Citation: 2008 TCC 405
Date: 20080708
Docket: 2004-2163(IT)G
BETWEEN:
TARA STIGEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Miller J.
[1]
Ms. Tara Stigen, an
Indian as defined in section 2 of the Indian Act, claims that interest
of $2,920.68 earned from Peace Hills Trust Company (“Peace Hills”) in 2001 is
exempt from tax pursuant to paragraph 81(1)(a) of the Income Tax Act
and subsection 87(2) of the Indian Act. The Minister of National Revenue
denies the exemption on the basis that the interest, while personal property,
is not situated on a reserve.
[2]
The parties filed an
Agreed Statement of Facts, most of which is reproduced as follows:
2. The Appellant earned interest income in
the amount of $2,920.68 from Peace Hills Trust Company (“PHTC”) (the
“Interest”) but did not include the amount on her 2001 personal income tax
return because the Appellant believed that the Interest was exempt from
taxation.
3. The Minister reassessed the Appellant to
include the Interest in her 2001 income.
…
5.
The Interest comprises interest from the
following:
Guaranteed Investment Certificate (“GIC”)
(PHTC – Saskatoon
branch) $2,128.54
GIC(s)
(PHTC – Edmonton branch) 787.60
Joint Savings Account
(PHTC – Edmonton branch) 4.54
Total $2,920.68
6.
The Appellant is an individual resident in Canada.
7.
The Appellant is an aboriginal Canadian and is
an Indian as defined in section 2 of the Indian Act.
8.
The Appellant has never resided on a reserve as
defined in section 2 of the Indian Act.
9.
The Appellant banked at the Edmonton branch of PHTC. In 1999, she and
her husband Chad Stigen opened a joint savings account at PHTC’s Edmonton branch (the “Joint Account”). The
paperwork relating to the Joint Account was prepared and kept at the Edmonton branch of PHTC.
10.
The Appellant and Chad Stigen both contributed
funds to the Joint Account.
11.
During 2001, the Appellant owned three
interest-bearing GICs issued by PHTC (the “GICs”):
• GIC #334250-5, which the Appellant
purchased at PHTC’s branch in Saskatoon, Saskatchewan, in 1999, while in Saskatoon on a visit;
• GICs #334250-7 and 334250-8, which the
Appellant purchased at PHTC’s branch in Edmonton, Alberta, in 2001.1
12.
The paperwork in respect of each GIC was
prepared and maintained at the PHTC branch at which the GIC was purchased.
13.
The Interest was earned on money in the Joint
Account and the GICs.
14.
The Appellant did not spend the Interest; she
left it in the Joint Account and/or GICs.
15.
PHTC is a trust company that was incorporated on
November 19, 1980 under the federal Trust Companies Act.
16.
PHTC is wholly owned by the Samson Cree Nation
of Hobbema, Alberta.
17.
In its 2001 Annual Report, PHTC’s mission
statement is: “To operate a full service trust company on a national basis with
emphasis on the First Nations communities”.
18.
PHTC is registered in British
Columbia, Alberta, Saskatchewan, Manitoba, Ontario,
New Brunswick, the Yukon Territory and the Northwest Territories.
19.
PHTC uses a regional branch concept to position
itself on or off reserve, to serve the largest number of First Nations
customers in a given area.
20.
During 2001, PHTC maintained on-reserve branches
in Kelowna, British Columbia; Hobbema, Alberta;
Fort Qu’Appelle, Saskatchewan;
and Saskatoon, Saskatchewan.
21.
During 2001, PHTC maintained off-reserve
branches in Edmonton, Alberta; Calgary Alberta; Winnipeg, Manitoba; and Fredericton, New Brunswick.
22.
The head office of PHTC is located in Hobbema, Alberta on the Samson Reserve.
23.
At the head office of PHTC, the Board of
Directors sets the policy and general framework, and organizes the mission
statement, operating philosophies, strategic plans, annual business plans and
capital plans of PHTC.
24.
The Board of Directors of PHTC generally meets
on-reserve.
25.
The minute books and share registers of PHTC are
maintained at the head office of PHTC.
26.
The corporate office of PHTC is located off
reserve in Edmonton, Alberta.
27.
PHTC’s corporate office in Edmonton oversees the delivery of the
policy of the Board of Directors and provides support to the operating regional
offices.
28.
