Citation: 2009 TCC 189
Date: 20090407
Docket: 2005-1710(IT)G
BETWEEN:
FRED KELLY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rip, C.J.
[1] Fred Kelly, an
Indian within the meaning of section 2 of the Indian Act, appeals from
income tax assessments for taxation years 1994 to 2003 inclusive, on the basis
that his business income is "personal property situated on a reserve"
within the meaning of section 87 of the Indian Act ("IA")
and is therefore exempt from tax pursuant to the application of section 81 of
the Income Tax Act ("ITA"). Mr. Kelly's position is that there is
a preponderance of weight of connecting factors between him and a reserve to
indicate that his income during the years in appeal was situated on a reserve
and is thus exempt from income tax.
[2] A detailed written
description of Mr. Kelly's background and experiences and the nature of his
consultations were produced at trial. Mr. Kelly described the work he did on
most contracts in issue. He said his work was structured to service First
Nations as "bands" under the IA. He provided advisory services
to their leadership, institutions and organizations that are based on reserves.
He says his work addresses in a holistic manner the social, cultural and
economic and political spheres and issues of traditional life on the reserve.
He is concerned with the preservation of the traditional way of life on reserves.
[3] Mr. Kelly has lived
an extraordinary life. He was raised on a reserve and attended residential
schools from 1947 to 1956. He later attended secondary schools in Sudbury, North Bay and Fort Frances. After high
school Mr. Kelly worked for Manitoba Hydro in dam construction and for the
Ontario Department of Highways. He also taught school and was a social activist.
He joined a movement to do away with the IA and was part of a First
Nation team negotiating the Canada Constitution.
[4] Mr. Kelly explained
that he is a Traditional Elder of the Anishinaabe Nation with unique
qualifications, skills and experience. He is a member and practioner of Medewe'in
being the Sacred Law and Medicine Society of the Anishinaabe, and referred to
by scholars as the Grand Medicine Society of the Ojibway. Mr. Kelly has
keen knowledge and understanding of Anishinaabe culture, history, traditions,
customs and ceremony. This, he stated, permits him to teach, provide guidance
and counsel to First Nations and their members, institutions, organizations and
groups.
[5] In 1969 Mr. Kelly
opened up a Western office of the National Indian Association in Winnipeg. In about 1979, he and
his wife purchased in joint tenancy a home on Lakewood Boulevard in Winnipeg. In 2000 he transferred
his interest in family home to Mrs. Kelly. During the years in appeal he
resided in his home in Winnipeg.
[6] In 1978 Mr. Kelly
began his business as a self-employed consultant to First Nations and
persons of First Nations and their aggregates, for example, schools and child
training centres. He carries on business under his own name and "Fred
Kelly Counselling". He called on his interests, background, experience and
knowledge to carry on his work. The fundamentals of his business were
traditional strategic planning and traditional governance.
[7] During the years in
appeal Mr. Kelly performed his work on reserves and in his home office, where
he had the usual basic furniture including computer and as well, as a reference
library and historical records. The books and records of the business are
located at his residence in Winnipeg. He worked, he said, wherever he was. In fact, Mr. Kelly
performed his services mainly off reserves; he estimated he spends 30 percent
of his work time on a reserve. The actual services he researched, prepared and
provided were carried out, the bulk of the time, from his office in his Winnipeg home.
[8] No log of when and
where he worked on a reserve was maintained by Mr. Kelly; he estimated his
time on reserves from calendar notations based on his pattern of activity. He
included travel time to and from reserves as time on a reserve. Counsel for the
respondent estimated that Mr. Kelly's actual time on reserves was equal to
about 15 percent of time carrying on business if one excludes travel time.
[9] Mr. Kelly secures
contracts by word-of-mouth. He does not advertise or promote his business. After
performing services, he sends an invoice to the client. During the years in
appeal clients paid him for his services by cheque mailed to him at his
residence in Winnipeg. During the years in appeal his bank was the Canadian Imperial Bank of
Commerce, Southdale Branch, in Winnipeg. He has another account with a Royal Bank branch in Winnipeg.
[10] Mr. Kelly is a
member of Medewe'in, a Sacred Law and Medicine Society of the
Anishinaabe, which, he testified, traces the migrations, vast territory and spiritual
history of the Anishinaabe and their interactions with other peoples. As such
he says he is able to provide advice to all First Nations based on his
understanding of indigenous principles. The Medewe'in is a sacred
society. It is stored within the spirituality of Medewe'in, Mr.
Kelly explained. Medewe'in provides access to an understanding of the
laws of Pimatiziwin or Sacred Life in its completeness as given by the
Creator. Pimatiziwin is an explanation of life itself since the
beginning of time.
