Shilling v. Minister of National Revenue, 99 DTC 5441, [1999] 3 CTC 415 (FCTD)

Sharlow J.:

The plaintiff Rachel Shilling claims that she is not required to pay income tax on her employment income for the years 1995 and 1996 because that income was “situated on a reserve” within the meaning of section 87 of the Indian Act.

The issue has been framed as a question of law under Rule 220, based on a statement of agreed facts and a transcript from the examination for discovery of the plaintiff.

The Facts

Ms. Shilling is an “Indian” as defined in the Indian Act and a member of the Rama Band, which is a “band” as defined in the Indian Act. The members of the Rama Band are Ojibway. The Rama Band has a reserve near Orillia, Ontario. The statement of agreed facts says, at paragraph 2:

The plaintiff s personal identity is connected to her being a member of the Band and of her First Nation.

This statement is further explained in the following excerpt from the examination for discovery of Ms. Shilling:

l l. [...] THE DEPONENT: My mother and father were both raised on the Rama reserve, except for the time my mother was in a residential school. That is part of our community. That is where I grew up, and that is where I am from.

By Mr. Plourde:

12. Q. Would it be fair to say that you consider yourself first and foremost a Native person? Is that what you are trying to convey in that paragraph?

A. M’hmm. That has been what we were taught. That is what was instilled upon us, that we were first part of the Shilling group on my community, then we were part of the Ojibway group, which ... I don’t know how to explain it. The people on my reserve were like first cousins and the Ojibway nation, which was all along the Great Lakes of Canada and United States, are like second cousins, so that is how we were always ... thought of it.

13. Q. When you refer to being a member of the Band, are you referring to being an Ojibway, or is that a different concept?

A. Ojibway ... when I am in Toronto and I meet other Ojibway persons, they are like a brother and a brother, like a sister to us, even though they may not be from Rama; then when you meet someone from Rama, it is even tighter. Like, it is...

14. Q. So the Band relates to the Rama reserve, itself?

A. To my community, yes.

15. Q. Okay.

A. And we are all Ojibway, so we think that we have relatives all over, and they are all Ojibway people. So you go to Minnesota, you can go to Sault Ste. Marie, Ontario, and those are your cousins.

16. Q. So that is a big family?

A. Yes, yes.

Ms. Shilling was born in 1951 and lived on the Rama reserve for the first 20 years of her life, with her parents and 11 siblings. Her reasons for moving to Toronto are explained in her examination for discovery:

A. My mother grew up in a residential school. She went to a residential school at the age of 5, and she was there until she was 21, I believe. No probably about 19. All the time that I was growing up on the reserve, I am the 1 lth of 12 kids, and by the time I started asking questions, the way she answered things was, “I don’t know what your traditions are. I know what they teach you in the church and in schools is not the answer, but I don’t know what to tell you, so you are going to have to go out and find that out on your own”.

The church had a very strong influence in my community and I wasn’t encouraged to attend any of the things that were happening on the reserve. But she always told me that, “Find out what it is. Find out what your culture is. I can’t teach you, but it is out there somewhere.”

So when I came to Toronto, the people who had the strongest traditions were the Mohawk people, and they are the ones who are sharing a lot of those teachings here in Toronto, and I would often ask about the Ojibway traditions, and no one could tell me. That includes my community and the community of Toronto, so 1 sort of took up the traditions of the Mohawk people and I spent a lot of time with the elders and they helped me to raise my son.

5. Q. You indicate that that is a reason. Are there other reasons that you felt you had to leave the reserve in ’71?

A. Yes, there are lots of reasons.

6. Q. Again, I don’t want to confuse you. There is a reference in the Statement of Claim, in paragraph 5, to a number of other reasons.

A. When I left, in ’71, the reserve, I also had brothers and sisters who were, like adults, and they had their own families and they lived in Detroit, Windsor, London, Toronto area, so I spent a lot of time with my family members and another one ... that is why I came to Toronto was, there was so many people in Toronto to look after me, and employment opportunities, of course, because there were ... the opportunities on my reserve were next to nothing. All of the jobs that were available on the reserve were filled by non-Native people.

Ms. Shilling has a son, born in 1972. In 1979, she decided to move back to the Rama reserve to introduce her son to the community and Ojibway traditions, which were starting to be revitalized around that time. Ms. Shilling was able to find work on the Rama reserve. While working there she lived on the Rama reserve, except for the first 6 months, when she lived in Orillia while waiting for accommodation on the reserve to become available.

When Ms. Shilling moved back to Toronto in 1985, it was to remove her son from some negative influences to which he was exposed on the Rama reserve.

Since 1985 Ms. Shilling has lived in Toronto and has worked there, except for a short period of time in 1989 when she received unemployment insurance benefits and a period of approximately six months, from October 1992 to March 1993, when she received disability insurance benefits.