The Saskatoon branch is on the Muskeg Cree Nation’s urban reserve.
29.
PHTC offers a range of financial services to
First Nations, their members and non-Native clientele.
30.
PHTC has both Native and non-Native clients.
There is no difference between the services that PHTC provides to First Nations
and their members, corporations, institutions and associations, and the
services provided to non-Native clientele.
31.
All PHTC’s branches offer the same services and
follow the same policies.
32.
Interest on a savings account at the Edmonton
branch of PHTC would be paid at the Edmonton branch. The interest rates for savings accounts were set at PHTC’s
corporate office, and were based on market surveys.
33.
Interest on a GIC would be credited depending on
whether or not interest was paid by cheque, in which case it would be paid via
an account in Hobbema. If paid directly into a bank account, it would be paid
at the location where the GIC was opened.
34.
Starting in 1996, the Appellant was employed by
Ledcor (a large multi‑discipline construction company) on a seasonal
basis as a member of a crew working on road paving projects in Alberta.
35.
The Appellant did not claim a tax exemption
under the Indian Act with respect to her employment earnings from
Ledcor.
36.
The vast majority of the funds the Appellant
used to purchase the GICs were employment earnings from Ledcor. Some of the
funds were reinvested interest, and some may have been employment insurance
benefits.
37.
The funds the Appellant and her husband
deposited in the Joint Account were savings from their employment with Ledcor.
38.
PHTC is generally similar to other institutions
that offer banking and trust services, and is competitive with other such
institutions of its size.
39.
In 2001 the capital assets of PHTC were located
in the various offices, as follows:
(thousands $)
|
Hobbema
|
256
|
|
Calgary
|
122
|
|
Edmonton
|
106
|
|
Winnipeg
|
172
|
|
Saskatoon
|
135
|
|
Fort Qu’Appelle
|
242
|
|
Kelowna
|
64
|
|
Fredericton
|
69
|
|
Corporate Office
|
509
|
|
Total
|
1674
|
40.
The Muskeg Cree Nation’s urban reserve in Saskatoon is an industrial park.
41.
Money that PHTC receives from all of its
clients, including the Appellant, as deposits into chequing and savings
accounts, for GICs and as fees for various services, go into a single company-wide
pool (the “Pool”). The funds in this national Pool are invested by PHTC in
cash and short term deposits, securities and loans (the “Investments”). The
Investments generate income for PHTC.
42.
The money that flows from a particular branch
into the Pool (including money that clients have placed in GICs or accounts in
that particular branch) cannot be tracked to specific Investments made by PHTC.
43.
The money that any client, including the
Appellant, places in a GIC or in a savings account cannot be tracked to
specific Investments made by PHTC.
44.
The income that PHTC earns on the Investments
becomes part of the Pool.
45.
The interest paid to clients on savings and
chequing accounts and GICs is paid out of the Pool.
46.
Interest compounded on a GIC is credited to the
GIC through a software system run by a service provider in Halifax.
47.
When making loans to client, PHTC’s branches can
draw on the entire Pool to do so.
48.
As reflected in PHTC’s 2001 Annual Report, the
value of PHTC’s Investments and the income generated by each category in 2001
were as follows:
2001
|
PHTC’s Investments
|
Amount
|
Income from each Investment category
|
|
• Cash,
short term deposits and securities
• Mortgages and loans “First Nations Component”
• Mortgages and loans “non First Nations Component”
|
$113,158,237
364,627,182
38,717,187
|
$ 5,584,683
28,662,475
2,861,022
|
|
Total
|
516,502,606
|
37,108,180
|
49.
The short term deposits and securities are
investments in off-reserve institutions. The short term deposits comprise money
market investments (e.g. in chartered banks and other financial institutions),
and the securities comprise government treasury bills, Government of Canada
bonds, provincial bonds, bankers acceptances and other securities (e.g.
corporate bonds).
50.
The mortgages and loans (collectively, the
“Loans”) comprise: residential mortgages, commercial mortgages, collateral
loans, commercial loans, and consumer loans.
51.
In coding Loans for its database, PHTC
identifies certain ones as “on reserve”. The “First Nations Component” of its
Loans portfolio comprises loans and mortgages coded “on reserve”.
52.
