Category Archives: 081(1)

Income of Indian on a Reserve – Question of Situs

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Income of Indian on a Reserve – Question of Situs

Bastien Estate v Canada, 2011 SCC 38

This was a 5:2 split decision allowing the appeal of the Taxpayer from the FCA (2009 FCA 108) and TCC (2007 TCC 625) decisions holding that the exemption in section 87 of the Indian Act, operating through paragraph 81(1)(a) of the Income Tax Act, did not apply.

The issue was whether interest income earned on term deposits with an on-reserve financial institution, being personal property, was situated on a reserve so as to be exempt from tax under the Income Tax Act.

The majority of the SCC held that the interest income was situated on a reserve, and therefore exempt from tax.  The location of intangible property is determined through a two-step analysis: (1) identify potentially relevant factors tending to connect the property to a location; and (2) determine what weight to give to each factor in identifying the location of the property in light of (a) the purpose of the exemption from tax, (b) the type of property, and (c) the nature of taxation of the property.  The FCA decisions in  Recalma, Lewin v. Canada, 2002 FCA 461, and Sero v. Canada, 2004 FCA 6, were overruled.

The dissenting members agreed with the outcome of the case but wanted connecting factors that are more concrete and discernible and less subject to manipulation.

FACTS

The taxpayer was a status Indian, who was born and dies on the reserve.  He operated a business on the reserve and invested some of the income obtained from the operation and sale of this business with two financial institutions located on the reserve.  The financial institutions, the interest income from which is subject to the appeal, had its only place of business on a reserve.

ANALYSIS

Majority

The Indian Act, in section 87, exempts personal property of an Indian situated on a reserve from taxation: Nowegijick v The Queen,

The TCC and FCA analysis was wrong for two reasons.  First, they did not give appropriate weight to the contractual nature of the investment vehicle.  The contract, entered into on a reserve, was to receive a particular rate of return on an investment, with payment on the reserve.  How the income that paid the return is generated is irrelevant to determining the location of the taxpayer’s income.

In interpreting the phrase “the personal property of an Indian or a band situated on a reserve” should have due regard to the “substance and plain and ordinary meaning of the language used rather than to forensic dialectics”: McDiarmid Lumber Ltd. v. God’s Lake First Nation, 2006 SCC 58.  The phrase “on a reserve” refers to the property being within the boundaries of a reserve, but this required the use of different legal tests for various types of property.

In the case of non-physical property generated by a transaction a fact-specific analysis is used, weighing potentially relevant factors to identify the location of the transaction.  To attribute location to property, courts must use the connecting factors approach set out in Williams v. Canada, [1992] 1 SCR 877.  No standard test exists for intangible property, as noted in Williams at p 891:

In one sense, the difficulty is that the transaction has no situs.  However, in another sense, the problem is that it has too many.  There is the situs of the debtor, the situs of the creditor, the situs where the payment is made, the situs of the employment which created the qualification for the receipt of income, the situs where the payment will be used, and no doubt others.  The task is then to identify which of these locations is the relevant one, or which combination of these factors controls the location of the transaction. [emphasis added]

The attribution of such property is always notional, and care must be taken not to open this up to manipulation and abuse contrary to the purpose of the Indian Act exemption.  This requires careful consideration of the particular circumstances of each case.

The two-step test applicable in determining location is (para 18):

  1. Identify potentially relevant factors connecting intangible personal property to a location, with connecting factor relevance depending on whether the factor identifies the location of the property for purpose of the Indian Act, and depending on the categories of property and types of taxation at issue.  Connecting factors include:
    1. residence of the payor and/or payee;
    2. place of payment; and
    3. where the activity giving rise to the income is performed.
  2. Purposively analyze thefactor side-by-side as to assess  what weightought to be given to each.  Weightis assigned using:
    1. the purpose of the exemption under s 87 of the Indian Act;
    2. the type of property in question; and
    3. the nature of the taxation of that property.

The purpose of the exemption under the Indian Act is to “guard against the possibility that one branch of government […] could erode the full measure of benefits given by that branch of government entrusted with the supervision of Indian affairs”: Mitchell v. Peguis Indian Band, [1990] 2 S.C.R. 85.   Thus, to protect Indians from non-Indians’ efforts to dispose them of property they hold qua Indians, and preserve property reserved for their use (not remedy historic economic disadvantage by treating Indians in the commercial mainstream differently than their fellow citizens) (para 21).

In some cases, court’s have linked the tax exemption to the traditional way of life of Indians. This has been criticized, and the focus should not shift from inquiring as to the location of the property (irrespective of any link to the traditional way of life of an Indian) (para 27).  An evolution of way of life is not to be impeded. However, the factors connecting the property to the life on a reserve may be a factor that strengthens or weakens the connection of property and reserve (para 28).  The court clearly stated that (para s28 and 30):

[28] …  the availability of the exemption does not depend on whether the property is integral to the life of the reserve or to the preservation of the traditional Indian way of life.

….

[30] … In determining the location of personal property for the purpose of s 87, there is no requirement that the personal property be integral to the life of the reserve, or that it, in order to be exempted from taxation, must benefit what the court takes to be the traditional Indian way of life.

 The second factor – the type of property – must also be examined.  Here, a term deposit was with a financial institution which, in consideration for money deposited, provided a rate of return.  The depositor is a creditor of the financial institution and is not a participant in the capital markets (irrespective of how the financial institution makes its money)  (para 32).  The court also drew a distinction between income from property and business income, but said that this did not affect the location of the income (para 37).

The connecting factors relevant for each type of property must also be considered.  The type of income in question determines the type of connecting factors that are relevant (para 38).  Conflict of law factors are important in considering the location of property and income, but only if they are weighed and considered in light of the purposes of section 87 of the Indian Act, the type of property, and the nature of the taxation (para 40).

The majority noted that the nature of income-generating activities and their occurrence off reserve may be relevant for other types of investments, but not for fixed-income securities  (para 48).  What is important is to recognize that “that the Income Tax Act does not operate in a vacuum but rather relies implicitly on the general law, especially the law of contract and property [… and] the Indian Act” (para 49).   Particularly, the expression “commercial mainstream” is not meant to be a factor in determining the location of property for purposes of the tax exemption (para 53).  Therefore, if “an Indian acquired an asset through a purely commercial business agreement with a private concern, the exemption would nonetheless apply if the asset were situated on a reserve” (para 54). The majority finished, in paragraph 62, by stating:

[62]   Of course, in determining the location of income for the purposes of the tax exemption, the court should look to the substance as well as to the form of the transaction giving rise to the income. The question is whether the income is sufficiently strongly connected to the reserve that it may be said to be situated there. Connections that are artificial or abusive should not be given weight in the analysis. For example, if in substance the investment income arises from an Indian’s off-reserve investment activities, that will be a significant factor suggesting that less weight should be given to the legal form of the investment vehicle. There is nothing of that nature present in this case. Cases of improper manipulation by Indian taxpayers to avoid income tax may be addressed as they are in the case of non-Indian taxpayers.

 The Minority

The dissenting judges noted that intangible property has not actual substance and cannot, strictly, be said to be situated in any place.   The dissent was concerned with giving too much weight to connecting factors that are artificial.   They advocate for use of connecting factors that are more discernible and concrete.

Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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Location of Business Income on a Reserve – Kelly

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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.

FACTS

This was an appeal from the TCC decision 2009 TCC 189, which was decided without the benefit of two recent SCC decisions: Bastien Estate v. Canada, 2011 SCC 38, and Dubé v. Canada, 2011 SCC 39.

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).

ANALYSIS

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, [1990] 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, [1997] 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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