[11] Mr. Kelly also is
recognized as a Traditional Elder in Canada. He has served as the Personal Elder to Phil
Fontaine when he first was the National Chief of the Assembly of First Nations
and at trial continued to serve as an Elder to Charles Fox, Ontario Regional
Vice Chief of the Assembly of First Nations and Personal Elder and consultant
to Leon Jourdain, Grand Chief of Grand Council Treaty #3 which is the
traditional governance of the Anishinaabe Nation #3. He also served as the
principal Elder with other groups that have been given other honours in the
Anishinaabe Nation. He declared that he is one of the Custodians to whom the
ancient history of the universe and creation, life and spiritual teachings, and
interpretations of messages are entrusted. The ancient language, Mr. Kelly
explained, is the principal means of imparting this knowledge rather than
through the use of colloquialisms. He also conducts traditional ceremonies.
These include the daily and four seasonal feasting ceremonies; the sweat lodge;
therapy, treatment and counselling; incidental and emergency treatments with
special medicines, herbs, or healing ceremonies; name-giving ceremonies;
traditional marriage ceremonies; funeral ceremonies; as well as teaching lodge
ceremonies to provide instruction to men, women, children, and other Elders. He
said that he is also a fluent speaker and teacher of the Anishinaabe language.
In an oral society such as the Anishinaabe Nation and most First Nations,
knowing the language intimately is critical and provides an exclusive insight
into the traditional way of life.
[12] The services provided
by Mr. Kelly to the First Nations include the conceptualizing, drafting,
analysing, explaining, translating, consecrating and teaching of traditional
concepts, including orders of Anishinaabe law. He is not aware of any other
person who has such in-depth understanding of Anishinaabe law proficient enough
to draft aspects of customary law.
[13] Mr. Kelly explained
that his work is intrinsically connected to the First Nation self‑determination
through self-government which, he declared, is by nature the very heart and
pulse of the traditional way of life of his clients, the people of First
Nations on reserves. The nature of his work in treaties and self‑government
is predicated on the nation-to-nation government-to-government relationship.
Due to his skills and unique life teachings and experiences, he said, he is
requested to assist First Nations with a variety of other matters in addition to
his work in treaties and self-government. As such, he testified, he is requested
to draft Temporal Laws in treaties and self-government, to provide assistance
with the reestablishment of traditional education and to provide traditional
healing to survivors of the legacy of the residential school system. He is also
consulted for assistance with negotiations for First Nations relating to
charitable gaming, in particular to provide guidance as to traditional games
carried on by Aboriginal people in order that First Nations are aware of their
aboriginal rights such that they may exercise and protect those rights. I have
only described several of Mr. Kelly's engagements which are in issue in
the appeals at bar.
[14] In 1994 Mr. Kelly
contracted with the Wauzhushk Onigum Nation, a band in the meaning of the IA.
The principal residence of its members is Rat Portage 38B reserve where the
Band Office is located and where all business affairs are conducted. Upon his
recommendation, the Band reverted from the Rat Portage First Nation to its
traditional name Wauzhushk Onigum which is the community within the Traditional
Constitution of the Anishinaabe Nation in Treaty #3. He was retained, he said,
because of his expertise in the traditional way of life consistent with
traditional law and jurisdiction. The Wauzhushk Onigum was seeking to build a
casino and felt that for practical reasons they ought to negotiate a Gaming
Agreement with the Province of Ontario. Mr. Kelly advised that they not negotiate inherent jurisdiction over
gaming and that they not seek to exercise provincial jurisdiction. In Mr.
Kelly's view, the Gaming Agreement would simply be a practical administrative
arrangement with the Province to generate revenue but inherent aboriginal
jurisdiction over gaming would remain intact. The Agreement would therefore be
interim in nature pending a more permanent arrangement on gaming based on
sovereignty, nationhood, the spirit of the treaty, and the inherent right of
self-government.
[15] In 1995 Mr. Kelly
provided services to Naotkamegwaaning (Whitefish Bay First Nation) for
approximately 50 days. He was responsible for the Whitefish Bay First Nation
reverting to its traditional name, amongst other things. One of the matters he
was consulted with by the Naotkamegwaaning Nation was to analyze the overall
management of First Nation service delivery and completed the qualification for
entry into an Alternative Funding Arrangement with the Department of Indian
Affairs. This analysis, he explained, highlighted the major strengths and gave
a general overview of leadership, organization, personnel management, program
management and financial management. The key issues of the ultimate financial
arrangements in terms of finance with greater authority to transfer funds
within programs to better fit First Nations' financial needs, along with
financial planning arising with up to five years and primary financial
accountability belongs to the First Nations citizenship. The analysis, in
Mr. Kelly's view, was a preparatory and transitory step back to traditional
governance negotiation conducted at the same time.
