Bell – Tax Court of Canada finds that bonuses received by a spouse handling back office functions were disproportionate to her contribution

A husband-wife team owned and managed a construction firm doing work in the general Vancouver area with the husband managing the business development and construction work and the wife handling the administrative and human resources work. In order to take advantage of her being a status Indian (he was not), the admin office was moved to the reserve which was closest to Vancouver. (Her own band was on a different reserve.)

The Crown did not challenge the Indian Act exemption for the regular salary paid to her (of approximately $100,000 per annum, which approximated her husband’s salary), nor did it challenge the deductibility of the bonusing of all of the firm’s remaining profits to her, including a $2 million bonus in 2008, but did challenge the exemption to her of those bonuses.

In finding that her bonuses were taxable to the taxpayer, Woods J found that there was no evidence that they were reasonably intended to compensate her for her duties of employment and, in particular, no evidence that her contribution was greater than her husband’s - and found, more generally, that there was no substantive connection between the reserve lands and the bonuses. However, she went on to note obiter that “if an Indian chooses to situate property on a reserve, the income should qualify for the exemption regardless of the individual’s motivation for doing so,” i.e., “the payment of the bonuses is abusive, but it is not abusive to locate the office on a reserve.”

It is not clear what she would have done if she had also been considering whether s. 67 denied the deduction of half or all of the bonuses, nor was she asked to address whether GAAR can apply to accessing the Indian Act exemption.

Neal Armstrong. Summary of Bell v. The Queen, 2016 TCC 175 under Indian Act, s. 87 and ITA. s. 67.