A Loan is coded “on reserve” if any one of the
following criteria is met:
• The security is on reserve;
Security on reserve may consist
of:
o INAC funding (acknowledged redirection)
o Ministerial Guarantees (Government Guarantees)
o Hard assets permanently located on a reserve secured by G.S.A. or
Chattel Mortgage i.e. grocery store building & inventory
o Moveable assets “normally situate on a reserve” secured by a G.S.A.
or Chattel Mortgage i.e. heavy equipment, mobile homes, motor vehicles,
recreational vehicles.
• The cash flow
for debt service is from reserve;
o INAC funding
o Any revenues earned on reserve i.e. forestry contract, salaries paid
by band.
• The borrower is situs on
reserve;
o Borrower’s permanent residence or place of business is on a reserve.
• The guarantor is on reserve;
o Guarantor’s permanent residence or place of business is on a
reserve.
53.
Loans are coded during the loan application
process and are not normally subject to monthly review or change. The actual
criteria used to determine whether a particular loan is on or off reserve is
not entered in a database and cannot be tracked.
54.
PHTC does not maintain statistics on any of the
following: the percentage of Loans used on reserve; the percentage of Loans to
Indians residing on reserve; the percentage of Loans to Indian bands or
councils with reserves; the percentage of Loans to Tribal Councils based on
reserve; the percentage of Loans to Indians residing on the Muskeg Lake
Cree Nation urban reserve in Saskatoon, or to the Muskeg Lake Cree nation or
band council.
____________
1 The GICs stipulate:
“Notwithstanding any term, condition or provision contained in this
Certificate to the contrary, it is understood and agreed that although the
Certificate may be serviced or dealt with off an Indian Reserve, the
Certificate and any other monies governed by the terms of this Certificate
shall be, and be deemed to be, held at the Head Office of the Company on the
Samson Indian Reserve at Hobbema, Alberta.”
Issue
[3]
The issue is whether
the deposits or GICs or the interest income therefrom were personal property of
an Indian situate on a reserve, exempting such interest income from taxation.
Analysis
[4]
Paragraph 81(1)(a)
of the Income Tax Act states:
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;
[5]
Subsections 87(1) and
(2) of the Indian Act states:
87(1) 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 and Statistical
Management Act, the following property is exempt from taxation:
(a) the interest of an
Indian or a band in reserve lands or surrendered lands; and
(b) the personal
property of an Indian or a band situated on a reserve.
87(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.
[6]
Appellant’s counsel
raised two arguments. He acknowledged at the outset that I could not
accept the first argument, as it required ignoring case precedents from the
Federal Court of Appeal. The second argument distinguished those Federal Court
of Appeal precedents which had found, relying on the connecting factors
approach established by Williams v. Canada, that interest
income was not situate on a reserve.
[7]
Appellant’s counsel’s
first argument did not follow the usual course of reviewing the connecting factors,
an approach which evaluates factors tying personal property to a reserve,
ultimately to determine if an Indian holds such property as part of an
entitlement of an Indian qua Indian on the reserve. Rather, the
Appellant looked at the nature of the property, the deposits, the GICs and the
interest flowing therefrom, and applying banking principles taken from the Trust
and Loan Companies Act, concluded such property was situated on reserve.
I am not going to go in depth through the steps that Mr. McNary took me to
get there, for, as he correctly foretold, I rely on the Federal Court of Appeal
cases that have previously dealt with the issue of determining situs of interest
income for purposes of section 87 of the Indian Act. I do have some comments,
however, on his first argument that the Federal Court of Appeal have erred in
its reasoning in Sero v. Her Majesty the Queen and Lewin v. Her
Majesty the Queen.
[8]
First, Appellant’s
counsel relied on comments of the Manitoba Court of Appeal in the case of McDiarmid
Lumber Ltd. v. God’s Lake First Nation
dealing with the application of section 89 of the Indian Act which
reads:
89(1) Subject
to this Act, the real and personal property of an Indian or a band
situated on a reserve is not subject to charge, pledge, mortgage, attachment,
levy, seizure, distress or execution in favour or at the instance of any person
other than an Indian or a band.
[9]
Specifically, I was
drawn to the following passage in McDiarmid Lumber:
75 It might be argued that Sero was wrongly decided by
giving particular importance to the fact that the bank’s investment income was
derived in the commercial mainstream. Had the court viewed the place where Ms.
