Location of Business Income on a Reserve
Kelly v The Queen, 2013 FC 171
At issue were the principles relevant in determining the situs of business income of an Indian on a Reserve?
The Court stated that no one list of factors is always relevant or of equal/equivalent weight, as each factor must be identified in light of the facts of each case, always so that the purposes of section 87 are not frustrated.
Kelly, the Crown argued, was merely an advisor who performed important services for reserves in exchange for business income – this alone was not seen as enough to trigger the section 87 exception.
Kelly, however, argued that his services are far from ordinary, and have a poignant and intimate connection and relationship to the reserve’s spirituality, culture, language, history, community pride, self-respect, and mode of life. Thus his income was locate on the reserve and exempt by section 87.
The TCC made a number of relevant findings of fact that showed the unique and close ties of the services Kelly provided that were invaluable, and were “entrenched in the traditional, social and cultural integrity of life on reserves,” and “promote the preservation and furtherance of the traditional way of life on reserves,” benefiting “Native communities as a whole.” (para 15). However, the TCC also stated that “Winnipeg was “the center or nucleus of his business operations” and to some extent “he carried on his business as any other consultant would.” Most of the time Mr. Kelly was physically present outside of reserves, often in Winnipeg where his home, office, books and records were located. Mr. Kelly’s business decisions occurred in Winnipeg, not on reserves. Any research or development necessary for his work was done at his Winnipeg home. Some consultations with clients happened at his Winnipeg home. Payments for his services were received at his Winnipeg home and he kept his money in off-reserve banks.” (para 19).
The FCA began by recognizing the recent SCC decisions in Dube and Bastien, which (as recognized in Robertson v The Queen, 2012 FCA 94) modified the law and significantly reset the previous analytical framework in relation to section 87. Specifically, (1) the methodology to be followed in, (2) the purpose behind, and (3) the factors relevant to, section 87 were addressed by the SCC.
1) The exemption applies ONLY to “the personal property of an Indian or a Band situated on a reserve”
a) Thus one must ask if the property is situated on a reserve, whether the property by physical or non-physical property (eg benefits or income).
2) In case of non-physical property, connecting factors can be used as indicia of situs (see Bastien para 16): see also connecting factors approach set out in Williams v. Canada, 1992 CanLII 98 (SCC).
3) The relevance and weights to be given to the connecting factors depends on the type of property, the nature of the taxation of the property, and the purpose behind section 87. Generally:
a) The relevance and weight, therefore, depends on the particular facts.
b) Different connecting factors may have different relevance and weight depending on the property and type of taxation (eg. EI vs Income vs pensions).
c) This mandates a purposive analysis by a court in light of the purpose of section 87
4) The type of property must be identified and factored into the analysis of relevance and weight
a) Since “[b]usiness income arising from services has a source, a destination, a reason for why it arises and continues, and a manner in which it is earned”, one must look at “the quantity, quality and nature of the services, who is providing the services and where, who is receiving the services and where, the reasons why the services are being rendered and received, the manner in which the services are being rendered and received, and the overall management of the business and where that is done” (para 40).
5) The Nature of the taxation must be properly identified and factored into the analysis of relevance and weight;
6) The Purposes of Section 87 must be properly identified and factored into the analysis of relevance and weight:
a) Section 87 “guard[s] against the possibility that one branch of government, through the imposition of taxes, could erode the full measure of the benefits given by that branch of government entrusted with the supervision of Indian affairs.” The Crown must “shield Indians from any efforts by non-natives to dispossess Indians of the property which they hold qua Indians.” Does “the Indian [hold] the property in question as part of the entitlement of an Indian qua Indian on the reserve”? The aim is to “insulate the property interests of Indians in their reserve lands from the intrusions and interference of the larger society so as to ensure that Indians are not dispossessed of their entitlements.” See Bastien, at paragraphs 21-23, citing Mitchell v. Peguis Indian Band,  2 S.C.R. 85 at pages 130-131 and 133 and Williams, supra at pages 885 and 887.
b) “The exemption was rooted in the promises made to Indians that they would not be interfered with in their mode of life”: Bastien, at paragraph 28. I note that this appears to be somewhat broader than the statements of purpose underlying section 87 set out in Mitchell and Williams, summarized immediately above. Williams did not cast the purpose behind section 87 that broadly. Mitchell concerned paragraph 90(1)(b) of the Act, a paragraph that deems personal property given to Indians under a treaty or agreement to be situated on a reserve.
c) Section 87 is not about “remedy[ing] the economically disadvantaged position of Indians” by allowing them to “acquire, hold, and deal with property in the commercial mainstream on different terms than their fellow citizens”: Bastien, at paragraph 23, citing Mitchell, at pages 131. Nor is section 87 about “confer[ring] a general economic benefit upon the Indians”: Bastien, at paragraph 23, citing Williams, at page 885.
d) The purposes of section 87 must not be taken to amend the words of section 87. Section 87 remains focused on determining whether “the personal property of an Indian or a band [is] situated on a reserve.” It is not necessary to find that the property under examination must benefit “the traditional Native way of life,” and suggestions to the contrary in cases such as Canada v. Folster,  3 F.C. 269 (C.A.), Recalma, supra and Lewin v. The Queen, 2001 D.T.C. 479 (T.C.C.) are to be disregarded. The focus is on whether there is a “connection between the property and the reserve such that it may be said the property is situated there for the purposes of the Indian Act” and not on whether “the property is integral to the life of the reserve or to the preservation of the traditional Indian way of life.” See Bastien, at paragraphs 26-27.
e) While the property under examination need not benefit “the traditional Native way of life,” the relationship between the property and life on the reserve may in some cases be a factor tending to strengthen or weaken the connection between the property and the reserve”: Bastien, at paragraph 28. In finding that a sufficiently close connection existed between the reserve and the source of the taxpayers’ income in Robertson, this Court (at paragraph 61) attached significant weight to the long history of commercial fishing in lakes near the reserve by the First Nation and their ancestors, and the continuing importance of that fishing to the economic, social, and cultural fabrics of the reserve.
7) Be aware of abusive or artificial connections to reserves in an attempt to improperly claim the section 87 exception.
The FCA noted that the factors and the purposes of section 87 are interconnected, such that one cannot simply list relevant factors and seek to apply them to the facts of the case. Rather, the facts of the case will identify and interact with the relevant connecting factors. The SCC criticized the “commercial mainstream” factor and its application, as property can be both in the commercial mainstream and yet intimately or integrally connected to a reserve (para 46). The income need not be connected to an aboriginal way of life, or be the entitlement of an Indian qua Indian on a reserve. The location of the taxpayer on reserve is not necessarily deserving of great weight, it is the location of the income earned on a reserve that is important. The location of business income is more complicated than just physical location of the person providing services and the books and records of the business. The commercial mainstream factor is meant to ensure that section 87 is not used to remedy the economically disadvantages position of Indians, and should not be used to undermine the purposes of section 87.
Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3
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