[16] In 1996 he was
retained by the Grand Chief of Grand Council Treaty #3, to provide advisory
services on the matter of traditional governance in the Treaty #3
territory. He participated in the drafting of the framework Agreement and
personally gave it the name of "Bimiwinitizowin Omaa Akiing –
Governance on Our Land". This continues to be the name of the process.
Mr. Kelly explained that this governance initiative represents the very
essence of the four orders of Anishinaabe Law. Through this process the
Anishinaabe Nation in Treaty #3 is in transition back to traditional
governance. Grand Council Treaty #3 takes the position that it is not
interested in exercising federal or provincial jurisdiction; it is only
interested in exercising its own inherent jurisdiction and the resources to do
so. For practical arrangements that are consistent with the inherent right of
self-government and Treaty #3, Mr. Kelly asserted, there must be a
harmonization of the administration of Anishinaabe laws with the laws of Canada and this is where the
services are brought to bear.
[17] These are some of
the services that Mr. Kelly provided to various reserves. He testified that he was
engaged by individual reserves to advise them on how to secure or retain their
distinct traditional and historic cultures. He said that he was instrumental in
ensuring that these reserves had the capacity and resources to pursue their
goals. A list of invoices Mr. Kelly sent to clients for the years in appeal was
produced as well as a list where clients carried on their activities. One
client was in the United States, another was a publicly traded corporation and another was not on a
reserve. Mr. Kelly does not claim that the income from these clients is
exempt. The other clients are located on reserves or connected to reserves and
it is the income earned from them that is the subject of these appeals. A
reconstructed list of where and when Mr. Kelly performed services on reserves
based on available records is included as Annex A to these reasons.
[18] The services he
provides, Mr. Kelly declared, are not rendered in the commercial mainstream. He
explained that while other First Nation consultants address Aboriginal law, he
deals with Anishinaabe law, the difference is that the former is the practice
of mainstream law that determines when and how the laws of Canada affect or do
not affect First Nations. The latter is the knowledge and practice of
indigenous law itself which can only be discerned by special skills,
qualifications, knowledge and expertise that he possesses.
[19] The work he carried
on, Mr. Kelly explained, must be performed in ceremony. There is no separation
of church and state. Any discussion of sacred law, for example, must be in
ceremony.
[20] The First Nations'
history is not written. It is an oral history which Mr. Kelly shares with
various First Nations. The actual cultural and traditional work he contracts
for is done at home and on reserves.
[21] The appellant submits
that the preponderance of the weight of connecting factors indicates that his
income during the years in appeal was situated on a reserve and is, therefore,
exempt from tax under the combined application of paragraph 81(1)(a) of
the ITA and section 87 of the IA.
[22] Subsection 81(1) of
the ITA exempts certain income from tax. The provision reads:
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There shall not be included in
computing the income of a taxpayer for a taxation year,
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Ne sont pas inclus dans le calcul du revenu d'un
contribuable pour une année d'imposition:
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(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.
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a) une somme exonérée de l'impôt sur le revenu par toute autre loi
fédérale, autre qu'un montant reçu ou à recevoir par un particulier qui est
exonéré en vertu d'une disposition d'une convention ou d'un accord fiscal
conclu avec un autre pays et qui a force de loi au Canada.
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[23] Section 87 of the IA
provides that:
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(1) Notwithstanding any other Act of Parliament or
any Act of the legislature of a province, but subject to s. 83, the following
property is exempt from taxation, namely,
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(1) Nonobstant toute autre loi fédérale
ou provinciale, mais sous réserve de l'article 83, les biens suivants sont
exemptés de taxation:
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(a) the interest of an Indian or a band in reserve lands or surrendered
lands.
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a) le droit d'un
Indien ou d'une bande sur une réserve ou des terres cédées.
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(b) the personal property of an Indian or a band situated on a
reserve.
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b) les biens
meubles d'un Indien ou d'une bande situés sur une réserve.
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(2) 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.
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(2) Nul Indien ou bande n'est assujetti à une
taxation concernant la propriété, l'occupation, la possession ou l'usage d'un
bien mentionné aux alinéas (1)a) ou b) ni autrement soumis à
une taxation quant à l'un de ces biens.
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[24] Appellant's counsel
reviewed many of the leading cases touching the issue in appeal. In Nowegijick
v. R.,
the Supreme Court of Canada held that the situs of salary received by
Mr. Nowegijick, an Indian as defined by section 2 of the IA, was the
residence or place of the debtor, irrespective where the employment was carried
on.