Sero and Mr. Frazer chose to do their banking and investing and where they
received their interest and investment income as the paramount connecting
factors, the receipt of those funds for taxation purposes would be located on
the reserve, the same place that the funds themselves were effectively
situated.
[10]
This passage, however,
must be put in context. The Manitoba Court of Appeal emphasized repeatedly in
its Reasons the difference between section 87 (exemption from taxation) and
section 89 (exemption from seizure).
44 … In the result, as we see in Williams, the
location of income-related benefits for the purposes of s. 87 may be difficult
or even impossible to fix by the application of common law principles. And as
we will see, a claim for exemption from taxation of income-related benefits
under s. 87 raises conceptually different considerations than does a claim
under s. 89 that intangible but otherwise exigible personal property is exempt
from seizure.
[11]
The Manitoba Court of
Appeal was clear that the analysis for purposes of determining situs of
personal property in the context of section 87 was based on the transaction –
the receipt of income. The analysis for the exemption from seizure pursuant to
section 89 should be based on the situs of the actual debt, the chose in
action. This distinguished the Court of Appeal’s reasoning. The Court
stressed the difficulty in attempting to determine situs when dealing
not with income, but with receipt of income. It was therefore understandable
how and why the connecting factors could serve such a useful purpose in grappling
with this difficult concept. Such was not the case when dealing with the debt
itself, which was at issue in McDiarmid Lumber in the context of
the exemption from seizure.
[12]
I do not place the
reliance on McDiarmid Lumber that Mr. McNary does, though I do agree
with the Manitoba Court of Appeal that the considerations under section 87 are,
and should be, different from the section 89 considerations. I have not been
convinced that I should draw from McDiarmid Lumber a whole new approach
to the analysis of situs for the purpose of section 87, by diminishing
reliance on the connecting factors test in favour of a common law approach to
determining situs of a debt.
[13]
Briefly, the
Appellant’s argument on this front is that she deposited funds with Peace Hills
which were held in trust for her, Peace Hills guaranteeing repayment with
interest. Relying on McDiarmid Lumber, the Appellant contends the
deposit is a simple contract debt and should be located, by relying on common
law principles and legislation, at the branch where the account is maintained.
Further, with respect to where GICs were held, the terms and conditions of the
GICs themselves stated:
Notwithstanding any term, condition or provision contained in this Certificate
to the contrary, it is understood and agreed that although the Certificate may
be serviced or dealt with off an Indian Reserve, the Certificate and any other monies
governed by the terms of this Certificate shall be, and be deemed to be, held
at the Head Office of the Company on the Samson Indian Reserve at Hobbema,
Alberta.
[14]
The Appellant contends
therefore that the GICs were deemed to be held at Peace Hills’ Head Office in
Hobbema, which is on reserve. Further, with respect to the GICs acquired on
reserve at the Saskatchewan branch (on reserve), section 447 of the Trust
and Loan Companies Act (“TLCA”) applies to render the indebtedness
of Peace Hills in respect of that GIC on reserve. Subsections 447(1) and (4) of
the TLCA read as follows:
447(1) For the purposes
of this Act, the branch of account with respect to a deposit account is
(a) the branch the
address or name of which appears on the specimen signature card or other
signing authority signed by a depositor with respect to the deposit account or
that is designated by agreement between the company and the depositor at the
time of opening of the deposit account; or
(b) if no branch has
been identified or agreed on as provided in paragraph (a), the branch
that is designated as the branch of account with respect thereto by the company
by notice in writing to the depositor.
…
(4) The indebtedness of a
company by reason of a deposit in a deposit account in the company shall be
deemed for all purposes to be situated at the place where the branch of account
is situated.
According to the Appellant, it is irrelevant as to how
Peace Hills invests the deposits it receives – situs has been established.
The Appellant concludes her argument in this respect as follows:
31 Accordingly, the Appellant submits that regardless of the
location of the branch of PHTC where each of the GICs was purchased, pursuant
to section 447 of the TLCA, the GICs and the respective portion of the
Interest in relation thereto, were situated on the Samson Cree Nation Reserve.
32 In the alternative, with respect to GIC No. 334250-5, this
particular GIC was purchased at the Saskatoon branch of PHTC, which is on the Muskeg Cree Nation Reserve.
Pursuant to subsection 447(4) of the TLCA, the indebtedness of PHTC in
respect of GIC No. 334250-5 is situated on the Muskeg Cree Nation Reserve.
