South Wind v. R., 98 DTC 6084, [1998] 1 CTC 265 (FCA)

Linden J.A.:

The issue in this appeal is whether income received by the Appellant from his logging business during the 1990 taxation year is exempt from taxation pursuant to section 87 of the Indian Act, R.S.C. 1985, c. I-5, and paragraph 81(l)(a) of the Income Tax Act, R.S.C. 1985, as amended. Paragraph 87(1 )(b) provides that:

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.

Paragraph 81 ( 1 )(a) incorporates this exemption into the Income Tax Act by providing that “[t]here shall not be included in computing the income of a taxpayer for a taxation year, ... an amount that is declared to be exempt from income tax by any other enactment of the Parliament of Canada”.

In order to fit within the scope of paragraph 87(1 )(b), the appellant’s property must be personal property which is owned by an Indian who is taxable in respect of that property. It is agreed by the parties that the appellant satisfies each of these conditions. In addition, however, paragraph 87(1 )(b) requires that the property must be situated on a reserve. This appeal turns on whether or not this latter condition has been satisfied.

In Mitchell v. Sandy Bay Indian Band,\ [1] LaForest J. expressed the importance of taking a purposive approach in applying the tax exemption provisions in the Indian Act. LaForest J. explained at page 131 that section 87 is part of a “legislative package” which was designed to uphold the Crown’s obligation 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”. LaForest J. also warned, however, that section 87 was not designed to act as a general remedy for economic disadvantage. He stated at page 131 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.

Building on Mitchell, the Supreme Court of Canada held in Williams v. R.,* [2] that the determination of whether or not property is situated on a reserve ought to be guided by an analysis of the “connecting factors” which link property to a reserve in light of the purpose which section 87 was designed to fulfil. The analysis of “connecting factors”, as laid out at in Williams, at pages 892 and 893, is to proceed as follows:

The first step is to identify the various connecting factors which are potentially relevant. These factors should then be analyzed to determine what weight they should be given in identifying the location of the property, in light of three considerations: (1) the purpose of the exemption under the Indian Act; (2) the type of property in question; and (3) the nature of the taxation of that property. The question with regard to each connecting factor is therefore what weight should be given that factor in answering the question whether to tax that form of property in that manner would amount to the erosion of the entitlement of the Indian qua Indian on a reserve.

This “connecting factors” test was most recently applied by this Court in Clarke v. Minister of National Revenue [3] *. In that case, an Indian woman who had been working in a hospital which served primarily her Reserve community and which was adjacent to but not technically on the Indian Reserve was exempted pursuant to paragraph 87(1 )(b) from paying tax on her employment income. The hospital in which the woman worked, the Norway House Indian Hospital, was funded by the Federal Government as part of its commitment to provide for the health care of Indians. The fact that her employment was intimately connected with the Norway House Indian Reserve was a critical factor in determining whether her employment income was property situated on a reserve.

Each case must, however, be judged on its own terms. As Gonthier J. explained in Williams at page 891:

A connecting factor is only relevant in so much as it identifies the location of the property in question for the purposes of the Indian Act. In particular categories of cases, therefore, one connecting factor may have much more weight than another. It would be easy in balancing connecting factors on a case by case basis to lose sight of this.

In this case, the property for which the appellant seeks an exemption is business income, not employment income, so that the factor analysis becomes somewhat more complex, there being more of them to consider than in the employment income cases.

Let me look briefly at the facts. The appellant resides on the Sagamok Indian Reserve. He is the sole proprietor of a logging business which provides exclusive logging services to Morrell Logging Ltd., a non-Indian business which is not situated on a reserve. In 1990, the appellant was paid $42,152.72 by Morrell Logging for the logging work which he performed at three different off-reserve cutting locations. The appellant spent about 40 weeks logging at these various locations. During the time when he was logging, the appellant would often remain at the cutting location, returning home to the Reserve on the weekends. Administrative work connected to the business, including answering and making telephone calls, what bookkeeping was needed, and storage of business receipts occurred at the appellant’s home on the Sagamok Reserve. The appellant owned his own equipment which, when it is not being used at a logging site, was stored at his home on the Sagamok Reserve. Finally, the appellant was paid by cheque drawn on Morrell Logging’s off-reserve bank accounts. He received his cheque any number of ways. Most often, the cheque would be delivered to him on the Reserve. Other times, it would be mailed to him for pick up at a post office or it would be delivered to him at the work site or it would be picked up by him at Morrell Logging. After cashing these cheques, the appellant would keep the money he received at his home on the Reserve.

On the basis of these facts, the Tax Court Judge found that the appellant’s business income was not property situated on a reserve. In reaching this conclusion, he considered the following connecting factors: (1) the off- reserve residence of the debtor, Morrell Logging; (2) the appellant’s residence on the reserve; (3) the place where the appellant’s income was paid, which, according to the Tax Court Judge, was the bank used by Morrell Logging; and (4) the off-reserve locations where the appellant engaged in the “income earning process”. Of these connecting factors, the Tax Court Judge gave the most weight to the location where the work was performed and where the income was earned. Commenting on this factor, the Tax Court Judge noted that the “[t]he business activities which did occur on the reserve, such as the storage of equipment or the keeping of books or the negotiation of contracts, were merely incidental to the business of the Appellant and only occurred on the Appellant’s residence thereon”. In response to the appellant’s argument that the income was earned on the Reserve because the head office of the appellant was on the Reserve, the Tax Court Judge wrote that “[t]he business was Mr. Southwind. Wherever he travelled so did the business. The business did not have a head office per se”. Ultimately, the Tax Court Judge found that the appellant could not “successfully argue that his entitlement as an Indian qua Indian is being eroded through income taxation where the only connecting factor linking the situs of the property (business income) to the reserve is his residence”.