[25] Williams v. Canada, a decision of the Supreme Court of
Canada, was concerned with the taxability of unemployment insurance
benefits received by an Indian following employment on a reserve by an employer
located on a reserve. Appellant's counsel described this case as the leading
case on the interpretation of the phrase "situated on a reserve" in
subsection 87(1) of the IA. The Crown had argued that the unemployment
insurance benefits should be taxable on the basis that the situs of the
income was located off the reserve, since the residence of the debtor (i.e. the
Government of Canada) was located off the reserve. The Supreme Court disagreed
and held that the unemployment insurance benefits were not taxable since its situs
was located on the reserve. Gonthier J., speaking for the majority of the
Court, stated that:
. . . 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
benefits such as those paid in this case must be closely re-examined 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.
[26] The Supreme Court in
Williams sets out an approach, or a new test, a "connecting factors
test", to determine situs: identify the various connecting factors
which are potentially relevant and then analyze them to determine what weight
should be given to each "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".
[27] Gonthier J.
expressed the following view with respect to sections 87, 89 and 90 of the IA:
[T]he purpose of these sections was
to preserve the entitlements of Indians to their reserve lands and to ensure
that the use of their property on their reserve lands was not eroded by the
ability of governments to tax, or creditors to seize. The corollary of this
conclusion was that the purpose of the sections was not to confer a general
economic benefit upon the Indians.
[28] Gonthier J., added:
Therefore,
under the Indian Act, an Indian has a choice with regard to his personal
property. The Indian may situate this property on the reserve, in which case it
is within the protected area and free from seizure and taxation, or the Indian
may situate this property off the reserve, in which case it is outside the
protected area, and more fully available for ordinary commercial purposes in
society. Whether the Indian wishes to remain within the protected reserve
system or integrate more fully into the larger commercial world is a choice
left to the Indian.
The purpose of the situs test in
s. 87 is to determine whether the Indian holds the property in question as part
of the entitlement of an Indian qua Indian on the reserve. Where it is
necessary to decide amongst various methods of fixing the location of the
relevant property, such a method must be selected having regard to this
purpose.
[29] Earlier, in Mitchell
v. Peguis Indian Band,
LaForest J. stated that:
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 1763. 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 distraint 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.
[30] LaForest J. also cautioned
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.
. . .
I draw
attention to these decisions by way of emphasizing once again that one must
guard against ascribing an overly broad purpose to ss. 87 and 89. These
provisions are not intended to confer privileges on Indians in respect of any
property they may acquire and possess, wherever situated. Rather, their purpose
is simply 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. The Alberta Court of Appeal
in Bank of Nova
Scotia v. Blood, [1990] 1 C.N.L.R. 16, captures the
essence of the matter when it states, at p. 18, in reference to s. 87, that:
"In its terms the section is intended to prevent interference with Indian
property on a reserve."
[31] The "connecting
factors" test was considered by the Federal Court of Appeal in Canada v. Folster (sub nom.
Clarke v. M.N.R.). Linden
J.A. writing for the Court of Appeal, referred to LaForest J.'s reasons in Mitchell
who, Linden J.A. wrote, characterized the purpose of the tax exemption under
section 87 of the IA as "an effort to preserve the traditional
way of life in Indian communities by protecting property held by Indians qua
Indians on a reserve"
and it was on this basis that the "connecting factors" text was
developed. Counsel declared that the purpose of Mr. Kelly's work was to
preserve the traditional way of life in Indian communities. Linden J.A., adopted
the views of Gonthier J. in Williams who:
. . . recognized that, although
there are necessarily many factors which may be of assistance in determining
the situs of intangible property such as unemployment insurance or
employment income, the relevance of these "connecting factors" must
be assessed on the basis of their ability to further the purpose of section 87.
Further, the weight to be given to each factor may change from case to case.
[32] However, Linden J.A.,
cautioned:
This new test was
not designed to extend the tax exemption benefit to all Indians. Nor was it
aimed at exempting all Indians living on reserves. Rather, in suggesting
reliance on a range of factors which may be relevant to determining the situs
of the property, Gonthier J. sought to ensure that any tax exemption would
serve the purpose it was meant to achieve, namely, the preservation of property
held by Indians qua Indians on reserves so that their traditional way of life
would not be jeopardized.
. . .
. . . It must be recalled that the
connecting factors test is simply a way for courts to apply the situs
principle in a principled way, by bringing some structure to the inquiry. It is
an inquiry which has, as its basic question: having regard for the legislative
purpose for which the section 87 tax exemption was enacted, where does it make
the most sense to locate the situs of the personal property at issue?