Accordingly, the Appellant submits that even in the absence of the agreement
between the Appellant and PHTC, GIC No. 334250-5 and the respective Interest,
were situated on the Muskeg Cree Nation Reserve.
[15]
I cannot accept this
argument. To extrapolate from comments in McDiarmid Lumber,
relating to exemption from seizure, to apply a new common law test to exemption
from taxation is taking McDiarmid Lumber far beyond its ratio. The
Federal Court of Appeal has specifically addressed the situs of personal
property in the form of the receipt of interest income, including dealing with
the application of subsection 461(4) of the Bank Act (equivalent to
section 447 of the Trust and Loan Companies Act). The Federal Court
of Appeal in Sero concluded:
47 For these reasons, I cannot accept the appellants’
argument that subsection 461(4) of the Bank Act overrides the connecting
factors test to compel the conclusion that the interest income in issue in this
case is “situated on a reserve” for the purposes of section 87 of the Indian
Act.
[16]
The Federal Court of
Appeal has determined that the connecting factors test is the test to be
applied in these circumstances, commenting in Recalma v. Her Majesty
the Queen
as follows:
11 So too, where investment income is at issue, it must be
viewed in relation to its connection to the Reserve, its benefit to the
traditional Native way of life, the potential danger to the erosion of Native
property and the extent to which it may be considered as being derived from
economic mainstream activity. In our view, the Tax Court Judge correctly placed
considerable weight on the way the investment income was generated, just as the
Courts have done in cases involving employment, U.I. benefits and business
income. Investment income, being passive income, is not generated by the
individual work of the taxpayer. In a way, the work is done by the money which
is invested across the land. The Tax Court Judge rightly placed great weight on
factors such as the residence of the issuer of the security, the location of
the issuer’s income generating operations, and the location of the security
issuer’s property. While the dealer in these securities, the local branch of
the Bank of Montreal, was on a Reserve, the issuers of the securities were not;
the corporations which offered the Bankers’ Acceptances and the managers of the
Mutual Funds in question were not connected in any way to a Reserve. They were
in the head offices of the corporations in cities far removed from any reserve.
Similarly, the main income generating activity of the issuers was situated in
towns and cities across Canada
and around the world, not on Reserves. In addition, the assets of the issuers
of the securities in question were predominantly off Reserves, which in case of
default would be most significant.
12 Less weight was properly accorded by the Tax Court Judge,
in this case of investment income, to factors such as the residence of the
taxpayer, the source of the capital with which the security was bought, the
place where the security was purchased and the income received, the place where
the security document was held and where the income was spent. We can find no
fault with the reasoning of the Tax Court Judge in the way he balanced the
various connecting factors involved in this case in the light of the purpose of
the legislation.
I am compelled to consider the connecting factors
approach.
[17]
The following is a
summary of the connecting factors that have been identified by both the Federal
Court of Appeal and Tax Court of Canada as relevant in determining situs
of passive income:
a) The residence of the taxpayer;
b) The origin or location of the capital invested;
c) The location of the branch where the investment activities
occurred;
d)
The location where the interest income is
used;
e)
The location of the investment
instruments;
f)
The location where the interest payment is
made;
g)
The nature of the investment;
h)
The residence of the issuer;
i)
The location of the issuer’s property in
the event of default that could be subject to potential seizure; and
j)
The location of the issuer’s income
generating activity from which the interest derives.
a) Residence of the Taxpayer
[18]
Ms. Stigen has never
lived on a Reserve.
b) Origin and Location of Capital Invested
[19]
The money invested by
Ms. Stigen derived primarily from employment income with Ledcor in road
construction. She claimed no exemption for her employment income, as it did not
relate in any way to work on Reserve.
c) Location of Bank Branch Where Securities
were Acquired
[20]
Ms. Stigen banked at
the Edmonton Branch of Peace Hills, which is off Reserve. Both the joint
account and two of the GICs were located at that Branch. The third GIC was at
Peace Hills’ Saskatoon Branch, on the Muskeg Cree Nation’s urban reserve, in an
industrial park. Ms. Stigen acquired the GIC in Saskatoon while on a visit to Saskatoon.
d) Location where Interest Income was used
[21]
Ms. Stigen did not
spend the interest income; she left it in the joint account or the GICs.
