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SUPREME
COURT OF CANADA
Citation: Bastien Estate v. Canada, 2011 SCC 38
|
Date:
20110722
Docket:
33196
|
Between:
Estate
of Rolland Bastien
Appellant
and
Her
Majesty The Queen
Respondent
-
and -
Huron-Wendat
Nation, Assembly of Manitoba Chiefs,
Grand
Council of the Crees (Eeyou Istchee)/Cree
Regional
Authority, Assembly of First Nations, Chiefs
of
Ontario and Union of Nova Scotia Indians
Interveners
Official
English Translation: Reasons of Deschamps J.
Coram: McLachlin C.J. and Binnie, Deschamps, Fish, Charron, Rothstein
and Cromwell JJ.
Reasons for
Judgment:
(paras. 1 to 65)
Concurring
Reasons:
(paras. 66 to 111)
|
Cromwell J. (McLachlin C.J. and Binnie, Fish and Charron
JJ. concurring)
Deschamps J. (Rothstein J. concurring)
|
Note: This document is subject to editorial revision before its
reproduction in final form in the Canada Supreme Court Reports.
bastien estate v.
canada
Estate of
Rolland Bastien Appellant
v.
Her Majesty
The Queen Respondent
and
Huron‑Wendat Nation, Assembly of
Manitoba Chiefs,
Grand Council of the Crees (Eeyou
Istchee)/Cree
Regional Authority, Assembly of First
Nations, Chiefs
of Ontario
and Union of Nova Scotia Indians Interveners
Indexed as: Bastien Estate v. Canada
2011 SCC 38
File No.: 33196.
2010: May 20; 2011: July 22.
Present: McLachlin C.J. and Binnie, Deschamps, Fish, Charron,
Rothstein and Cromwell JJ.
on appeal from the federal court of appeal
Aboriginal law — Taxation —
Exemptions — Interest income — Status Indian living on reserve investing income
in term deposits with caisse populaire on same reserve — Interest income earned
on term deposits paid and deposited in savings account — Whether interest
income exempt from income taxation as personal property “situated on a reserve”
— Connecting factors approach to determining location of intangible personal
property — Whether caisse’s economic activity in “commercial mainstream” off
reserve is potentially relevant factor — Indian Act, R.S.C. 1985, c. I‑5,
s. 87(1) (b).
Taxation — Income tax —
Exemptions — Income from property — Interest income earned on term deposits
deposited in status Indian’s savings account on reserve — Whether interest
income exempt from tax as “personal property of an Indian situated on a
reserve” — Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .),
s. 3 , 9 — Indian Act, R.S.C. 1985, c. I‑5, s. 87(1) (b).
B was a status Indian who belonged
to the Huron‑Wendat Nation. He was born and died on the Wendake Reserve
near Quebec City. From 1970 until 1997, B operated a moccasin manufacturing
business on that reserve. He invested some of the income from the
operation and sale of his business in term deposits with the Caisse populaire
Desjardins du Village Huron. The Caisse has since its founding had its head
office, its only place of business and its sole fixed asset on the Wendake
Reserve. In 2001, the certificates of deposit paid interest that was deposited
in B’s transaction savings account at the Caisse. B considered this income to
be property exempt from taxation under the Indian Act . However, in 2003,
the Minister of National Revenue made an assessment in which he added the
investment income to B’s income for the 2001 taxation year. The assessment was
confirmed and B’s estate appealed unsuccessfully to the Tax Court of Canada and
the Federal Court of Appeal. Both courts held that the Caisse generated its
revenues in the “economic mainstream”, not on the reserve, and therefore that
the interest it paid to B was not situated on the reserve.
Held: The appeal should
be allowed.
Per McLachlin C.J. and
Binnie, Fish, Charron and Cromwell JJ.: The phrase “on a reserve” in
s. 87 of the Indian Act should be interpreted having regard to the
substance and the plain and ordinary meaning of the language used. Where,
because of its nature or the type of exemption in question, the location of
property is not objectively easy to determine, the connecting factors approach
set out in Williams v. Canada, [1992] 1 S.C.R. 877, must be applied:
First, the court identifies potentially relevant factors connecting the intangible
personal property to a location. Second, the court analyses these factors
purposively in order to assess what weight should be given to them. This
analysis considers the purpose of the exemption under the Indian Act ,
the type of property in question and the nature of the taxation of that
property. The Williams approach applies here, since the location of a
transaction — the payment of interest pursuant to a contract — for the purposes
of taxation has to be determined.
The purpose of the tax exemption
is to preserve Indian property on a reserve. While the relationship between
the property and life on the reserve may in some cases be a factor tending to
strengthen or weaken the connection between the property and the reserve, 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. The property in issue here is investment income derived
from term deposits, which are a basic investment vehicle evidenced by a
certificate of deposit. The investor, as the holder of a certificate of
deposit, is not a participant in the equity markets but rather is simply
entitled to be paid the agreed‑upon rate of interest over the agreed‑upon
period of time in addition to having the capital returned at the end of that
period. This investment income is personal property for the purposes of
s. 87 of the Indian Act . The contract provides for a right to a
sum of money payable under certain conditions. But for the tax exemption, B’s
interest income earned from term deposits would be income from property to be
added to his yearly income pursuant to ss. 3 , 9 and 12(1) (c) of the
Income Tax Act .
The relevant connecting factors
identified in Williams include: the residence of the debtor, the
residence of the person receiving the benefits, the place the benefits are
paid, and the location of the employment income which gave rise to the
qualification for benefits. General legal rules about the location of property
are relevant for the purposes of the Indian Act . Thus, provisions and
jurisprudence relating to the location of income may prove helpful in deciding
whether income is located on a reserve. While these rules cannot be imported
from one context into another without due consideration, they ought to be
considered and given appropriate weight in light of the purpose of the
exemption, the type of property and the nature of the taxation in issue.
Here, the connecting factors
identified in Williams are potentially relevant. When they are
considered and weighed in light of the purpose of the exemption, the type of
property and the nature of the taxation of that property, all point to the
reserve as the location of the interest income. The location of the debtor,
the Caisse, and the place where payment must be made, both under the contract
between B and the Caisse and under art. 1566 of the Civil Code of
Québec, are clearly on the reserve. The income arises from a contractual
obligation which was entered into on the reserve. These connecting factors
should weigh heavily in attributing a location to the interest income. Other
potentially relevant connecting factors reinforce rather than detract from the
conclusion that the interest income is property situated on the reserve. The
residence of the payee, B, was on the reserve. As for the source of the
capital which was invested to produce the interest income, it too was earned on
the reserve.
The fact that the Caisse produced
its revenue in the “commercial mainstream” off the reserve is legally
irrelevant to the nature of the income it was obliged to pay to B. This is
true as to both form and substance. While that factor may have weight with
respect to other types of investments, it has been given significantly too much
weight by the lower courts with respect to the term deposits in issue here. B
made a simple loan to the Caisse. The Caisse’s income‑producing actions
and contracts after B invested in term deposits cannot be deemed his own and do
not diminish the many and clear connections between his interest income and the
reserve. The question is the location of B’s interest income and not where the
financial institution earns the profits to pay its contractual obligation to
B. The exemption from taxation protects an Indian’s personal property situated
on a reserve. Therefore, where the investment vehicle is, as in this case, a
contractual debt obligation, the focus should be on the investment activity of
the Indian investor and not on that of the debtor financial institution. When
one focuses on the connecting factors relevant to the location of B’s interest
income arising from his contractual relationship with the Caisse, it is
apparent that the other commercial activities of the Caisse should have been
given no weight in this case. B’s investment was in the nature of a debt owed
to him by the Caisse and did not make him a participant in those wider
commercial markets in which the Caisse itself was active. B’s investment
income should therefore benefit from the s. 87 Indian Act
exemption.
Per Deschamps and Rothstein JJ.:
The identification of connecting factors for the purposes of the Indian Act must
be focused on concrete and discernible links between the property and the
reserve, regardless of whether the property is tangible or intangible.
In this case, the personal
property whose location must be determined is the personal right whose legal existence
is provided for in the investment contract, that is, a right to be paid
interest, subject to certain conditions. For the purpose of determining the
location of this intangible property, the debtor’s place of residence is a
factor that can have some weight, but this factor cannot be paramount, since
what must be done is not, as might be the case in a private international law
context, to determine the place where judicial proceedings should be
introduced. The place of payment of the interest is not really relevant for
the purpose of determining the place where the property is held, since the
taxing provision that governs the tax treatment of interest income —
s. 12(4) of the Income Tax Act — does not require that interest
actually be paid to be included in the taxpayer’s income. The fact that the
creditor resides on a reserve is relevant. It is to the advantage of Indians
living on a reserve to foster the economic development of the reserve, and
income spent or invested on a reserve can only contribute to that development.
Nevertheless, residence must not be considered a prerequisite for the
exemption, since it ceased to be a statutory requirement more than a century
ago. The place where the contract was signed does not on its own constitute a
sufficiently objective legal basis for determining the location of a right to
be paid interest, since it would be open to manipulation and could be
artificial. To be compatible with the purpose of the exemption, the choice to
sign the contract on a reserve must not have been based simply on obtaining a
personal benefit for an Indian whose usual place of business was off the
reserve. Lastly, in the case of a right to be paid interest, it is necessary
to look beyond the investment contract and consider the source of the invested
capital. Where the capital resulted from several different activities, the
place where the greatest proportion of the activities were carried out should
serve as a factor by analogy with the paramount location concept used in relation
to tangible property.
In this case, the debtor’s place
of residence, that of the creditor, the place where the contract was signed and
the activity that generated the capital that made it possible to enter into the
investment contract all favour granting the exemption to B’s estate.
There is agreement with the
majority that it is not necessary to consider whether the property or the
activity that generated it is connected with the traditional Aboriginal way of
life. It is also agreed that the activity engaged in by a financial
institution to fulfil its monetary obligations in the context of investment
contracts providing for the payment of interest is not a valid factor for
determining whether personal property held by an Indian is situated on a reserve.
However, there is disagreement with the weight attached in the analysis to
formal connections that, in certain circumstances, have a tenuous relationship
with the reserve. The majority’s approach disregards the provision that
governs the tax treatment of interest income and is inconsistent with the
historical purpose of the exemption.
Cases Cited
By Cromwell J.
Applied:
Williams v. Canada, [1992] 1 S.C.R. 877; disapproved: Recalma
v. Canada (1998), 158 D.L.R. (4th) 59; considered: Mitchell v.
Peguis Indian Band, [1990] 2 S.C.R. 85; referred to: Nowegijick
v. The Queen, [1983] 1 S.C.R. 29; Union of New Brunswick Indians v. New
Brunswick (Minister of Finance), [1998] 1 S.C.R. 1161; R. v. Lewis,
[1996] 1 S.C.R. 921; Lewin v. Canada, 2002 FCA 461, 2003 D.T.C. 5476,
aff’g 2001 D.T.C. 479; Sero v. Canada, 2004 FCA 6, [2004] 2 F.C.R. 613; McDiarmid
Lumber Ltd. v. God’s Lake First Nation, 2006 SCC 58, [2006] 2 S.C.R. 846; University
of British Columbia v. Berg, [1993] 2 S.C.R. 353; Canada v. Folster,
[1997] 3 F.C. 269; Will‑Kare
Paving & Contracting Ltd. v. Canada, 2000 SCC 36, [2000] 1 S.C.R. 915; Southwind
v. Canada (1998), 156 D.L.R. (4th) 87.