The test is no more magic than that.
[33] Appellant's counsel
argued that his client's work was connected to a reserve that was designed to
protect the potential danger to the erosion of Native property. He again referred
to the views of Linden J.A., this time, in his reasons in Recalma v. Canada:
In evaluating the various factors
the Court must decide where it "makes the most sense" to locate the
personal property in issue in order to avoid the "erosion of property held
by Indians qua Indians" so as to protect the traditional Native way
of life. It is also important in assessing the different factors to consider
whether the activity generating the income was "intimately connected
to" the Reserve, that is, an "integral part" of Reserve life, or
whether it was more appropriate to consider it a part of "commercial
mainstream" activity. (see Folster v. The Queen (1997), 97 D.T.C. 5315 (F.C.A.)) We should indicate that
the concept of "commercial mainstream" is not a test for determining
whether property is situated on a reserve; it is merely an aid to be used in
evaluating the various factors being considered. It is by no means
determinative. The primary reasoning exercise is to decide, looking at all the
connecting factors and keeping in mind the purpose of the section, where the
property is situated, that is, whether the income earned was "integral to
the life of the Reserve", whether it was "intimately connected"
to that life, and whether it should be protected to prevent the erosion of the
property held by Natives qua Natives.
[34] Linden J.A. stated
that different factors may be given different weight in each case. What is
"extremely important" is the type of income being considered as
attracting tax. For example, "where business income is involved, most
weight was placed on where the work was done and where the source of the income
was situated".
[35] In his latter
comments Linden J.A. referred to the reasons in Southwind v. The Queen, which was released several months
earlier by the Federal Court of Appeal and was concerned with whether a
business carried on by an Indian residing on a reserve, was situated on a
reserve. The business provided exclusive logging services to a non-Indian
business not situated on a reserve. Both this Court and the Court of Appeal confirmed
the assessment, that the business was not situated on a reserve. The Tax Court
considered "connecting factors" to include the appellant's residence,
the place where the appellant's income was paid (i.e., the bank used by the
debtor) and where the income was earned or the work performed; the most weight
was to the latter factor.
[36] The Court of Appeal
doubted the accuracy of the evaluation of the "connecting factors"
applied by this Court. Linden J.A., in Southwind, accepted the Crown's
set of factors to consider in deciding whether business income is situated on a
reserve:
. . . (1) the
location of the business activities, (2) the location of the customers
(debtors) of the business, (3) where decisions affecting the business are made,
(4) the type of business and the nature of the work, (5) the place where the
payment is made, (6) the degree to which the business is in the commercial
mainstream, (7) the location of a fixed place of business and the location of
the books and records, and (8) the residence of the business' owner.
[37] Linden J.A. then
referred to Mitchell, supra, where, according to the Supreme
Court:
. . . where an Indian enters into
the "commercial mainstream", he must do so on the same terms as other
Canadians with whom he competes. Although the precise meaning of this phrase is
far from clear, it is clear that it seeks to differentiate those Native
business activities that deal with people mainly off the Reserve, not on
it. It seeks to isolate those business activities that benefit the individual
Native rather than his community as a whole, recognizing, of course, . . . [as
appellant's counsel says], that a person benefits his or her community by
earning a living for his family.
[Emphasis added.]
[38] In Canada v.
Monias, Evans
J.A. noted that:
. . . while the
employees' work may help to maintain and enhance the quality of life on the
reserves for members of the bands living there, it does not necessarily connect
the acquisition or use of their employment income to the reserves as physical
locations.
[39] In the appeal at
bar, Mr. Kelly's counsel asserts, Mr. Kelly did not enter the "commercial
mainstream" since, among other things, he did not deal with persons mainly
off the reserve.
[40] Appellant's counsel
also referred to Employment Income Guidelines published by the Canada Revenue
Agency ("CRA") in June 1994 with a view to assisting status Indians
to determine whether employment income is exempt or not from taxation. The
Guidelines incorporate "connecting factors" that describe various
employment situations contemplated by section 5.87 of the IA. Guideline 4
reads as follows:
WHEN:
* THE EMPLOYER IS RESIDENT ON A RESERVE; AND
* THE EMPLOYER IS:
* AN INDIAN BAND
WHICH HAS A RESERVE, OR 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, IF THE
ORGANIZATION IS DEDICATED EXCLUSIVELY TO THE SOCIAL, CULTURAL, EDUCATIONAL, OR
ECONOMIC DEVELOPMENT OF INDIANS WHO FOR THE MOST PART LIVE ON RESERVES; AND
* THE DUTIES OF
THE EMPLOYMENT ARE IN CONNECTION WITH THE EMPLOYER'S NON-COMMERCIAL ACTIVITIES
CARRIED ON EXCLUSIVELY FOR THE BENEFIT OF INDIANS WHO FOR THE MOST PART LIVE ON
RESERVES;
ALL OF THE INCOME
OF AN INDIAN FROM AN EMPLOYMENT WILL USUALLY BE EXEMPT FROM INCOME TAX.