e) Location of the Investment Instruments
[22]
The paperwork relating
to the joint account and two of the GICs was located off reserve at Peace Hills’
Edmonton Branch. The paperwork relating to the remaining GIC was located on
reserve at Peace Hills’ Saskatoon Branch.
f) Location where Interest Payments were made
[23]
The interest on the
joint account was paid off reserve at Peace Hills’ Edmonton Branch. Interest
compounded on a GIC is credited to the GIC through a software system run by a
service provider in Halifax. Interest paid on a GIC can be paid either
from an account at Hobbema or directly from the Branch where the GIC is held,
depending on the method of payment.
g) Nature of the Investment
[24]
The investments were
the joint accounts at Peace Hills, along with the GICs issued by Peace Hills.
h) Residence of the Issuer, Peace Hills
[25]
Peace Hills is
registered in six provinces and two territories. It has branches in five
provinces and has branches both on and off reserve. While its head office is on
reserve, its corporate office is off reserve.
i) Location of Peace Hills’ Property
[26]
In 2001, the majority
of Peace Hills’ capital assets were located off reserve. As can be seen from
paragraph 39 of the Agreed Statement of Facts, the amount of capital assets in
Hobbema, Saskatoon, Fort Qu’Appelle and Kelowna (on reserve) is considerably less than the
capital assets in the other centres.
j) The Location of Peace Hills’ Income
Generating Activity
[27]
There has been some
criticism of the emphasis put on this factor, and generally by the approach
taken by the Federal Court of Appeal in Recalma. The Federal Court
of Appeal addressed this concern head-on in the case of Sero. It is
indeed this very criticism that is at the root of the Appellant’s alternative
argument addressed at the outset of these Reasons. The Court of Appeal in Sero
had this to say about Recalma and the importance of this particular
connecting factor:
23 In reaching the conclusion that these appeals must be
decided in the same way as Recalma, I have not ignored the fact that, in
Mr. Frazer’s case, the source of the money used to make the investments was Mr.
Frazer’s on-reserve business. That is a connection to the reserve but, in my
view, a relatively weak one. It is not enough to overcome the fact that once
Mr. Frazer invested his money in the Royal Bank, his investments became a
source of income with no more connection to the reserve than the investment of
Ms. Sero.
24 Nor have I ignored the published criticisms of Recalma:
see, for example, Donald K. Biberdorf, “Aboriginal Income and the “Economic
Mainstream” in Report of Proceedings of the Forty-Ninth Tax Conference,
1997 Conference Report (Toronto: Canadian Tax Foundation, 1998), 25:1-23);
Murray Marshall, Business and Investment Income and Section 87 of the Indian
Act: Recalma v. Canada (1998), 77 C.B.R. 528, Bill Maclagen, Section 87
of the Indian Act: Recent Developments in the Taxation of Investment Income
(2000), 48 C.T.J. 1503; Thomas E. McDonnell, “Taxation of an Indian’s
Investment Income” in Current Cases (2001), 49 C.T.J. 954; Martha
O’Brien, Income Tax, Investment Income and the Indian Act: Getting Back on
Track (2002), 50 C.T.J. 1570.
25 There may be merit to some of the criticisms of Recalma.
For example, it is not clear to me whether, in determining the situs
of investment income for purposes of section 87 of the Indian Act, it is
relevant to consider the extent to which investment income benefits the
“traditional Native way of life”. This seems to me a difficult test to apply,
since it is at least arguable that the “traditional Native way of life” has
little or nothing to do with reserves. However, it is not necessary to express
an opinion on that point, because it is of no consequence in these appeals.
26 The principal criticism of Recalma is that it is
anomalous to determine the situs of income on a debt by reference to the
location of the activities of the debtor rather than the activities of the
creditor. I see no anomaly in such an approach. The connecting factors
test from Williams requires consideration of all of the characteristics
of the property in issue. It seems to me that where the property is the
interest on a debt, an analysis of the economic characteristics of the debtor
is important.
27 Some critics also point out that the practical result of Recalma
is to make it impossible for an Indian to earn tax-exempt investment income,
except perhaps by investing in a financial or other enterprise with an asset
base that is located or mostly located on a reserve. That criticism is based on
the premise that section 87 is intended to permit an Indian to earn tax exempt
income on any investment, as long as it is acquired through a financial
institution with a presence on a reserve in the form of a branch. That is the
premise that Recalma found to be unsound.