By Deschamps J.
Referred to: Dubé v.
Canada, 2011 SCC 39, rev’g 2009 FCA
109, 393 N.R. 143, and 2007 TCC 393, 2008 D.T.C. 4022; Mitchell v. Peguis Indian Band, [1990] 2
S.C.R. 85; Williams v. Canada, [1992] 1 S.C.R. 877; Union of
New Brunswick Indians v. New Brunswick (Minister of Finance), [1998] 1
S.C.R. 1161; Nowegijick v. The Queen, [1983] 1 S.C.R. 29; The Queen v.
National Indian Brotherhood, [1979] 1 F.C. 103; McDiarmid Lumber Ltd. v.
God’s Lake First Nation, 2006 SCC 58, [2006] 2 S.C.R. 846; Robinson v. The Queen, 2010 TCC 649, [2011] 2 C.T.C. 2286; Horn v. Canada, 2007 FC 1052, [2008] 1 C.T.C. 140, aff’d 2008 FCA
352, 302 D.L.R. (4th) 472; Shilling v. M.N.R., 2001 FCA 178, [2001] 4
F.C. 364; Canada v. Monias, 2001 FCA 239, [2002] 1 F.C. 51; Southwind v. Canada (1998), 156
D.L.R. (4th) 87; Large v. The Queen, 2006 TCC 509, 2006 D.T.C. 3558.
Statutes and Regulations
Cited
An
Act for the protection of the Indians in Upper Canada from imposition, and the
property occupied or enjoyed by them from trespass and injury, S.C. 1850,
c. 74, s. 4.
Civil Code of Québec, S.Q. 1991,
c. 64, arts. 1440, 1566.
Deposit Insurance Act, R.S.Q., c. A‑26.
Income Tax Act, R.S.C. 1985, c. 1
(5th Supp .), ss. 3 , 9 , 12(1) (c), (4) , 56 , 248(1) “property”.
Indian Act, R.S.C. 1985, c. I‑5,
ss. 87 , 89 , 90 .
Indian
Act, S.C. 1951, c. 29, s. 86.
Indian
Act, 1876, S.C. 1876, c. 18, ss. 64, 65.
Regulation respecting the application of the Deposit Insurance Act, (1993) 125 G.O.Q. II, 3333, r. 1, s. 1.
Royal Proclamation (1763), R.S.C. 1985,
App. II, No. 1.
Treaty No 8 (1899).
Trust and Loan Companies Act, S.C. 1991, c. 45 .
Authors Cited
Bartlett, Richard H. “The Indian Act of Canada” (1977‑1978),
27 Buff. L. Rev. 581.
Biberdorf, Donald K. “Aboriginal Income and the ‘Economic
Mainstream’”, Canadian Tax Foundation, Report of Proceedings of the Forty‑Ninth
Tax Conference, 25:1. Toronto: The Foundation, 1998.
Canada.
Revenue Canada, Taxation. Interpretation Bulletin No. IT‑62,
“Paragraph 81(1)(a) (also subparagraph 110(1)(a)(iv) and paragraph 149(1)(c))”,
August 18, 1972.
Dockstator, Mark. “The Nowegijick Case: Implications for Indian Tax
Planning Strategies”, [1985] 4 C.N.L.R. 1.
L’Heureux, Nicole, Édith Fortin et Marc Lacoursière. Droit
Bancaire, 4e éd. Cowansville, Qué.: Yvon Blais, 2004.
Lord, Guy, et autres. Les principes de l’imposition au Canada,
13e éd. Montréal: Wilson &
Lafleur, 2002.
MacIntosh, Constance. “From Judging Culture to Taxing ‘Indians’:
Tracing the Legal Discourse of the ‘Indian Mode of Life’” (2009), 47 Osgoode
Hall L.J. 399.
Maclagan, Bill. “Section 87 of the Indian Act : Recent
Developments in the Taxation of Investment Income” (2000), 48 Can. Tax J.
1503.
Marshall, Murray. “Business and Investment Income under
Section 87 of the Indian Act : Recalma v. Canada”
(1998), 77 Can. Bar Rev. 528.
McDonnell, Thomas E. “Taxation of an Indian’s Investment
Income” (2001), 49 Can. Tax J. 954.
O’Brien, Martha. “Income Tax,
Investment Income, and the Indian Act : Getting Back on Track” (2002),
50 Can. Tax J. 1570.
Slattery, Brian. “Understanding the Aboriginal Rights” (1987), 66 Can.
Bar Rev. 727.
Sullivan, Ruth. Sullivan on the
Construction of Statutes, 5th ed. Markham, Ont.: LexisNexis, 2008.
APPEAL from a judgment of the
Federal Court of Appeal (Nadon, Blais and Pelletier JJ.A.), 2009 FCA 108, 400
N.R. 349, 2010 D.T.C. 6740, 2010 D.T.C. 5054, [2009] F.C.J. No. 434 (QL), 2009 CarswellNat 5362, affirming a decision of Angers J., 2007 TCC 625, 2008 D.T.C. 4064, [2008] 5
C.T.C. 2533, [2007] T.C.J. No. 541 (QL), 2007 CarswellNat 5406. Appeal allowed.
Michel
Beaupré and Michel Jolin, for
the appellant.
Pierre
Cossette and Bernard Letarte, for
the respondent.
Peter W.
Hutchins and Lysane Cree, for
the intervener the Huron‑Wendat Nation.
Jeff D.
Pniowsky and Sacha R. Paul, for
the intervener the Assembly of Manitoba Chiefs.
John
Hurley and François Dandonneau, for
the intervener the Grand Council of the Crees (Eeyou Istchee)/Cree Regional
Authority.
Maxime
Faille and Graham Ragan, for
the intervener the Assembly of First Nations.
David C.
Nahwegahbow and James Hopkins, for
the intervener Chiefs of Ontario.
Brian A.
Crane, Q.C., and Guy Régimbald, for
the intervener the Union of Nova Scotia Indians.
The
judgment of McLachlin C.J. and Binnie, Fish, Charron and Cromwell JJ. was
delivered by
Cromwell J. —
I. Overview
[1]
Under the Indian Act, R.S.C. 1985, c.
I-5 , the late Rolland Bastien was exempt from taxation with respect to personal
property situated on a reserve. He earned interest income on term deposits with
an on-reserve caisse populaire, a Quebec savings and credit union. The income
is admittedly personal property for the purposes of the tax exemption. At issue
is whether this personal property C the interest income C was situated on a reserve so that the exemption from tax applies to
it. The Tax Court of Canada and the Federal Court of Appeal held that the
exemption did not apply. They reasoned that the caisse populaire generated its
revenues in the “economic mainstream”, not on the reserve, and therefore that
the interest it paid to Mr. Bastien was not situated on the reserve. Mr.
Bastien’s estate challenges that conclusion.
[2]
In my respectful view, the interest income paid
to Mr. Bastien was situated on a reserve and was therefore exempt from
taxation. One determines the location of intangible personal property such as
the interest income in issue in this case by conducting a two-step analysis.
First, one identifies potentially relevant factors tending to connect the property
to a location and then determines what weight they should be given in
identifying the location of the property in light of three considerations: the
purpose of the exemption from taxation, the type of property and the nature of
the taxation of that property. In this case, virtually every potentially
relevant factor connects the interest income to the reserve: Mr. Bastien
obtained the certificates of deposit on the reserve and the interest income was
payable there; the caisse populaire which issued the certificates of deposit
has its only place of business on the reserve. The principal that gave rise to
the interest income was earned on the reserve and Mr. Bastien lived there. I
would allow the appeal.
II. Facts, Proceedings and Issue
1. Facts
[3]
Under the Indian Act , the personal
property of an Indian situated on a reserve is exempt from taxation. This
includes exemption from income taxation: Nowegijick v. The Queen, [1983]
1 S.C.R. 29, at pp. 38–39. The relevant provisions are ss. 87(1) (b) and
(2) of the Indian Act , as they read at the time the interest income was
paid to Mr. Bastien:
87. (1) Notwithstanding any other Act of
Parliament or any Act of the legislature of a province, but subject to
section 83, the following property is exempt from taxation, namely,
. . .
(b)
the personal property of an Indian or a band situated on a reserve.
(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.
[4]
This exemption from taxation under s. 87 with
respect to on-reserve property is part of a larger scheme of protections.
Under s. 89, real and personal property of an Indian (or band) situated on a
reserve is not subject to attachment or seizure. Thus, the location of the
property on the reserve is relevant both to whether it is taxable and to
whether it is exigible. The words “situated on a reserve” should be interpreted
consistently throughout the Act to mean “within the boundaries of the reserve”:
Union of New Brunswick Indians v. New Brunswick (Minister of Finance),
[1998] 1 S.C.R. 1161, at para. 13; R. v. Lewis, [1996] 1 S.C.R. 921, at
pp. 955–58. Under s. 90, certain property is deemed to be situated on a
reserve even though it may in fact be physically located elsewhere. The
deeming provision applies, speaking generally, to personal property purchased
for the use and benefit of Indians (with Indian funds or funds appropriated by
Parliament) and to personal property given to Indians under a treaty or
agreement with the Crown. There are no other provisions of the Indian Act
specifying how the location of property is to be determined for the purposes of
this protective scheme.
[5]
The late Rolland Bastien was a status Indian and
belonged to the Huron-Wendat Nation. He was born and died on the Wendake
Reserve near Quebec City. His wife and children who succeed him are also Huron
and live on the reserve. From 1970 until 1997 when he sold the business to his
children, Mr. Bastien operated a moccasin manufacturing business on the Wendake
Reserve: Les Industries Bastien enr. He invested some of the income from the
operation and sale of his business in term deposits with two caisses populaires
situated on Indian reserves, the Caisse populaire Desjardins du Village Huron
(the “Caisse”) situated on the Wendake Reserve and the Caisse populaire
Desjardins de Pointe-Bleue situated on the Mashteuiatsh Reserve. Only the
income from the investments with the Caisse on the Wendake Reserve is in issue
on this appeal. The Caisse has since its founding in 1965 had its head office,
its only place of business and its sole fixed asset on the reserve (partial
agreed statement of facts, A.R., vol. II, at p. 200).
[6]
In 2001, Mr. Bastien held certificates of
deposit at the Caisse and these investments paid interest that was deposited in
a transaction savings account at the Caisse. Mr. Bastien considered this income
to be property exempt from taxation. However, in 2003, the Minister of
National Revenue made an assessment in which he added the investment income to
Mr. Bastien’s income for the 2001 taxation year. The Minister confirmed the
assessment and Mr. Bastien’s estate appealed unsuccessfully to the Tax Court
and the Federal Court of Appeal.
2. Proceedings
[7]
In the Tax Court (2007 TCC 625, 2008 D.T.C.
4064), Angers J. applied the Federal Court of Appeal’s decision in Recalma
v. Canada (1998), 158 D.L.R. (4th) 59. He was of the view that the
location of investment income should be analysed by having regard to four
factors: its connection to the reserve; whether it benefited the traditional
Native way of life; the risk that taxation would erode Native property; and the
extent to which the investment income was derived from economic mainstream
activity. Angers J. thought that this fourth factor C whether
the income was derived from the economic mainstream C was the
most important. He found that the Caisse earned its income from activities in
the economic mainstream which were not closely connected to the reserve.