[41] The following are
two of the examples the CRA states are exempt:
Mr. N. works for
the education department of a tribal council at an off-reserve location central
to several reserves. Mr. N lives off reserve and the tribal council is resident
on one of the reserves. Mr. N is exempt from income tax on his employment
income because the duties he performs for the tribal council are connected to
the reserves served by the council, and the employer is resident on a reserve.
. . .
Mr. P works for an
Indian organization providing child and family related services to members of a
large number of bands with reserves scattered over a large area within a
province. Some of these services are provided in the provincial capital, where
Mr. P works, and the organization's administrative office is at an off-reserve
location central to the bands served. However, the organization's directors,
consisting of the band chiefs, meet at each reserve in rotation. Mr. P is
exempt from income tax on his employment income because the duties he performs
for the Indian organization that employs him are connected to the reserves
served by the Indian organization, and the employer is resident on a reserve.
[42] While these guidelines
and case law such as Bell v. Canada,
refer to employment income, principles applied to determine situs of
employment income may be useful in analyzing the situs of business
income as well.
[43] There is no doubt
that Mr. Kelly's knowledge, background and perseverance are valuable resources
to the First Nations. However, notwithstanding that his business activity may
be invaluable to the First Nations and he performed his work primarily for
persons and organizations on a reserve to promote Indian tradition and custom,
does it necessarily follow that his income from the business is "personal
property [of Mr. Kelly] situated on a reserve" within the meaning of
subsection 87(1) of the IA?
[44] Mr. Kelly's clients,
that is, the debtors from whom he earned the income in issue, resided on
reserves. The clients were reserves, bands, Indian leaders, institutions,
organizations and groups. His work is important to the economic and cultural
life of the First Nations communities. However, Mr. Kelly spent only between 15
percent and 30 percent, probably the lesser amount, of his time on any
reserve. He performed the greater portion of his work at home in Winnipeg.
[45] Appellant's counsel
submitted that the case law and CRA's administrative policy supported Mr.
Kelly's position that his business income was situated on a reserve. He
referred to Pete,
an Indian under the IA and a consultant with expertise in Indian matters
and funding of Indian activities who assisted status Indians and Indian bands
and groups as well as the Federal Department of Indian Affairs. Mr. Pete lived
and resided in Saskatoon and like Mr. Kelly, maintained an office in his residence. In Pete,
the trial judge was influenced by the situs of the debtor and held that
income earned from the Department of Indian Affairs was not situated on a
reserve since the Department was not located on a reserve. Income earned from
consulting to Indian bands was exempt under section 87 of the IA. The
trial judge relied on Nowogijick which, counsel submitted, is still good
law depending on the circumstances.
[46] Residence of the
debtor may still be "an important factor, or even the exclusive one",
as stated in paragraph 32 of Williams, counsel asserted. The reason the
residence of the debtor was discarded as a significant factor in Williams was
because of the conceptual difficulty in establishing the residence of the Crown
in any one place in Canada. In Mr. Kelly's case, his counsel argued, the residence of the debtor,
the First Nations and then members, organizations and groups, were resident on
reserves. The "connecting factors" test described in Williams,
then, must be applied in light of the purpose of the section 87 tax exemption,
which counsel declared, was summarized in Folster "as an effort to
preserve the traditional way of life in Indian communities by protecting
property held by Indians qua Indians on a reserve".
[47] Appellant's counsel
referred to the set of factors described by Linden J.A. in paragraph 36 of
these reasons to consider in deciding whether business income is situated on a
reserve. I shall deal with each of them.
(a) The location of the business activities
A relatively
low portion of time during which Mr. Kelly performed his services for any
client was actually on a reserve. Travel to and from a reserve is not time on a
reserve. Mr. Kelly's research was performed in Winnipeg; the bulk of his work was
performed in Winnipeg: providing translation, correspondence, drafting documents, preparing
forums and presentations. In appellant counsel's view the fact Mr. Kelly worked
from home should carry little weight since the work he did at home was integral
to the life of reserves and intimately connected to that life. Also, counsel
adds, the nature of his client's business did not involve dealing with tangible
property such as fishing and logging, for example. Therefore counsel submits
little weight should be given to this factor.