[28]
The Federal Court of
Appeal is clear on the approach to be followed. What then did Peace Hills
do with the money invested with it? The Appellant’s deposits became part
of a Pool, which Peace Hills invested in cash and short-term deposits and
securities (consisting of money market investments, Government treasury bills,
Government bonds and corporate bonds) and loans (consisting of residential
mortgages, commercial mortgages, collateral loans, commercial loans and
consumer loans). The loans with a First Nations component constituted over 70%
of all of Peace Hills’ investments, yet Peace Hills is unable to break this
down further into on or off reserve loans. Peace Hills’ income from investments
became part of the pool. Ms. Stigen’s interest on the joint account and GICs
would have been paid out of the pool.
[29]
The Appellant concludes
from this investment record that Peace Hills, unlike the issuers of securities
in Recalma, had a strong connection to Reserves. With respect, I
would not go so far: it is simply unknown how much investment is on reserve.
Certainly there is a connection, but there appears to be a stronger connection
to the commercial mainstream. The strength of connection required in this
regard has been described in Recalma as follows:
14 … The result may, of course, be otherwise in factual
circumstances where funds invested directly or through banks on reserves are
used exclusively or mainly for loans to Natives on reserves. When Natives, however
worthy and committed to their traditions, choose to invest their funds in the
general mainstream of the economy, they cannot shield themselves from tax
merely by using a financial institution situated on a reserve to do so.
[30]
Also this Court
expressed a similar view in Lewin:
36 If it had been a financial institution created solely for
the purposes, concerns and needs of the Indians living on the reserve and if
the bulk of its income had primarily been reinvested on the reserve to
strengthen, develop and improve the social, cultural and economic well-being of
the Indians living there, the situation could have been different.
[31]
Peace Hills does have a
connection with the First Nations community, but it is not in any way exclusive
to on-reserve investments, and indeed it provides services to non-native
clientele.
[32]
Peace Hills is a
financial institution operating across the country both on and off reserve, not
differentiating between its native and non-native clientele. It is not an
institution which is so directly connected to one or more reserves that the
investment in it by an Indian requires protection as part of the entitlement of
an Indian qua Indian on the Reserve. That is effectively what the
Appellant seeks: that Peace Hills is so closely connected to Reserves that such
a connecting factor is in and of itself sufficient to justify the application
of section 87. I disagree. The connection to Reserves, taken in
conjunction with all the other connecting factors, is simply not strong enough.
[33]
The Appellant has
attempted to distinguish Sero, Lewin and Recalma from the
case before me. The major distinction is the nature of the financial
institution and the investment activities engaged in by them. The Appellant
emphasizes the extent of Peace Hills’ investment with a First Nations
connection, though cannot specify the on-reserve element. I see a financial
institution engaged in the provision of the same financial services as other
Canadian financial institutions, both on and off reserve. I do not find that
the activities are so connected to reserves, as to distinguish them
sufficiently to draw a different conclusion from Recalma, Sero or
Lewin.
[34]
I do not accept the
Appellant’s argument that Peace Hills is so connected to reserves that that
factor alone is sufficient to exempt an Indian investor from taxation on
interest earned from Peace Hills. Such a result ignores well-established case
law that requires a weighing of all connecting factors; yes, some factors are
more significant than others in dealing with passive income, but the weighing
process is a cumulative one. When I consider the source of Ms. Stigen’s
investment (earned off reserve), her residence (off reserve), her dealings with
Peace Hills being primarily off reserve, the lack of tracking of her money to
on-reserve investments, Peace Hills’ corporate office being off reserve and the
extent of Peace Hills’ off-reserve investments, I simply cannot conclude
that there are sufficiently strong connecting factors to find the interest
income is situate on reserve. I also conclude that this result is consistent
with sentiments expressed by the Supreme Court of Canada in Williams
that “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”. I have not been convinced that Peace Hills is part of that
protected reserve system. It is a national financial institution with some
emphasis on First Nations – that is not enough to grant Peace Hills some
special status as an element of a protected reserve system. Ms. Stigen has
not demonstrated any other supporting connecting factors that would make it so.
[35]
For these reasons, I
find Ms. Stigen cannot avail herself of the exemption from taxation found in
section 87 of the Indian Act and the appeal is dismissed.
Signed at Ottawa, Canada, this 8th
day of July 2008.
“Campbell J. Miller”
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