Consequently, in his view, the investment income was not exempt from taxation.
[8]
The Federal Court of Appeal upheld this
conclusion (2009 FCA 108, 400 N.R. 349). Nadon J.A. thought that this case was
governed by the court’s previous decisions in Recalma, Lewin v.
Canada, 2002 FCA 461, 2003 D.T.C. 5476, and Sero v. Canada, 2004 FCA
6, [2004] 2 F.C.R. 613. Nadon J.A. highlighted that the most important
consideration was whether the investment income C that is,
the profit generated from the capital invested in a financial institution C was produced on or off the territory of the reserve. In other
words, Nadon J.A. found that if all or part of the funds were invested in the
general mainstream of the economy, the taxation exemption could not apply. In
his view, that was the case and the appeal should be dismissed.
[9]
In concurring reasons, Pelletier J.A. (Blais
J.A. concurring) added some comments about the nature of the caisses
populaires’ business activities. The caisses populaires, he thought, now fully
participate in the capital market, at least to the extent that their cash
requirements permit or their surplus funds demand. The nature of the capital
market itself should be given the most weight in order to determine the
location of investment income. That market is not limited to a reserve, a
province or even a country.
3. Issue
[10]
There is only one question before the Court: Was
Mr. Bastien’s interest income earned on the term deposits with the Caisse
populaire Desjardins du Village Huron exempt from income taxation because it
was personal property situated on a reserve?
III. Analysis
[11]
The appellant submits that the analyses in the
Tax Court and the Federal Court of Appeal were faulty in two related respects.
First, they failed to give appropriate weight to the contractual nature of the
investment vehicle in determining whether or not it was situated on a reserve.
Mr. Bastien contracted with the Caisse on the reserve for a particular rate of
return on his investment to be paid to him on the reserve; how the Caisse
produced income by dealings with others, the appellant contends, was not
relevant to determining the location of Mr. Bastien’s investment income. The
appellant points to art. 1440 of the Civil Code of Québec, S.Q. 1991, c.
64, which provides that a contract has effect only between the contracting
parties and does not generally affect third persons. Second, the appellant
submits that the courts below erred by giving determinative weight to the fact
that the income was derived from the commercial mainstream; the appellant says
that all the relevant factors ought to have been considered and they all favour
the reserve as the location of the interest income.
[12]
The respondent substantially supports the
reasoning of the Federal Court of Appeal. To be exempt from taxation, the
interest income must be closely connected to a reserve, that is to say, that
the issuer’s income-generating activities must be exclusively situated on a
reserve. In this case, as the Caisse’s income-generating activities were in the
commercial mainstream, Mr. Bastien’s interest income paid by the Caisse cannot
be exempt from taxation. Additionally, the respondent submits that the privity
of contract rule should not limit the courts in making factual findings about
the location of the issuer’s income-generating activities. Nor should the rule
imply that the situs of the contract is the situs of the
investment income.
[13]
I agree substantially with the appellant. To
explain why, I will discuss first, the statutory language of the exemption;
second, the analysis that is required to determine the location of property for
the purposes of the exemption; and finally, how it applies in this case.
1. The Statutory Language
[14]
The exemption from taxation (s. 87(1) (b))
applies to “the personal property of an Indian or a band situated on a
reserve”. Courts should interpret the phrase “on a reserve” having due regard
to the “substance and the plain and ordinary meaning of the language used
rather than to forensic dialectics”: Nowegijick, at p. 41; see
also Lewis, at p. 958; Union of New Brunswick Indians, at paras.
13–14; McDiarmid Lumber Ltd. v. God’s Lake First Nation, 2006 SCC 58,
[2006] 2 S.C.R. 846, at para. 19. As noted earlier, there is an exemption from
both taxation and from seizure (s. 89) with respect to property “situated on a
reserve” and that phrase should be given the same construction wherever it is
used throughout the Indian Act : Union of New Brunswick Indians,
at para. 13.
[15]
The phrase “on a reserve” refers throughout the
Act to the property being within the boundaries of the reserve. However,
different legal tests are used to determine whether various types of property
are so situated for the particular purposes. For example, an issue in the God’s
Lake case was whether a bank account in an off-reserve bank was exempt from
seizure. The Court looked for guidance to the traditional common law rules and
the terms of the Trust and Loan Companies Act, S.C. 1991, c. 45 .
These made it clear that the account was located at the branch which was
off the reserve: para. 13. However, where the question concerns the location
of non-physical property generated by a transaction, such as the payment of
benefits, for taxation purposes, a more fact-specific analysis is used which
weighs factors potentially relevant to identifying the location of the
transaction. An important point, however, is that regardless of the type of
property or the difficulty of ascribing to it a location, the objective must
always be to implement the statutory language, and that requires keeping the
focus on whether the property is situated on a reserve.
2. Determining
the Location of Income
[16]
Where, because of its nature or the type of
exemption in question, the location of property is not objectively easy to
determine, courts must apply the connecting factors approach set out in Williams
v. Canada, [1992] 1 S.C.R. 877, in order to attribute a location to
the property. While this search for location may seem at times to be more the
stuff of metaphysics than of law, the attribution of location is what the Indian
Act provisions require. The difficulty of doing so means that it is not
generally possible to apply a simple, standard test to determine the location
of intangible property. Gonthier J. recognized this in Williams, at p.
891, where he was considering whether unemployment insurance benefits were
exempt from taxation under s. 87 :
Because the
transaction by which a taxpayer receives unemployment insurance benefits is not
a physical object, the method by which one might fix its situs is not
immediately apparent. 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.
[17]
As the location of such property will always be
notional, there is a risk that attributing a location to it will be arbitrary.
An alternative would be to apply consistently a single strict rule, but that
solution is not without its limitations. Gonthier J. expressed caution against
a single criteria test. Indeed, where one or two factors have a controlling
force, there could be manipulation or abuse, and there is cause to worry that
such an analysis would miss the purpose of the Indian Act exemption: Williams,
at p. 892.
[18]
To address this challenge, Gonthier J. in Williams
set out a two-step test. At the first step, the court identifies potentially
relevant factors connecting the intangible personal property to a location. “A
connecting factor is only relevant”, wrote Gonthier J., “in so much as it
identifies the location of the property in question for the purposes of the Indian
Act ” (p. 892). Thus, even in this somewhat metaphysical sphere, the focus
is clearly on ascribing a physical location to the property in question.
Connecting factors mentioned in Williams include things such as the
residence of the payor and the payee, the place of payment and where the
employment giving rise to qualification for the benefit was performed: Williams,
at p. 893. As Gonthier J. noted, potentially relevant connecting factors
have different relevance depending on the categories of property and the types
of taxation in issue. So, for example, “connecting factors may have different
relevance with regard to unemployment insurance benefits than in respect of
employment income, or pension benefits” (p. 892). To take this into account, as
well as to ensure that the analysis serves to identify the location of the
property for the purposes of the Indian Act , at the second step, the
court analyses these factors purposively in order to assess what weight should
be given to them. This analysis considers the purpose of the exemption under
the Indian Act ; the type of property in question; and the nature of the
taxation of that property (p. 892).
[19]
Williams thus
establishes a clearly structured analysis, but one that turns on careful
consideration of the particular circumstances of each case assessed against the
purpose of the exemption. As Gonthier J. noted at p. 893, the Williams
approach “preserves the flexibility of the case by case approach, but within a
framework which requires the court to assess the weight which is to be placed
on the various connecting factors”. The Williams approach applies here
because we are dealing with the location of a transaction C the payment of interest pursuant to a contract C for the purposes of taxation.
[20]
In this case and others, the Tax Court and the
Federal Court of Appeal have developed and applied jurisprudence which adapts
the Williams analysis to the taxation of interest and other investment
income. As this is the first case in this Court since Williams to
address this issue, it is timely to restate and consolidate the analysis that
should be undertaken in applying the s. 87 exemption to interest income. I will
therefore review the analysis required by Williams in more detail, focusing
in turn on the purpose of the exemption, the type of property, the nature of
the taxation of that property and the potentially relevant connecting factors.
(i) The Purpose
of the Exemption
[21]
In Mitchell v. Peguis Indian Band, [1990]
2 S.C.R. 85, La Forest J. discussed the purpose of both the tax exemption and
the immunity from seizure in the Indian Act . With respect to the
exemption from taxation, he observed that it serves to “guard against
the possibility that one branch of government, through the imposition of taxes,
could erode the full measure of the benefits given by that branch of government
entrusted with the supervision of Indian affairs” (p. 130). He summed up his
discussion of the purpose of the provisions by noting that since the Royal
Proclamation of 1763, R.S.C. 1985, App. II, No. 1, “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”.
He added an important qualification: the purpose of the
exemptions is to preserve property reserved for their use, “not to remedy the
economically disadvantaged position of Indians by ensuring that [they could]
acquire, hold and deal with property in the commercial mainstream on different
terms than their fellow citizens”: p. 131. As La Forest J. put it:
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. [Emphasis added; p. 133.]
[22]
However, La Forest J. was careful to emphasize
that even with respect to purely commercial arrangements, the protections from
taxation and seizure always apply to property situated on a reserve. As he put
it, at p. 139:
… if an Indian band concluded a purely
commercial business agreement with a private concern, the protections of ss. 87
and 89 would have no application in respect of the assets acquired pursuant to
that agreement, except, of course, if the property was situated on a
reserve. It must be remembered that the protections of ss. 87 and 89 will
always apply to property situated on a reserve. [Emphasis added.]
[23]
The Court returned to the purpose of the
exemptions in Williams. Gonthier J. confirmed that the purpose of the
exemptions “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” (p. 885).
Echoing the limitation described by La Forest J. in Mitchell, Gonthier
J. added that “the purpose of the sections was not to confer a general economic
benefit upon the Indians” (at p. 885) and that “[w]hether 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” (p. 887). In light of
this, Gonthier J. held that the purpose of the requirement in s. 87 that the
property be “situated on a reserve” is to “determine whether the Indian holds
the property in question as part of the entitlement of an Indian qua
Indian on the reserve” (p. 887). In both Union of New Brunswick Indians
and God’s Lake, the Court confirmed that the purpose of the exemptions
was as set out in Mitchell and Williams.
[24]
It will be useful to make two additional points.
[25]
The first is that a purposive approach to the
application of the exemption provisions must be rooted in the statutory text
and does not give the court “license to ignore the words of the Act ... or
otherwise [circumvent] the intention of the legislature” which that text
expresses: University of British Columbia v. Berg, [1993] 2 S.C.R. 353,
at p. 371. As Professor Sullivan has wisely observed, even when the broad
purposes of legislation are clear, “it does not follow that the unqualified
pursuit of those purposes will give effect to the legislature’s intention”: R.
Sullivan, Sullivan on the Construction of Statutes (5th ed. 2008), at p.
297; see also Nowegijick, at p. 34. A purposive analysis must
inform the court’s approach to weighing the connecting factors. But it must be
acknowledged that there may not always be a complete correspondence between the
meaning of the text and its broad, underlying purpose.