(b) Location of the debtors of Mr. Kelly
The debtors of the income in issue earned by Mr. Kelly
resided on a reserve. Appellant submits that in light of the purpose of the tax
exemption as summarized by Linden J.A. in Folster, "to preserve the
traditional way of life in Indian communities", significant weight should
be accorded to this factor.
(c) The location where
decisions are made
The bulk of
this factor occurs in Winnipeg. Counsel states that this factor need not take place in a
particular location and therefore little weight should be given to it.
Whether or not
a business, or any of its components, may be carried on in any location is not
relevant; what is relevant is where, in fact, the business, or a substantial
part of it, is carried on.
(d) Type of business
and nature of the work
This is
perhaps the most significant favourable factor in the appellant's case.
Mr. Kelly
carried on the business to contribute to the preservation of the traditional
life of First Nations people and their communities and, as I say earlier, was a
valuable and significant contribution to the life of a reserve. That Mr. Kelly
may have had clients who were not connected to a reserve cannot be ignored but does
not detract from the overall nature of the business.
(e) Place where
payment was made
Appellant's
counsel states no weight should be granted to this factor since its relevance
is questionable based on its inability to further the purpose of
section 87 of the IA.
(f) Degree to which
the business is in the commercial mainstream
The unique
nature of Mr. Kelly's business and the services provided, counsel declares, are
such that they are outside the commercial mainstream. Mr. Kelly's counsel
says that his client was not competing in the commercial mainstream with other
persons. His services 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 and are a benefit to the Native
communities as a whole, such that section 87 of the IA applies.
(g) Location of a fixed place of business and the
location of the books and records
This factor,
Mr. Kelly's counsel states, should also be given little weight as it is inapt
in Mr. Kelly's circumstances to further the purpose of the tax exemption.
Factors such as this should not outweigh the really significant connecting
factors in favour of Mr. Kelly's position.
(h) Residence of the
owner of the business
Like in (g)
above, counsel minimizes the importance of this factor on the overall scheme.
This factor also is not apt in Mr. Kelly's circumstances to further the purpose
of the tax exemption.
Appellant's
counsel submits that based on Mr. Kelly's unique qualifications, skills and
experience, and his distinctive knowledge and understanding of Anishinaabe
culture, history, traditions, customs and ceremonies, there is little doubt
that the business income he earns is property that he holds as an Indian qua
Indian. Therefore, he says, having regard to all the "connecting
factors" identified in the context of business income and the proper
weight to be accorded to them, and keeping in mind the purpose of the exemption
from taxation under section 87 of the IA, Mr. Kelly's business income
should be protected to prevent the erosion of property held by an Indian qua
Indian as the services giving rise to this property were "integral to
the life of reserves" and were "intimately connected" to that
life.
Counsel
suggests that had Mr. Kelly been employed under a contract of service, rather
than engaged under a contract for service, by the First Nations and their
leaders, members, institutions, organizations and groups to whom he provided
his services, the CRA would likely have exempted his income under Guideline 4. Counsel
says that Guideline 4 the CRA expressly acknowledges that significant weight
should be given to the nature of the employment duties performed by a status
Indian when they are provided in connection with the employer's non-commercial
activities carried on exclusively for the benefit of Indians who for the most
part live on reserves. As Mr. Kelly was his own employer and his activities
were non-commercial in nature and carried on exclusively for the benefit of
Indians who for the most part live on reserves, it follows that significant
weight should be given to the nature of the services he provided. According to
appellant's counsel Guideline 4 implicitly acknowledges that strict
requirements to the effect that a status Indian must live on reserve and that
all of his duties or activities must be carried out on reserve are artificial
and unreasonable restrictions in the application of section 87 of the IA.
Therefore, the fact that Mr. Kelly did not live on reserve and carried out most
of his activities off reserve should carry little weight in the circumstances.
[48] Unfortunately for
the appellant I cannot agree with him that his business income was situated on
a reserve.
[49] The purpose of
section 87 of the IA, as stated earlier, is to preserve the traditional
way of life in Indian communities by protecting property held by Indians qua
Indians on a reserve and that government or creditors do not seize or erode
the use of the land. In Union of New Brunswick Indians v. New Brunswick (Minister of Finance), McLaughlin J. (as she then was) noted
that the purpose of sections 87 and 89
. . . is simply to
insulate the property interests of Indians in their reserve lands from the
intrusion and interference of the larger society so as to ensure that Indians
are not dispossessed of their entitlements.
On the other hand,
section 87 does not confer a general economic benefit upon the Indians.
