This was held even in the case of Frazer where all of the connecting factors pointed to the reserve except the income generating activities of the issuer. The only conclusion that could be drawn from the decision in Recalma and subsequent cases was that almost all investment income earned by an Indian was subject to tax. If the source of the funds used by the debtor to pay the investment income was generated off a reserve then the investment income was taxable. This was an absurd result. 8. Bastien and Dubé: A Shifting Tide? More of the Same? The cases of Bastien and Dubé are the most important Section 87 cases in the last number of years and to a certain extent, modified how the courts will look at Section 87 cases and determine if there is sufficient connection to a reserve. 12 In Bastien, the facts were quite simple. Mr. Bastien (deceased) had operated a moccasin manufacturing business on the Wendake Reserve near Quebec City. Mr. Bastien invested some of his income from the operation and sale of the on reserve business in the branch of a Caisse Popular. The Caisse had its sole branch on a reserve and its sole fixed asset on the reserve. Mr. Bastien purchased fixed income guaranteed investment certificates from the Caisse. The income was paid into his account at the branch of the Caisse. The facts in Dubé were somewhat different than in Bastien. Mr. Dubé lived part-time on and off his home reserve. He owned real property off reserve. The evidence did not prove that Mr. Dubé s invested capital was earned on any reserve. Mr. Dubé took his funds and invested in fixed income guaranteed investments with a Caisse on a reserve that was not his home reserve. The income from the investment was paid into his account on a reserve. 12 See Robertson v. The Queen 2012 FCA 94, dealing with fishing income, at para. 23.

25 In both cases, the financial institutions invested the funds held on deposit in investments outside of the reserve boundaries. In both cases, the lower courts relying on Recalma found that the most important connecting factor was the income earning activities of the payor of the investments. This was off reserve, in the commercial mainstream. Thus, the income earned by Mr. Bastien and Mr. Dubé was taxable. In both cases, the Supreme Court of Canada overruled the earlier decisions and found that the connecting factors of the place of contract, the location and residence of the Caisse branch and the place of payment, all pointed to an on reserve location. In Bastien, the location of Mr. Bastien s residence and the place where the capital was earned also pointed to a reserve. This was not the case for Mr. Dubé. In short, the Court focussed on where they should focus; the income earning activities of the Indian person. All of those relevant activities (the entering into the contract) were fully located on reserve. The minority in Dubé did not agree that Mr. Dubé s investment income was exempt from taxation. The minority in Dubé did agree that Mr. Bastien s income was exempt because in addition to the other relevant factors, Mr. Bastien earned his capital on reserve and lived on reserve. The difference appeared to be that Mr. Dubé s capital was not earned on reserve and he had no other connections to the reserve. In the view of the minority, the majority in Dubé placed too much weight on the place of contract, residence of the debtor and payment and legal terms which were subject to manipulation. Bastien and Dubé have breathed some life into an otherwise moribund Section 87 and there are some significant principles to be taken from the cases. I take these important principles to be: (1) The purpose of Section 87 is simply the protection from taxation of an Indian s assets on a reserve; it is not to overcome any real or perceived economic disadvantage. Section 87 only protects property that is found to be within the boundaries of a reserve.