[26]
The second and related point concerns the
expression “Indian qua Indian”. In both Mitchell and Williams,
the Court referred to the purpose of the exemption as protecting property
which Indians hold qua Indians: Mitchell, at p. 131; Williams,
at p. 887. In some of the subsequent jurisprudence, this has been taken as a
basis for importing into the s. 87 analysis the question of whether the income
in question benefits the traditional Native way of life. For example, in Canada
v. Folster, [1997] 3 F.C. 269, the Federal Court of Appeal
attributed the significance of this factor to La Forest J. in Mitchell, observing that he had
“characterized the purpose of the tax exemption provision as, in essence, an
effort to preserve the traditional way of life in Indian communities by
protecting property held by Indians qua Indians on a reserve” (para.
14). In Recalma, the Federal Court of Appeal identified as a relevant
consideration the question of whether the investment income benefits the
traditional Native way of life (para. 11). This factor
has been relied on in cases in the Tax Court and the Federal Court of Appeal
since Recalma: see, e.g., Lewin v. Canada, 2001 D.T.C. 479, at
paras. 36 and 63–64.
[27]
The reference to rights of an “Indian qua
Indian” in Mitchell, which was repeated in Williams, and the
linking of the tax exemption to the traditional way of life have been
criticized: C. MacIntosh, “From Judging Culture to Taxing ‘Indians’: Tracing
the Legal Discourse of the ‘Indian Mode of Life’” (2009), 47 Osgoode Hall
L.J. 399, at p. 425. However, I do not read either judgment as departing
from a focus on the location of the property in question when applying the tax
exemption. The exemption provisions must be read in light of their purpose,
but not, as Professor MacIntosh puts it, be “let loose from the moorings of
their express language” (p. 425). A purposive interpretation goes too far if
it substitutes for the inquiry into the location of the property mandated by
the statute an assessment of what does or does not constitute an “Indian” way
of life on a reserve. I do not read Mitchell or Williams as
mandating that approach.
[28]
In my respectful view, Recalma and some of the cases
following it have gone too far in this direction. The exemption was rooted in
the promises made to Indians that they would not be interfered with in their
mode of life: see, e.g., R. H. Bartlett, “The Indian Act of Canada”
(1977-1978), 27 Buff. L. Rev. 581, at pp. 612-13; Mitchell, at
pp. 135–36. However, a purposive interpretation of the exemption does not
require that the evolution of that way of life should be impeded. Rather, the
comments in both Mitchell and Williams in relation to the
protection of property which Indians hold qua Indians should be read in
relation to the need to establish a connection between the property and the
reserve such that it may be said that the property is situated there for the
purposes of the Indian Act . While the relationship
between the property and life on the reserve may in some cases be a factor
tending to strengthen or weaken the connection between the property and the
reserve, 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. See M. O’Brien, “Income Tax, Investment Income,
and the Indian Act : Getting Back on Track” (2002), 50 Can. Tax J. 1570,
at pp. 1576 and 1588; B. Maclagan, “Section 87 of the Indian Act : Recent
Developments in the Taxation of Investment Income” (2000), 48 Can. Tax J.
1503, at p. 1515; M. Marshall, “Business and Investment Income under Section 87
of the Indian Act : Recalma v. Canada” (1998), 77 Can.
Bar Rev. 528, at pp. 536-39; T. E. McDonnell, “Taxation of an Indian’s
Investment Income” (2001), 49 Can. Tax J. 954, at pp. 957-58.
[29]
Sharlow J.A. in Sero acknowledged that
this aspect of Recalma may be open to criticism, adding that:
[I]t 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.
[para. 25]
[30]
I agree with these comments. Section 87
protects the personal property of Indians which is situated on a reserve from
taxation. 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.
(ii) The Type of Property
[31]
This factor examines the nature of the property
in question. The property in issue here is investment income derived from term
deposits. As noted, the parties agree that Mr. Bastien’s investment income is
“personal property” (“biens meubles”) within the meaning of the s. 87
exemption. However, for the purposes of considering what weight to ascribe to
various potentially relevant connecting factors, the nature of the term
deposits needs to be considered in more detail.
[32]
A term deposit is a basic investment vehicle
evidenced by a certificate of deposit. Generally, the investor lends money to a
financial institution on condition that he or she can only withdraw the money
after the term has ended or forego some or all of the interest if the funds are
withdrawn before the end of the term. In return, the financial institution pays
a predetermined rate of interest to the investor. Term deposits are similar to
savings accounts in that the investor, like the account holder, is a creditor
of the financial institution. The investor, as the holder of a certificate of
deposit, is not a participant in the equity markets but rather is simply
entitled to be paid the agreed-upon rate of interest over the agreed-upon
period of time in addition to having the capital returned at the end of that
period. See N. L’Heureux, É. Fortin and M. Lacoursière, Droit
bancaire (4th ed. 2004), at p. 408.
[33]
The term deposits in issue here were “deposits
of money” within the meaning of the Quebec Deposit Insurance Act,
R.S.Q., c. A-26, and the Regulation respecting the application of the
Deposit Insurance Act, (1993) 125 G.O.Q. II, 3333, r. 1. However, the
Regulation excludes from the definition of “deposit of money” funds used to
acquire shares in the capital stock of a savings and credit union or shares of
a mutual fund (s. 1). This exclusion underlines the point that the holder of
the certificate is not participating in the equity markets.
[34]
To sum up, this investment income is, for the
purposes of s. 87 of the Indian Act , personal property. The contract
provides for a right to a sum of money payable under certain conditions.
(iii) Nature of Taxation
[35]
But for the exemption, Mr. Bastien’s interest
income earned from term deposits would be included in his income for income tax
purposes. I will explain briefly.
[36]
Interest income, for taxation purposes, can be
income from a business or from property. G. Lord et al.
explain the difference:
[translation]
Thus, income from property is income earned from one or more pieces of
property, as opposed to business income, which must come from an activity
related to a profession, calling, trade or manufacture. (G. Lord et al., Les principes de l’imposition au Canada
(13th ed. 2002), at p. 154)
[37]
As Mr. Bastien’s interest income was not part of
his business activities, it was income from property. The Income Tax Act,
R.S.C. 1985, c. 1 (5th Supp .), defines “property” as “property of any kind”,
including “a right of any kind” and, “unless a contrary intention is evident,
money”: s. 248(1) . From the point of view of income taxation, Mr. Bastien
exchanged property (the principal sum) for the right to recover the debt (the
term deposit) at a later fixed time in order to obtain a sum of money
(interest). Income from property must be added to the taxpayer’s yearly income
pursuant to ss. 3 , 9 and 12(1) (c) of the Income Tax Act . I do not
think that the fact that tax is payable on accrual rather than payment is
relevant to the determination of where the investment income is situated.
(iv) Connecting Factors
[38]
Williams requires
the court to identify the connecting factors for the type of property in
question: p. 892. Gonthier J. identified several potentially relevant
connecting factors including: “the residence of the debtor, the residence of
the person receiving the benefits, the place the benefits are paid, and the
location of the employment income which gave rise to the qualification for
benefits”: p. 893. While it is instructive to review the various connecting
factors considered in that case, one must bear in mind that the factors
relevant to the receipt of unemployment insurance benefits which were in issue
there are not necessarily those relevant to receipt of interest income. The
type of property is important in identifying the relevant connecting factors.
[39]
Gonthier J. turned first to the “traditional
test” (p. 893), the residence of the debtor, which had been applied in Nowegijick,
at p. 34. However, given that the debtor in Williams was the
federal Crown and that there were special considerations in determining the
location of the Crown, he concluded that the residence of the debtor was a
factor entitled to limited weight in the context of unemployment insurance
benefits: p. 894. For the same reasons, he found that the place of payment
was also of limited weight. Other potentially relevant factors considered were
the residence of the recipient and where the employment income, which was the
basis of the qualification for the benefits paid, had been earned: p. 894.
Noting that unemployment insurance benefits are based on premiums arising out
of previous employment, Gonthier J. observed that “the connection between the
previous employment and the benefits is a strong one” (p. 896). He thought that
the tax treatment of premiums and benefits reinforced the strength of this
connection: p. 896. Given the strength of this connecting factor, Gonthier J.
concluded that the place of residence of the recipient at the time of receipt
would only be significant if it pointed to a location different from that of
the qualifying employment. Importantly, he also concluded that given the many
links between the employment income and the reserve, the employment income
giving rise to the benefits was clearly on the reserve on any test: “[t]he
employer was located on the reserve, the work was performed on the reserve, the
appellant resided on the reserve and he was paid on the reserve” (p. 897).
Gonthier J. was also careful to note that he was not attempting to develop a
test for the situs of the receipt of employment income or to determine
the relevance to the analysis of the benefit recipient’s place of residence at
the time of receipt: pp. 897-98.
[40]
Gonthier J. rejected resolving the location of
the unemployment insurance benefits by simply applying conflict of laws
principles about the location of a debt. He noted that the purposes of
conflict of laws principles have little or nothing in common with the purpose
underlying the Indian Act tax exemption and that the location of
property for tax exemption purposes should be considered according to the
purposes of the Indian Act , not the purposes of the conflict of laws:
p. 891. However, as Gonthier J. acknowledged and later cases have confirmed,
this does not make irrelevant for Indian Act purposes the whole body of
existing law about the location of various types of property. While Gonthier
J. in Williams declined to adopt the residence of the debtor as the
governing factor simply because that is the applicable conflict of laws rule,
he noted that it may remain an important connecting factor, or even an
exclusive one, provided that the weight assigned to it is determined in light
of the purpose of the Indian Act tax exemption, the type of property and
the nature of the taxation in issue.
[41]
Other cases illustrate the ongoing relevance to
the Indian Act tax exemption of general legal principles about the
location of property. In Union of New Brunswick Indians, the question
was whether Indians living in New Brunswick were exempt from sales tax on
purchases, made off the reserve, of goods to be used on the reserve. A
majority of the Court applied the rule that tax is paid at the point of sale
and concluded that the tax was not in respect of property situated on a
reserve. Similarly in God’s Lake, in the context of interpreting the
exemption from seizure of property situated on a reserve, the Court applied
traditional common law principles and statutory provisions to determine that
funds in an off-reserve bank account were not situated on the reserve. The
Court was careful to distinguish taxation transactions where the location is
objectively difficult to determine from cases in which the issue is simply
where a potentially exigible asset is located: para. 18. However, it is
important to note that the rule about the location of a bank account is not a
conflict of laws principle, but a generally applicable legal rule which, in
that case, was included in a statute. Of course, a different legal test is used
to determine the location of a bank account for the purposes of protection from
seizure and the location of a transaction, such as the payment of interest, for
the purposes of taxation. However, it would be hard to justify the conclusion,
for example, that a bank account was situated on a reserve for the purposes of
exemption from seizure but that a contractual obligation entered into on the
reserve to pay interest there on that same account was not on the reserve for
the purposes of exemption from taxation.
[42]
These cases underline the point that general
legal rules about the location of property are relevant for the purposes of the
Indian Act . Thus, provisions and jurisprudence relating to the location
of income may prove helpful in deciding whether income is located on a
reserve: see O’Brien, at pp. 1589-91. While these rules cannot be imported
from one context into another without due consideration, they ought to be
considered and given appropriate weight in light of the purpose of the
exemption, the type of property and the nature of the taxation in issue.