While I have some doubts about the accuracy of the evaluation of the factors done by the Tax Court Judge, I am of the view that the result reached by him is consistent with the wording and purpose of paragraph 87(1 )(b), as well as with the jurisprudence interpreting it.

Counsel for the appellant, Mr. Nadjiwan, has argued that, for the purposes of determining the location of business income, this Court should not treat the appellant as an employee of Morrell Logging, as the Tax Court Judge appeared to do. Instead, it is submitted that this Court should consider, in determining the location of the business income, the following connecting factors: (1) the on-reserve location of the appellant’s head office;

(2) the on-reserve residence of the appellant as the business owner; and (3) where the work is performed. Elaborating on the latter, the appellant submits that while the majority of his work is performed off the Reserve, this situation is no different than that in Nowegijick v. /?., [4] where a taxpayer, who resided on a reserve and worked for a business which was located on a reserve but which employed the taxpayer on logging sites off the reserve, was entitled to an exemption on his employment income. If the appellant had incorporated his business, Mr. Nadjiwan argued, he would be in the same position as Nowegijick, so that, as an unincorporated business, he should be equally tax exempt.

For the Crown, Mr. Bourgard rightly offered a more complex set of factors to consider in deciding whether business income is situated on the reserve. He suggested that we examine (1) the location of the business activities, (2) the location of the customers (debtors) of the business, (3) where decisions affecting the business are made, (4) the type of business and the nature of the work, (5) the place where the payment is made, (6) the degree to which the business is in the commercial mainstream, (7) the location of a fixed place of business and the location of the books and records, and (8) the residence of the business’ owner.

As was found by the Tax Court Judge, and having considered all of these factors, I am of the view that the appellant’s business income does not fit within paragraph 87(1 )(b) because it is not property situated on a reserve. While it is significant that the appellant lives on a Reserve, engages in some administrative work out of his home on the Reserve, and stores the business records and the business assets which he owns on the Reserve when they are not in use, [5] the appellant, in my view, is engaged not in a business that is integral to the life of the Reserve, but in a business that is in the “commercial mainstream”.

According to the Supreme Court in Mitchell, where an Indian enters into the “commercial mainstream”, he must do so on the same terms as other Canadians with whom he competes. Although the precise meaning of this phrase is far from clear, it is clear that it seeks to differentiate those Native business activities that deal with people mainly off the Reserve, not on it. It seeks to isolate those business activities that benefit the individual Native rather than his community as a whole, recognizing, of course, as Mr. Nadjiwan says, that a person benefits his or her community by earning a living for his family.

Although Morrell Logging is not the appellant’s employer, the significance of its off-reserve location lies in the fact that Morrell Logging was the appellant’s only customer and debtor in the taxation year. The nature of the appellant’s business income must be determined, in part, by reference to the source from which that business income is received. In this respect, the appellant’s situation is distinguishable from Nowegijick, where the debtor employer was located on a Reserve. Moreover, all of the services performed by the appellant were done off the Reserve, a very significant feature of this case. I agree with Mr. Nadjiwan that the method of payment by cheque drawn on an off-reserve bank, though relevant, is not as important as it was thought to be by the Tax Court Judge.

As for the comparison with Nowegijick, this case is different because the employer in that case was a corporation based on the Reserve, while in this case the appellant was an unincorporated sole proprietor of his own business who sold his services exclusively to a customer that was off the Reserve and supplied those services by working in logging on off-reserve sites. True, as Mr. Nadjiwan argued, he could have been pesonally better off tax-wise if he had incorporated, [6] assuming that Nowegijick is still good law in the post-Williamsera, when the place of work has become such an aimportant factor in the analysis. But, so too, he could have been worse off tax-wise had he not arranged an independent contractor relationship with his customer and had he become an ordinary employee of the logging company like some of his fellow loggers. It is obvious that the hypotheticals are not being evaluated here; the Court must take the facts and circumstances as they were, not as they might have been.

In concluding, it should be noted that section 87 does not exempt all Natives resident on a Reserve from income taxation. The process of determining the tax status of income earned by Natives on Reserves has become quite complex, depending on a sophisticated analysis of a series of factors. It may appear to some that inconsistencies exist in the treatment of the various cases, but each of them depends on its unique facts. All we can do is evaluate the factors and draw the lines, as best we can, between business income and employment income that is situated on the Reserve and integral to community life, and income that is primarily derived in the commercial mainstream, working for and dealing with off-reserve people.

These cases are sometimes not easy to reconcile because the Courts are struggling to make sense in our time of legislative language enacted long ago, even before income tax was ever collected in this country. It is to be hoped that some day soon Parliament will turn its attention to section 87 and devise an income tax scheme for aboriginals that is more easily administered and more suited to our age.

For these reasons, this appeal should be dismissed without costs, and the decision of the Tax Court Judge should be affirmed.

Appeal dismissed.