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.
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.
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,  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):
- 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:
- residence of the payor and/or payee;
- place of payment; and
- where the activity giving rise to the income is performed.
- Purposively analyze thefactor side-by-side as to assess what weightought to be given to each. Weightis assigned using:
- the purpose of the exemption under s 87 of the Indian Act;
- the type of property in question; and
- 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,  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):
 … 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.
 … 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:
 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 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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