(v) Applying the Williams Analysis to Mr. Bastien’s
Interest Income
[43]
In my view, the connecting factors identified in
Williams are potentially relevant here. When they are considered
and weighed in light of the purpose of the exemption, the type of property and
the nature of the taxation of that property, all point to the reserve as the
location of the interest income in this case.
[44]
I turn first to the location of the debtor, a
factor traditionally relied on to determine the location of the obligation to
pay. Here the debtor is the Caisse whose head office and only place of
business as well as its only fixed asset is located on the Wendake Reserve. The
income C interest agreed to be paid by the Caisse to Mr. Bastien C arises from a contractual obligation between the taxpayer and the
Caisse which was entered into on the reserve. By virtue of the contract, the
income was to be paid (and was paid) by the Caisse by depositing it into the
taxpayer’s account on the reserve: see art. 1566 of the Civil Code of
Québec. Thus, the location of the debtor and the place where payment must
be made are clearly on the reserve. Unlike the situation facing the Court in Williams,
where reliance on the location of the debtor involved the complex question of
the location of the federal Crown, there is no such complication here. The
Caisse’s only place of business is on the reserve and its obligation, both
under the contract and the Civil Code, was to pay on the reserve. As
noted earlier, the Court in God’s Lake applied generally applicable
legal rules about the location of a bank account for the purposes of the
exemption from seizure and while the fact that it applied these rules is not
dispositive of the question of the location of the interest income in issue
here, it tends to reinforce the conclusion that the interest income is located
on the reserve in this case. While the provisions relied on by the Court in God’s
Lake do not apply here because they relate to banks and not to caisses
populaires, both the contract between the parties and the provisions of art.
1566 of the Civil Code provide that payment of the interest income is to
be made on the reserve.
[45]
Having regard to the purpose of the exemption,
the type of property and the nature of the taxation of that property, the
connecting factors of the location of the debtor, the place where the legal
obligation to pay must be performed and the location of the term deposits
giving rise to the income should in my view be given significant weight in the
circumstances of this case. As noted, the property flows from a contractual
obligation which, both under the contract and the terms of the Civil Code
(art. 1566), is to be performed on the reserve. The deposits themselves and
the account into which the interest on them is paid are on the reserve. The
debtor’s only place of business is on the reserve. Thus, the type of property
supports the view that the connecting factors of the place of contracting, the
place of performance and the residence of the debtor should weigh heavily in
attributing a location to the interest income. The nature of the taxation C the income is income from property C
reinforces this view. And so does the purpose of the exemption, which is to
preserve Indian property on a reserve.
[46]
The analysis must also take account of other
potentially relevant connecting factors. Here, those factors reinforce rather
than detract from the conclusion that the interest income is property situated
on the reserve.
[47]
Consider the residence of the payee, Mr.
Bastien. That of course was on the reserve. As for the source of the capital
which was invested to produce the interest income, it too was earned on the
reserve. There is some parallel with Williams in this regard. In Williams,
the employment income which gave rise to the entitlement to unemployment
insurance benefits had been earned on the reserve. Gonthier J. noted that the
connection between the benefits and the qualifying employment was strong
because the benefits are based on premiums arising from the previous
employment: p. 896. In this case, while the interest income was derived from
the loan to the Caisse, it was Mr. Bastien’s business income, generated on the
reserve and not assessed by the Minister, which produced the capital which in
turn was invested to produce that income. These other potentially relevant
connecting factors do not point to any other location than the reserve and tend
to strengthen rather than undermine the connection between the investment
income and the reserve.
[48]
The Tax Court and the Federal Court of Appeal
attached great weight to the fact that the Caisse’s income-generating
activities were in general commercial markets off the reserve. While that
factor may have weight with respect to other types of investments, it has been
given significantly too much weight with respect to the term deposits in issue
here. I agree with the following comments by Maclagan, at pp. 1516-17:
In the case of a fixed-income security,
there is legally no further income-generating activity of anyone that needs to
take place beyond that which takes place when a taxpayer purchases the
securities. ... The mere step of acquiring a fixed-income investment generates
the right to receive a certain fixed amount of income. The income-generating
activity that matters is the generation of the original capital and the
acquisition of the securities. Of course, the issuer has to pay the income
to the investor, but this might be paid out of capital, other borrowings, or
unrelated earnings ... . [Emphasis added.]
[49]
The general legal principles concerning privity
of contract reinforce this view. The majority of the Court in Will-Kare
Paving & Contracting Ltd. v. Canada, 2000 SCC 36, [2000] 1 S.C.R. 915,
at para. 31, noted 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. The same, in my view, may be said of the exemption provisions in
the Indian Act .
[50]
I turn therefore to the general law relating to
privity of contract. The rule is set out in art. 1440 of the Civil Code of
Québec which provides:
1440. A contract has effect only between the contracting parties; it
does not affect third persons, except where provided by law.
[51]
Mr. Bastien made a simple loan to the on-reserve
Caisse. The Caisse’s income-producing actions and contracts after Mr. Bastien
invested in term deposits cannot be deemed his own and do not diminish the many
and clear connections between his interest income and the reserve.
Consequently, the potentially relevant factor of the location of the issuer’s
income-generating activities is of no importance in this case.
[52]
In my respectful view, the Recalma line
of cases has sometimes wrongly elevated the “commercial mainstream”
consideration to one of determinant weight. More precisely, several decisions
have looked to whether the debtor’s economic activity was in the commercial
mainstream even though the investment income payable to the Indian taxpayer was
not. This consideration must be applied with care lest it significantly
undermine the exemption.
[53]
The expression “commercial mainstream” was used
in Mitchell. In one context, the expression was used to emphasize the
distinction between property that is held pursuant to treaty or agreement from
property that is not. This distinction is important for the purposes of s. 90
of the Indian Act , which deems certain personal property to be on a
reserve for the purposes of the tax exemptions. La Forest J.’s reasons
in Mitchell distinguish between property that is deemed by s. 90 to be
on a reserve C
that is, property purchased with Indian funds or money appropriated by
Parliament for the benefit of Indians, or property given to Indians under a
treaty or agreement C
from property otherwise acquired and therefore not deemed to be on the
reserve. Thus, the expression “commercial mainstream” in this context was not
a factor to identify the location of property, but a consideration to help
identify property which, although actually located elsewhere, was deemed by s.
90 to be located on a reserve. La Forest J. explained (at p. 138):
When Indian bands
enter the commercial mainstream, it is to be expected that they will have
occasion, from time to time, to enter into purely commercial agreements with
the provincial Crowns in the same way as with private interests. … Indians
have a plenary entitlement to their treaty property; it is owed to them qua Indians.
Personal property acquired by Indians in normal business dealings is clearly
different; it is simply property anyone else might have acquired, and I can
see no reason why in those circumstances Indians should not be treated in the
same way as other people.
There can be no
doubt, on a reading of s. 90(1)(b)
[i.e. personal property given to Indians under a treaty or agreement], that it
would not apply to any personal property that an Indian band might acquire in
connection with an ordinary commercial agreement with a private concern. Property
of that nature will only be protected once it can be established that it is
situated on a reserve. Accordingly, any dealings in the commercial
mainstream in property acquired in this manner will fall to be regulated by the
laws of general application. [Emphasis added.]
(See also O’Brien, at p. 1576;
D. K. Biberdorf, “Aboriginal Income and the ‘Economic Mainstream’” in Canadian
Tax Foundation, Report of Proceedings of the Forty-Ninth Tax Conference (1998),
25:1-23, at pp. 25:8-25:9; Maclagan, pp. 1507-8.)
[54]
As I mentioned earlier, La Forest J. in Mitchell
also noted that the purpose of the legislation is not to permit Indians to
“acquire, hold, and deal with property in the commercial mainstream on
different terms than their fellow citizens”: p. 131. However, he was clear
that, even 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. As he emphasized, “[i]t must be remembered
that the protections of ss. 87 and 89 will always apply to property situated on
a reserve”: p. 139.
[55]
The “commercial mainstream” was an important
factor in the reasoning of the Federal Court of Appeal in Folster. Mrs.
Folster challenged the assessment that her employment income was not tax
exempt. She lived on a reserve and worked as a nurse in a hospital adjacent to
the reserve which was funded by the federal government for the benefit of
Indians. Most patients served were Aboriginal and the hospital had once been
located on reserve, but had since been relocated. Linden J.A. held:
Where, therefore, an Aboriginal
person chooses to enter Canada’s so-called “commercial mainstream”, there is no
legislative basis for exempting that person from income tax on his or her
employment income. Hence, the requirement that the
personal property be “situated on a reserve”. The situs principle
provides an internal limit to the scope of the tax exemption provision by tying
eligibility for the exemption to Indian property connected with reserve land. Thus,
as will be seen, where an Indian person’s employment duties are an integral
part of a reserve, there is a legitimate basis for application of the tax
exemption provision to the income derived from performance of those duties.
[Emphasis added; para.14.]
[56]
This paragraph is problematic because it might
be taken as setting up a false opposition between “commercial mainstream”
activities and activities on a reserve. Linden J.A. in Folster was
alive to this danger when he observed that the use of the term “commercial
mainstream” might “… imply, incorrectly, that trade and commerce is somehow
foreign to the First Nations” (para. 14, note 27). He was
also careful to observe in Recalma that the “commercial mainstream”
consideration was not a separate test for the determination of the situs
of investment property, but an “aid” to be taken into consideration in the
analysis of the question (para. 9). Notwithstanding this wise counsel, the
“commercial mainstream” consideration has sometimes become a determinative
test. So, for example, in Southwind v. Canada (1998), 156 D.L.R.
(4th) 87 (F.C.A.), the court observed that the term “commercial mainstream”
… 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. [para. 14]
[57]
Similarly, in Lewin, Tardif J. made the
following statement which was upheld by the Federal Court of Appeal:
Thus,
the income of the reserve’s credit union was derived mainly from off-reserve
economic activities, including mortgage loans, personal loans, investments with
the Fédération des caisses populaires and purchases of municipal bonds.
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. [paras. 35-36]
[58]
Then in Sero, Sharlow J.A. wrote:
The Royal
Bank operates in the “commercial mainstream”, to use the phrase from Mitchell
v. Peguis Indian Band. The source of the interest income earned by Ms. Sero
and Mr. Frazer is found in that commercial mainstream, and not on a reserve. I
can discern no relevant factual distinction between these cases and Recalma
and Lewin. [para. 22]
[59]
The same is true for the decision under appeal.
The Tax Court judge concluded:
In the case
at bar, it is true that the Reserve was the late Rolland Bastien's place of
residence, the source of the capital, the location of the Caisse populaire, the
place where the investment income, or a good part of it was used, the location
of the investment vehicle, and the place where the investment income was paid.
However, these are factors of lesser importance in determining the situs
of investment income, as for that purpose the emphasis is mainly on the
connection between the investment income and the reserve and the extent to
which that income can be considered as being derived from an economic
mainstream activity. [para. 37]
The Federal Court of Appeal
upheld this conclusion: para. 39.