[50] What we are
considering in this appeal is whether the situs of Mr. Kelly's income,
his personal property, is or is not on a reserve, notwithstanding the benefits
that his services have endowed upon his clients. Section 87 of the IA addresses
the "personal property on a reserve", not whether the individual
resides on a reserve.
[51] There are factors in
Mr. Kelly's business that are connected to reserves. His debtors are reserves, bands,
Indians and groups from reserves and reserve leaders. Also, the type of
counselling Mr. Kelly makes available through his business to reserves and
others aligned to the reserves is invaluable and meets the test of preserving
the traditional way of life in Indian communities; this connection cannot be
overemphasized. Appellant's counsel aggressively promotes the weight of these
two factors. Counsel asks me to give very little, if any, weight to those
factors that have little or no connection to a reserve and very little to do to
preserving traditional way of life in Indian communities, but nevertheless
influence Mr. Kelly's business operations.
[52] Mr. Kelly carried on
his business to a very large extent off reserves or "a reserve".
Business decisions were made off a reserve. The research and the development of
the work for which Mr. Kelly was consulted were performed at his residence in Winnipeg. He received payment
for his work by mail addressed to him at his Winnipeg residence. Mr. Kelly maintained
the business' books and records in Winnipeg. He also accepted contracts from non-status
Indians. These are important characteristics colouring Mr. Kelly's business and
how he approached his business. It is no doubt true that he possesses expertise
in his chosen field that is of great value to preserving traditional way of
life to Indian communities. However, one cannot ignore the manner in which the
business was operated.
[53] In Williams,
Gonthier J. cautioned that:
. . . it would be
dangerous to balance connecting factors in an abstract manner, divorced from
the purpose of the exemption under the Indian Act. A connecting factor is only
relevant in so much as it identifies the location of the property in question
for the purposes of the Indian Act. In particular categories of cases,
therefore, one connecting factor may have much more weight than another. It
would be easy in balancing connecting factors on a case by case basis to lose
sight of this.
[54] Mr. Kelly carried on
business from his residence in Winnipeg. His residence in Winnipeg was the centre or nucleus of his
business operations. From Winnipeg he consulted with the many reserves and Indians who
engaged his services to advance the preservation of their traditions. To this
extent he carried on his business as any other consultant would: he had an
expertise, he found a niche where he could exploit his expertise and offered and
provided his services to persons who could make good and valued use of his
expertise and he invoiced his clients for services performed. He was carrying
on business as any other Canadian in a commercial mainstream.
[55] I have noted the
observations of the Federal Court of Appeal per Rothstein, Evans and Malone JJ.A.
in The Queen v. Shilling,
who acknowledged that:
42 . . . paragraph
87(1)(b) refers to personal property of an Indian that is situated on
"a reserve" and not "the reserve" of the
Indian in question. The Trial Judge inferred (paragraph73) from this that an
Indian's property situated on any reserve is eligible for the tax
exemption conferred under paragraph 87(1)(b). However, we are not
convinced that this meaning is compelled by the language of paragraph87(1) (b),
although we recognise [sic] that the personal property of an Indian may
attract the benefits of section 87, even when, like Ms. Shilling, its
owner does not reside on a reserve.
43 In Desnomie
v. The Queen,
. . . at paragraph 21, it was doubted whether section87 applies to personal
property located on a reserve other than the taxpayer's own reserve. These
doubts are reinforced by a passage in Leonard v. R. in Right of British
Columbia (1984), 52 B.C.L.R. 389, at 395 (C.A.), where Macfarlane,
J.A. seems to have taken the more restrictive view of the scope of section87:
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.
[Emphasis added to the word "the"]
[56] These comments imply
a requirement that a taxpayer's personal property be connected to a particular
reserve, whether or not the Indian resides on the reserve. There was no
evidence linking Mr. Kelly's personal property to a particular reserve.
[57] I cannot satisfy
myself that Mr. Kelly's income from his business is protected from section 87
of the IA, that he held his income from business as part of the
entitlement of an Indian qua Indian on a reserve. There is no nexus
between the business income received by Mr. Kelly and the occupancy of reserve
lands by him personally. While I have given some weight to the fact that his
debtors were reserves or persons residing on reserves and significant weight to
the services he provided to these persons, I cannot identify the location of
Mr. Kelly's income as being on a reserve. Once the property, i.e., the
amount of money invoiced and paid to Mr. Kelly, left a reserve it entered the
economy off the reserve. The money, when received by Mr. Kelly, ceased to have
anything to do with a reserve. The factors in favour of the income not being on
a reserve have more weight than any factors that may arguably be connected to a
reserve.
[58] The appeals are
dismissed with costs.
Signed at Ottawa, Canada, this 7th
day of April 2009.
"Gerald J. Rip"
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