[60]
I do not agree that the “commercial mainstream”
factor should be given determinative weight in this case. The question is the
location of Mr. Bastien’s interest income. As I have discussed earlier, the
question is not where the financial institution earns the profits to pay its
contractual obligation to Mr. Bastien. Yet the focus of the “commercial
mainstream” analysis in the courts below led them to concentrate the analysis
on the Caisse’s income-earning activities rather than on Mr. Bastien’s. The
exemption from taxation protects an Indian’s personal property situated on a
reserve. Therefore, where the investment vehicle is, as in this case, a
contractual debt obligation, the focus should be on the investment activity of
the Indian investor and not on that of the debtor financial institution: see
McDonnell, at p. 957; Maclagan, at p. 1522; O’Brien, at pp. 1576 and 1580.
[61]
When one focuses, as required by Williams,
on the connecting factors relevant to the location of Mr. Bastien’s interest
income arising from his contractual relationship with the Caisse, it is
apparent that the other commercial activities of the Caisse should have been
given no weight in this case. Mr. Bastien’s investment was in the nature of a
debt owed to him by the Caisse and did not make him a participant in those
wider commercial markets in which the Caisse itself was active.
[62]
Of course, in determining the location of income
for the purposes of the tax exemption, the court should look to the substance
as well as to the form of the transaction giving rise to the income. The
question is whether the income is sufficiently strongly connected to the
reserve that it may be said to be situated there. Connections that are
artificial or abusive should not be given weight in the analysis. For example,
if in substance the investment income arises from an Indian’s off-reserve
investment activities, that will be a significant factor suggesting that less
weight should be given to the legal form of the investment vehicle. There is
nothing of that nature present in this case. Cases of improper manipulation by
Indian taxpayers to avoid income tax may be addressed as they are in the case
of non-Indian taxpayers.
[63]
Applying the exemption of interest income in
this case is broadly consistent with the purpose of preserving Indian property
situated on the reserve. It provides an investment option protected from
taxation for Mr. Bastien’s property while preserving it against possible
seizure.
4. Conclusion
[64]
All potentially relevant factors in this case
connect the investment income to the reserve. In the circumstances of this
case, the fact that the Caisse produced its revenue in the “commercial
mainstream” off the reserve is legally irrelevant to the nature of the income
it was obliged to pay to Mr. Bastien. This is true as to both form and
substance. Mr. Bastien’s investment income should therefore benefit from the s.
87 Indian Act exemption.
IV. Disposition
[65]
I would allow the appeal with costs throughout.
English version of the reasons
of Deschamps and Rothstein JJ. delivered by
Deschamps J. —
[66]
Before Confederation, the Crown promised not to
tax lands and personal property of Indians situated on reserves. The current Indian
Act, R.S.C. 1985, c. I‑5 , includes a provision to that effect.
The courts have considered several aspects of this exemption. This Court has
now been asked to decide two cases in which Indians argue that property
belonging to them is situated on a reserve and consequently exempt from
taxation (see also Dubé v. Canada, 2011 SCC 39, released concurrently).
For the purposes of the Income Tax Act, R.S.C. 1985, c. 1 (5th
Supp .), the property in question is a right provided for in an investment
contract, that is, a right to be paid interest. Under s. 12(4) of the Income
Tax Act , interest accrued in a taxation year must be included in computing
the taxpayer’s income. The notices of assessment in these two cases resulted
from the application of that provision.
[67]
Intangible property, such
as a right provided for in a contract, has no actual substance and cannot,
strictly speaking, be physically situated in a place. The legal
characterization exercise required by the Indian Act is therefore to
attribute a location to the property in question. Since this exercise is
required by statute but has no physical basis, the location is a pure legal
fiction. This is not the first time that the issue of the location of
intangible property for the purposes of the Indian Act has been
considered. The fact that it has not been settled yet shows how hard it is to
develop a test that is consistent with the purpose of the exemption and is also
consistent with a liberal interpretation of the Indian Act . The two
cases now before the Court involve facts that are so different that they
highlight how risky it would be to adopt a test that focuses on formal factors
and under which the circumstances of the liability for tax or the eligibility
for the exemption are not taken into account. With all due respect, I find
that the analysis proposed by my colleague Cromwell J. gives too much
weight to connecting factors that may in some circumstances be artificial, and
that it essentially makes a single factor — the debtor’s place of residence —
determinative. In my view, this analysis is compatible with neither the
context nor the purpose of the exemption.
[68]
It will be helpful to
reproduce the relevant passages from the provisions that protect the property
of Indians, and more specifically those according to which personal and real
property of Indians that is or is deemed to be situated on a reserve is exempt
from taxation or is not subject to seizure. These passages from the Indian
Act read as follows:
87. (1) Notwithstanding any other Act of Parliament or
any Act of the legislature of a province, . . . 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.
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.
90. (1) For the purposes of sections 87 and 89 ,
personal property that was
(a) purchased by Her Majesty with Indian moneys or moneys
appropriated by Parliament for the use and benefit of Indians or bands, or
(b) given to Indians or to a band under a treaty or agreement
between a band and Her Majesty,
shall
be deemed always to be situated on a reserve.
[69]
The scope of the
protection from taxation afforded to Aboriginal people has varied over time.
The original statutory protection, which dates back to 1850, extended to Indian
lands and to any Indians residing on such lands (An Act for the protection
of the Indians in Upper Canada from imposition, and the property occupied or
enjoyed by them from trespass and injury, S.C. 1850, c. 74,
s. 4). That protection was altered by the Indian Act, 1876, S.C.
1876, c. 18 (ss. 64 and 65), which provided that the exemption would
from then on apply to personal and real property belonging to Indians, but it
no longer required that the Indians themselves reside on a reserve. This
important aspect was provided for once again in 1951 when the Indian Act,
S.C. 1951, c. 29, s. 86 (now s. 87 ), was passed.
[70]
This exceptional
protection from taxation was linked to the Crown’s fiduciary duty to protect
the lands of Aboriginal peoples after the latter had renounced the use of force
against non‑Aboriginal people. The Royal Proclamation of 1763,
R.S.C. 1985, App. II, No. 1, provided: “it is just and reasonable,
and essential to our Interest and the Security of our Colonies, that the
several Nations or Tribes of Indians, with whom We are connected, and who live
under our Protection, should not be molested or disturbed in the Possession of
such Parts of Our Dominions and Territories as, not having been ceded to or
purchased by Us, are reserved to them, or any of them, as their Hunting
Grounds” (see also B. Slattery, “Understanding Aboriginal Rights” (1987),
66 Can. Bar Rev. 727, at p. 753, and Mitchell v. Peguis Indian
Band, [1990] 2 S.C.R. 85, at p. 131). This undertaking by the Crown
was also repeated in certain treaties under which Aboriginal peoples
surrendered lands: “We assured them that the treaty would not lead to any
forced interference with their mode of life, that it did not open the way to
the imposition of any tax” (Treaty No. 8 (1899), quoted in
R. H. Bartlett, “The Indian Act of Canada” (1977‑1978), 27 Buff.
L. Rev. 581, at p. 613).
[71]
In Mitchell,
La Forest J., who based his analysis on the origins and the
historical evolution of the exemption, summarized the Crown’s undertaking as
set out in ss. 87 and 89 of the Indian Act as follows: “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” (Mitchell, at p. 131 (emphasis added)). The purpose of
the exemption was reformulated — as follows — in Williams v. Canada,
[1992] 1 S.C.R. 877 (at p. 885), and the new formulation was reproduced in
Union of New Brunswick Indians v. New Brunswick (Minister of Finance),
[1998] 1 S.C.R. 1161 (at para. 8):
The
purpose of the s. 87 exemption 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”. It “was not to confer a general economic benefit upon the
Indians”.
[72]
A modern view of
relations between the Crown and Aboriginal people would suggest that the Court
should base the exemption, to repeat the expression used by
La Forest J. in Mitchell, on the honour of the Crown and on the
Crown’s duty to respect the ability of Aboriginal people to manage the economic
development of their reserves. Indeed, this philosophy pervaded Union of
New Brunswick Indians, as is clear in particular from the following comment
by the Chief Justice: “The fact that the exemption is closely tied to the
reserve enhances reserve‑linked benefits, promotes privatization of
reservation economies and encourages an entrepreneurial spirit”
(para. 44).
[73]
The requirement that
the property be or be deemed to be situated on a reserve is related to the
purpose of the exemption. From a historical perspective, the reserve was a
place reserved to unemancipated Aboriginal people, a place where they resided
and owned their property, and a place where the Crown had promised to protect
them. The emphasis placed on the requirement in question helps not only to
determine whether a decision is consistent with the purpose of the exemption,
but also to define the corollary to the requirement: what the exemption
provided for in ss. 87 and 89 does not cover. La Forest J.
discussed this very point in Mitchell:
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. [p. 131]
[74]
This discussion of the
interpretive approach to and the purpose of the exemption will help in
identifying the factors that can be applied to determine the location of a
right to be paid interest.
[75]
For many years,
although its official position was that intangible property was not exempt from
taxation for the purposes of s. 87(1) of the Indian Act , the
Department of National Revenue nevertheless extended the exemption to certain
types of intangible property by applying criteria based on categories. For
example, the location of employment income was where the services were
performed — for a teacher it was the location of the school, for an office
employee it was the location of the office, and so on (see Interpretation
Bulletin No. IT‑62 of Revenue Canada, Taxation (1972); see also
M. Dockstator, “The Nowegijick Case: Implications for Indian Tax Planning
Strategies”, [1985] 4 C.N.L.R. 1, at p. 14).
[76]
In Nowegijick v. The
Queen, [1983] 1 S.C.R. 29, the Court confirmed that the exemption applies
to intangible property. In the case of employment income, it adopted the
debtor’s place of residence as a criterion by referring to the principles of
private international law and to the judgment of Thurlow A.C.J. in The Queen
v. National Indian Brotherhood, [1979] 1 F.C. 103 (T.D.).
Thurlow A.C.J. had made the following comment (at p. 109):
A
chose in action such as the right to a salary in fact has no situs. But where
for some purpose the law has found it necessary to attribute a situs, in the
absence of anything in the contract or elsewhere to indicate the contrary, the
situs of a simple contract debt has been held to be the residence or place
where the debtor is found. See Cheshire, Private International Law,
seventh edition, pp. 420 et seq.
[77]
However, the criterion
of the debtor’s place of residence has not been adopted for all types of
intangible property. In Mitchell, after reviewing the case law with
respect to tangible property and noting that where property is not kept
permanently on a reserve, the paramount location of the property must be
determined, La Forest J. held
that for the purposes of ss. 87 and 89 of the Indian Act , a discernible nexus must be found
between the property in question and the occupancy of the reserve (Mitchell,
at p. 133).
[78]
The discernible nexus
test is a flexible one. It can be used for both tangible and intangible
property. And it is the discernible nexus test that emerges from the analysis
of the location of the property in Mitchell. La Forest J.
referred to the property — electricity delivered on a reserve — on which the
tax itself was based rather than to the debtor’s place of residence, which
would have corresponded to the test adopted in Nowegijick (Mitchell,
at p. 147) and would have resulted in denial of the exemption.
[79]
In Williams, the
exemption would have been denied had the criterion of the debtor’s place of
residence adopted in Nowegijick been applied: the debtor was the
federal government. But Mr. Williams argued that a rationale based on the
principle applied in the context of the conflict of laws was not legally
satisfactory and that National Indian Brotherhood and Nowegijick
had left open the possibility of considering other factors. His arguments were
accepted. The Court noted that the reason a debt is associated with the
debtor’s place of residence in the conflict of laws is that that is where the
debt can normally be enforced, but that the purposes of the conflict of laws in
fact have little or nothing in common with those of the Indian Act .
More specifically, Gonthier J. wrote the following (Williams,
at p. 891):
It
is simply not apparent how the place where a debt may normally be enforced has
any relevance to the question whether to tax the receipt of the payment of that
debt would amount to the erosion of the entitlements of an Indian qua Indian
on a reserve. The test for situs under the Indian Act must be
constructed according to its purposes, not the purposes of the conflict of
laws.
[80]
The Court showed that
it was aware of the desirability of developing criteria that are predictable in
their application, and also of avoiding abstract connecting factors that are
divorced from the purpose of the exemption. In Gonthier J.’s words, “[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” (p. 892). The Court warned that a test focused
on too few factors — or on too many — might be open to manipulation and abuse.
Such approaches might be inconsistent with the purpose of the exemption.
[81]
In Williams, the
property that was, according to the Indian, exempt from taxation consisted of
unemployment insurance benefits. The Court began by discussing the nature of
the property and the incidence of the tax. After concluding that the benefits
constituted personal property within the meaning of the Indian Act , the
Court stressed that because of the wording of the provision (s. 56 of the Income
Tax Act ), the incidence of the tax attached to the transaction itself — the
receipt of benefits — rather than to the money in the taxpayer’s hands.
However, because the reference in the taxing provision to the receipt of
benefits had to do with the determination of the time of imposition of the tax,
the place where they were received was unimportant.
[82]
In view of these
conclusions regarding the nature of the property and the words of the taxing
provision, all that remained in Williams was to identify one or more
connecting factors that would take the purpose of the exemption into account.
The debtor’s place of residence, that of the creditor, and the place of
employment might be considered relevant (p. 893). Since the case
concerned benefits resulting from a policy decision, the place of residence of
the debtor — the Government of Canada — was a connecting factor of limited
weight (p. 894). And since the duration and the amount of the benefits
were closely tied to the employment, it was the location of the qualifying
employment that was considered to be the most important factor (p. 900).
It was not necessary to develop a general test for the location at which
employment income is received, because in the case then before the Court, all
the possible connecting factors for the type of property in question pointed to
the reserve (p. 897): the employer was located on the reserve, the work
was performed on the reserve, the appellant resided on the reserve, and he had
been paid on the reserve.
[83]
It is interesting to
compare Mitchell and Williams. In both cases, the Court focused
on the purpose of the exemption. In Mitchell, La Forest J.
recognized the value of the concepts of the paramount location and the concrete
and discernible connection with the reserve, and gave weight to the activity —
the delivery of electricity — that had resulted in the debt owed to the band (Mitchell,
at pp. 147‑48). In Williams, although Gonthier J. did
not actually use the expressions “paramount location” and “discernible nexus”,
the test he adopted was based on connecting factors that corresponded precisely
to those concepts. Moreover, the important connection was with the activity —
the employment — on which the payment of benefits was based. It was this
connection that was concrete (see also, on identifying a concrete connection: McDiarmid
Lumber Ltd. v. God’s Lake First Nation, 2006 SCC 58, [2006] 2 S.C.R. 846).
Indeed, it was because a debt does not have a location of its own that the
Court had to resort to identifying a concrete connection in both those cases.
This comparison will in several respects be helpful to us in identifying the
most important connections in the two cases now before the Court.
[84]
In these appeals, the
requirement that the appellants — the Estate of Rolland Bastien and Alexandre
Dubé — include in their income interest generated by the investment contract
flows from the facts that each of them, as a taxpayer, held an “interest”
(which corresponds in the civil law context to the concept of a right) in an
investment contract, and that interest accrued to them in the taxation years in
issue (s. 12(4) of the Income Tax Act ). Under the provision in
question, the legal transaction that results in the incidence of the tax is the
holding of an interest in an investment contract with respect to which interest
has accrued. The taxpayer must include the accrued interest in his or her
income, even if it has not actually been paid and received. Section 12(4)
provides that the taxpayer is liable to pay tax if he or she “holds” an
interest in a given contract, but what “holds” means is not relevant to the
determination of the place where the property is situated. It is relevant to
the determination of the time of taxation. As in Williams, therefore,
the taxing provision with respect to the calculation of income is of little
help in determining the property’s location for the purposes of the Indian
Act (Williams, at p. 888).
[85]
Since the taxing
provision that requires the taxpayer to include the interest in his or her
income is not really helpful for the purpose of determining the place where the
property is held, it will be necessary to look more closely at the nature of
the property in question. Section 248(1) of the Income Tax Act defines
“property” as follows: “‘property’ means property of any kind whatever whether
real or personal or corporeal or incorporeal and . . . includes
. . . a right of any kind whatever”. The investment contract
provides for a personal right, that is, a right to be paid interest, subject to
certain conditions. The interest is the product of the invested capital. Its
amount depends on the amount that was invested and on the rate agreed to by the
parties. In sum, it is this personal right whose legal existence is provided
for in the contract that is the personal property whose location must be
determined for the purposes of the Indian Act .
[86]
A number of connecting
factors could be relied on in determining the location of the right to be paid
interest provided for in an investment contract. Building on the ones
enumerated in Williams, I will consider the following: the debtor’s
place of residence, that of the creditor, the place where the contract was
signed, and the activity that generated the capital that made it possible to
enter into the investment contract.
[87]
In my opinion, the
debtor’s place of residence is a factor that can have some weight in a case
concerning a right, provided for in a contract, according to which interest is
to accrue to a creditor. However, since what must be done is not, as might be
the case in a private international law context, to determine the place where
judicial proceedings should be introduced against a debtor in order to enforce
the payment of a debt, this factor cannot be paramount. On this point, I agree
with Gonthier J. in Williams that the private international law
criterion of the debtor’s place of residence is not really helpful in the
context of the Indian Act . Nor is the place of payment under the Civil
Code of Québec, S.Q. 1991, c. 64, or under a contract really relevant,
since the taxing provision does not require that interest actually be paid.
What is being taxed is not an actual payment.
[88]
The fact that the
creditor resides on a reserve is relevant to the determination of the location
of the right provided for in the contract. It is to the advantage of Indians
living on a reserve to foster the economic development of the reserve. Income
spent or invested on a reserve can only contribute to that development: if
people who earn income reside on a reserve, it can be inferred from this that
they will, in spending or investing it, generate economic activity that will
contribute to protecting property situated on the reserve. Nevertheless, for
the Indian in question to reside on the reserve must not be considered a
prerequisite for the exemption, since it ceased to be a statutory requirement
more than a century ago.
[89]
What now remains is to
consider the activity that generated the capital that made it possible to enter
into the investment contract. I will begin by mentioning the factors that I do
not consider relevant in the context of an investment contract. In my view,
neither the capital nor the interest is in itself helpful. These are two types
of intangible property that have, by definition, no actual location. It would
be artificial to attribute a legal location to them for the purpose of
subsequently determining the legal location of the right to be paid interest
provided for in the contract. It seems to me that to do so would be to give
excessive weight to factors that have no basis in fact. A discernible
connecting factor must have a concrete basis, as opposed to being the product
of “crossbred” legal fictions. What is more, it would be pointless to try to
determine the location at which the interest accrued. The accrual of interest
results not from an activity, but solely from the passage of time.
[90]
In my view, it would be
unsatisfactory from the standpoint of legal certainty to give significant
weight to the place where the investment contract providing for the right to be
paid interest was signed, since this is a factor that would be open to
manipulation. For example, the parties to a contract could choose to sign it
in a given place for the sole purpose of benefiting from an exemption. Such a
choice could be an artificial one. On its own, therefore, the place where the
contract was signed does not appear to constitute a sufficiently objective
legal basis for determining the location of a right to be paid interest
provided for in an investment contract. It could be a relevant factor if it
reinforced other facts linking the property to the reserve or to a location off
the reserve. However, its value would be minimal if it was also the debtor’s
place of residence and if that factor had already been taken into
consideration. To be compatible with the purpose of the exemption, the choice
to sign the contract on a reserve must not have been based simply on obtaining
a personal benefit for an Indian whose usual place of business was off the
reserve. Such a choice would be inconsistent with the comments made in Mitchell
— and reproduced in Williams — on what the exemption does not cover.
The two cases now before the Court involve contracts signed on reserves, so
this is not an appropriate occasion to discuss a case in which, even though a
contract is entered into elsewhere than on a reserve, a concrete and
discernible connection with a reserve can be identified.
[91]
The identification of
connecting factors for the purposes of the Indian Act must be focused on
concrete and discernible links between the property and the reserve. In the
case of a right to be paid interest, it is therefore necessary to look beyond
the investment contract and consider the source of the invested capital. The
activity that generated the capital is a factor based on identifiable facts
that are not open to manipulation and that are sufficiently concrete to aid in
determining the location of intangible property such as a right to be paid
interest. I am well aware that it might appear to be difficult to trace such
an activity back to its origin, but it seems to me that this difficulty can be
overcome, since all that it involves is an assessment of facts. And the fact
that the capital resulted from several different activities does not pose an
unusual problem. This Court has already endorsed the paramount location
concept in relation to tangible property (see Mitchell, Union of New
Brunswick and God’s Lake). In my opinion, absent a clear breakdown
of the various activities, the place where the greatest proportion of the
activities were carried out should serve as a factor by analogy with the
paramount location concept used in relation to tangible property.
[92]
An analysis that is
based on the underlying activity not only takes the essentially intangible
nature of the property in issue into account, but it can also provide a solid
foundation for the development of a form of symmetry in the tax treatment of
property belonging to Indians. Just as the employment on the reserve was the
activity that resulted in the benefits in Williams, it is the location
of the activity that resulted in the accumulation of the interest‑producing
capital that will be more relevant in these appeals. Owing to the nature of
the property, this is a factor that must be considered in light of the purpose
of the exemption and the incidence of the tax.
[93]
In his reasons in Dubé
(at para. 29), Cromwell J. maintains that the source of the capital
cannot be determinative of whether the exemption should apply, because that
would mean that investment contracts could be entered into elsewhere than on a
reserve and still benefit from the exemption. In my view, it is inappropriate
to make alarmist comments based on hypothetical examples. The test continues
to be based on the identification of concrete and discernable connections with
the reserve. In the appeals now before the Court, the facts are such that the
connecting factors can be applied without difficulty. The facts favour
granting the exemption in the case of Rolland Bastien’s estate and denying
it in that of Alexandre Dubé.
[94]
In Estate of Rolland
Bastien, the parties have agreed on the main facts. Mr. Bastien was
an Indian within the meaning of the Indian Act . He was born on the
Wendake Reserve in 1919, lived there all his life and died there in 2003. He
worked on the reserve all his life, operating the family moccasin manufacturing
business founded by his great‑grandfather. In 1997, he sold the family
business to his children, Denis and Ginette, both of whom were residents of the
Wendake Reserve. The business generated economic activity on the reserve. Its
income was never taxed. The invested capital came exclusively from the
business’s income and from the proceeds of its sale. The amounts in question
were invested in term deposits at the Caisse populaire Desjardins du Village
Huron, located on the Wendake Reserve, and the Caisse populaire Desjardins de
Pointe‑Bleue, located on the Mashteuiatsh Reserve, near Roberval. At no
time in his life did Mr. Bastien live on the Mashteuiatsh Reserve.
[95]
In this appeal, it is
clear that all the factors — the debtor’s place of residence, that of the
creditor, the place where the contract was signed and the activity that
generated the capital that made it possible to enter into the investment
contract — connect the property with a reserve.
[96]
In Dubé, the
facts are less clear, however, and I must defer to the findings of fact of the
Tax Court of Canada judge. Mr. Dubé is an Indian within the meaning of
the Indian Act . He has been a member of the Obedjiwan Reserve ever
since he was born. At the time of the hearing in the Tax Court of Canada, he
owned two residences: one on the Obedjiwan Reserve and another in Roberval,
Quebec. He had also owned another residence in St‑Félicien before buying
the one in Roberval. His spouse and children lived in the residences in St‑Félicien
and Roberval during the school year. Mr. Dubé acknowledged that he too
lived in them. The judge found it difficult to accept Mr. Dubé’s argument
that he lived on the reserve, given that the family spent 10 months a year
in a residence off the reserve and given that no capital gain had been reported
when the residence in St‑Félicien was sold.
[97]
Mr. Dubé operated
a business that transported passengers between the Obedjiwan Reserve and St‑Félicien
and provided a medical transportation service from the Obedjiwan Reserve to
Roberval and from Roberval to other destinations. Since no banking services
were available on the Obedjiwan Reserve, Mr. Dubé did business with the
Caisse populaire Desjardins de Pointe‑Bleue. According to the judge,
Mr. Dubé’s interest income was “substantial”: the amount on deposit that
generated it was over a million dollars. When asked at the hearing about the
source of the income that had enabled him to accumulate this capital,
Mr. Dubé was unable to provide information about deposits that far
exceeded the income from his transportation business. The judge summed up the
evidence as follows: “the appellant initially stated that it was business
income and then said that he did not know where the money came from and that he
would have to, as he put it, look into his affairs” (Dubé v. The Queen,
2007 TCC 393, 2008 D.T.C. 4022, at para. 16). The judge stated that he
was unable “to conclude that [Mr. Dubé’s] business [was] the source of the
income deposited” (para. 43). As a result, he was unable to establish a
connection with the reserve. He added that because the family lived off the
reserve, he was unable to conclude that the income was used on the reserve.
[98]
On the basis of the
findings of fact of the Tax Court of Canada judge, it is difficult to find a
concrete and discernible connection with the reserve. The judge was unable to
establish a connection between the activity that generated the interest‑producing
capital and the reserve. In this regard, the debtor’s place of residence was
clearly situated on a reserve, but as I explained above, the place where
interest payments were to be made is not really relevant in light of the
transaction to which the incidence of the tax attached: interest accrued in a
year must be reported as income, regardless of whether it was actually paid.
The judge rejected Mr. Dubé’s argument that he resided on the reserve. If
the accrued interest were exempt from taxation, this would amount to giving it
preferential treatment in relation to the property generated by the activity
itself. Mr. Dubé did not show how the fact that the contract was entered
into on the reserve furthers the purpose of the exemption. His choice appears
to have been based on obtaining a personal tax benefit. There was no
connection with the economic development of the reserve. Indeed, there is no
solid evidence of a connection between the right provided for in the contract
with respect to which the interest accrued and a reserve.
[99]
In these circumstances,
I can only conclude that the purpose of the exemption would not be furthered by
protecting this property from taxation. The connection is tenuous.
Mr. Dubé did not reside on the reserve, and the economic activity that
generated the property to which an investment contract applied — that is, the
capital — was not connected with the reserve. The incidence of the tax does
not favour granting the exemption, quite the contrary. If, as the Tax Court of
Canada judge found, the capital did not come from Mr. Dubé’s business
activities, granting the exemption would be tantamount to turning the reserve
into a tax haven for Indians engaged in unspecified for‑profit activities
off the reserve. This squares in every respect with La Forest J.’s
description in Mitchell (quoted above) of what the exemption does not
cover. The economic development of the reserve cannot justify granting the
exemption in these circumstances.
[100]
Since my conclusion is
different from that of Cromwell J., I should explain the points on which
we are in agreement and those on which we disagree. I agree with my colleague
that there is no need to consider whether the property or the activity that
generated it is connected with the traditional Aboriginal way of life. I also
agree with him that the activity engaged in by a financial institution to
fulfil its monetary obligations in the context of investment contracts
providing for the payment of interest is not a valid factor for determining
whether personal property held by an Indian is situated on a reserve. What
must be considered is the location of the activity that generated the invested
capital.
[101]
However, I have
reservations regarding certain other criticisms — evident in some of the
academic commentary — that favour artificial connections. I am not prepared to
rewrite the law on the basis of these criticisms or to disregard the experience
acquired over nearly 30 years, since Nowegijick. For this same reason,
I cannot, as a matter of principle, agree with Cromwell J., since in my
view he pays insufficient attention to the purpose of the exemption and to this
experience. I also have reservations about how my colleague applies the
connecting factors proposed in Williams.
[102]
In principle, I cannot
agree that significant weight should be given to connecting factors that can be
easily manipulated. In my view, that is the effect of the importance attached
to the contractual aspects of the investment contract rather than to the
property’s concrete and discernible connections with the reserve.
Cromwell J. accepts the argument that the Tax Court of Canada failed to
give sufficient weight to the contractual nature of the deposit at the Caisse
populaire in determining the location of the property in issue (paras. 11
and 13). In my opinion, the Tax Court of Canada was right not to dwell on that
aspect of the property.
[103]
It can be seen from
past experience, as is clear from a number of decisions, that it is easy to set
up, on the basis of a purely legal test, a contractual framework that, on its
face, meets the requirements for the exemption. The courts have been asked to
decide numerous cases concerning employment income in which, in order to gain a
financial advantage, employers had designated an establishment on a reserve on
the assumption that their employees would be able to benefit from the exemption
under the Indian Act even though the jobs had no real connection with
the reserve (see: Robinson v. The Queen, 2010 TCC 649, [2011] 2 C.T.C.
2286; Horn v. Canada, 2007 FC 1052, [2008] 1 C.T.C. 140, aff’d 2008
FCA 352, 302 D.L.R. (4th) 472; Shilling v. M.N.R., 2001 FCA 178, [2001]
4 F.C. 364; Canada v. Monias, 2001 FCA 239, [2002] 1 F.C. 51;
Southwind v. Canada (1998), 156 D.L.R. (4th) 87). This type of planning
had even extended to other types of businesses (see Large v. The Queen,
2006 TCC 509, 2006 D.T.C. 3558). Indeed, what the Aboriginal community seemed
to understand from Nowegijick was that they could, by contract, arrange
their affairs to take advantage of the exemption (see Dockstator). Although
this approach may seem attractive from a financial perspective, it is hard to
see how it can be consistent with the purpose of the exemption. With respect,
Cromwell J.’s approach opens the door to setting up contractual frameworks
on reserves that have nothing to do with the purpose of the exemption, and it
provides an impetus for tax planning aimed solely at benefiting from the
exemption (see, on interest income: Large v. The Queen). Although such
planning is legitimate for contractual purposes, it cannot be endorsed and held
to be consistent with the purpose of the exemption provided for in the Indian
Act .
[104]
In my view, it is
necessary to continue to emphasize the application of concrete factors. What
the Indian Act provides for is a right to protect property situated on a
reserve, not a right to an exemption that applies to planning measures that notionally
situate intangible property on a reserve for the sole purpose of sheltering
them from taxation.
[105]
Furthermore, regarding
the application of the connecting factors proposed in Williams, I do not
agree that 20 years of experience drawn from decisions of Canadian courts
should be swept aside.
[106]
I cannot agree with
Cromwell J.’s description of the nature of the relevant transaction for
income tax purposes. My colleague considers that the relevant transaction is
the payment of interest (paras. 15, 19 and 41). With respect, if, in Williams,
the transaction on which the issue of eligibility for the exemption was based
was found to be the receipt of benefits, it was because of the taxing provision
in issue in that case (Williams, pp. 891 et seq.). In the
instant case, the property in issue is the right to be paid interest under the
investment contract. Under s. 12(4) of the Income Tax Act , it is
only when the taxpayer’s income for a given taxation year is computed that the
tax consequences of this right are realized: the accrued interest must be
included in the taxpayer’s income. Since the interest does not actually have
to be paid for the property to attract tax consequences, I do not see how the
payment of interest could be the personal property whose status under the Indian
Act is in issue. Accordingly, little weight should be attached to the
place where the payment is to be made.
[107]
Moreover, the decision
to attach determinative weight to the fact that the payment could be made on
the reserve is in my view not only anachronistic, but unrealistic. In this age
of electronic transactions, the fact that interest is paid at maturity into an
account administered on a reserve seems to me to be a tenuous connection.
Indians, like all other citizens, can have access to their funds from almost
anywhere. To assume that they go to a Caisse populaire situated on a reserve
when they want to have access to their funds, it would be necessary to assume
that they do things differently than other citizens.
[108]
I would also point out
that ownership of a right provided for in a contract does not lead to the concept
of the location of a deposit account as was the case in God’s Lake,
which concerned the seizure of amounts deposited in an account.
[109]
In sum, I cannot agree
with Cromwell J.’s analysis for several reasons. First, he attaches
excessive weight to formal connections that, in certain circumstances, have a
tenuous relationship with the reserve. Second, he essentially gives
determinative weight to a single factor — the debtor’s place of residence —
while rejecting the concrete connecting factors of the creditor’s place of
residence and the location of the activity that generated the capital. Third,
he fails in his analysis to consider the provision that governs the tax
treatment of interest income. In short, the factors he chooses to apply are in
reality but one, the debtor’s place of residence, and his analysis is
inconsistent with the historical purpose of the exemption.
[110]
The parallel
consideration of these two appeals highlights the need to identify concrete and
discernable connections with the reserve. In the appeal of Mr. Bastien’s
estate, all the connecting factors favour granting the exemption. In
Mr. Dubé’s appeal, on the other hand, the connection results from a legal
fiction that has no basis in solid evidence.
[111]
For these reasons, I
would allow the appeal in the case of Mr. Bastien’s estate, with costs
throughout.
Appeal allowed with
costs.
Solicitors for the
appellant: Langlois Kronström Desjardins, Québec.
Solicitor for the respondent: Attorney General of
Canada, Montréal.
Solicitors for the intervener the Huron‑Wendat
Nation: Hutchins Légal inc., Montréal.
Solicitors for the intervener the Assembly
of Manitoba Chiefs: Thompson Dorfman Sweatman, Winnipeg.
Solicitors for the intervener the Grand
Council of the Crees (Eeyou Istchee)/Cree Regional
Authority: Gowling Lafleur Henderson, Montréal.
Solicitors for the interveners the
Assembly of First Nations and the Union of Nova Scotia
Indians: Gowling Lafleur Henderson, Ottawa.
Solicitors for the intervener the Chiefs
of Ontario: Nahwegahbow, Corbiere Genoodmagejig, Rama.