Although Ms. Shilling has lived for long periods in Toronto, she has always maintained substantial connections with her family and her community on the Rama reserve, which she considers her home. She inherited from her grandfather a certificate of occupancy for 6 acres of land on the Rama reserve. She is related to approximately 30% of the people on the reserve. She goes there approximately every second weekend, staying with relatives or, in summer, camping out. She contributes in various ways to community life on the Rama reserve.

Throughout her career, Ms. Shilling has chosen work that involves providing services to native people and organizations. That is true of substantially all of her paid work, including her work on the Rama reserve between 1984 and 1989, and her work in Toronto before and after that time. She has also helped to establish and manage several organizations in Toronto that serve native people.

Ms. Shilling’s employer since 1993 has been Roger Obonsawin, who carries on business as sole proprietor under the name Native Leasing Services (NLS). Mr. Obonsawin is a Mohawk and an “Indian” as defined in the Indian Act. He resides and carries on his business on the Six Nations of the Grand River reserve in southern Ontario.

The statement of agreed facts does not disclose the location of Mr. Obonsawin’s assets except that the head office of NLS is located on the Six Nations of the Grand River reserve and a bank account is maintained for NLS at a branch of the Canadian Imperial Bank of Commerce located on the nearby reserve at Mississauga of New Credit. For purposes of this proceeding, the Crown has admitted that NLS and its owner, Mr. Obonsawin, are located on the Six Nations of the Grand River reserve.

In 1992, NLS entered into a contract with Anishnawbe Health Toronto (AHT), a native health centre in Toronto, under which NLS places employees with AHT.

AHT was established in 1987. Its focus is preventive health care. It is committed to the recovery of native people through traditional healing, which is the core of the operation. In this regard it holds ceremonies and assists in seasonal fasting. It also provides some western health care services.

AHT maintains significant and necessary links with many reserve communities, which are the source of traditional medicines and the location for certain ceremonies and other aspects of the healing process that cannot be done in an urban environment. Those communities include Ojibway, Mohawk and other groups with reserves in different parts of Ontario, but not the Rama Band. The clientele of AHT consists primarily of native people.

In 1993, Ms. Shilling found work at AHT. She was told that she would have the option of contracting with NLS. She knew Mr. Obonsawin and was familiar with his work in promoting the interests of native people. She chose that option in order to take advantage of section 87 of the Indian Act.

Ms. Shilling’s contract with NLS was entered into on March 8, 1993. It initially provided her with a salary of $22.50 per hour. The contract was revised on April 18, 1994 to provide for an annual salary of $32,000. The contract was amended twice, increasing her salary to $46,800 per year effective April 18, 1994 and decreasing it effective December 5, 1994 to $41,754 per year.

Ms. Shilling’s salary is paid to her by a transfer of funds from the NLS bank account at a bank on the reserve at Mississauga of New Credit. Initially the money was transferred to Ms. Shilling’s account in a branch of Canada Trust in Toronto. Since June 14, 1995, the money has been transferred to her account at a branch of the Toronto Dominion Bank on the reserve at Walpole Island. From June of 1995 that was Ms. Shilling’s only bank account.

Ms. Shilling has provided various services to AHT. She began as coordinator for a training program for native people and is now an acting program director.

The duties of Ms. Shilling are carried out principally in Toronto, and generally are aimed at assisting native people in crisis to reconnect with their culture, and providing support in their healing process. She has organized camping trips to reserves, usually the Stoney Point reserve, which are held twice annually. During these trips AHT’s clients meet with elders and engage in the sweat lodge. She has taken people to monthly sweats on reserves, organized by AHT. These trips last 12 to 13 hours each.

Ms. Shilling was also responsible for coordinating a group of parents to start a Head Start program, to prepare aboriginal children for schooling and teach them about their heritage. It is not clear whether that was done in the course of her employment, or as a volunteer.

Although Ms. Shilling’s services are provided to AHT and are aimed at assisting AHT’s clients, the Crown does not contend that she is an employee of AHT. The statement of agreed facts says that she is an employee of NLS.

For the taxation years 1993 and 1994, Ms. Shilling was not required to pay tax on her employment income from NLS because of a remission order issued under the Financial Administration Act. However, that remission order does not apply for 1995 and 1996.

Ms. Shilling filed income tax returns for 1995 and 1996. The Crown has assessed her on the basis that her employment income from NLS is taxable. Her objections to those assessments are being held in abeyance by agreement, pending the outcome of these proceedings.

The Law

Section 87 exempts from taxation all personal property of an Indian situated on a reserve. This is one of the provisions in the Indian Act that is rooted in the Crown’s obligation to protect the interest of Indians in reserve lands. [1] Other aspects of that obligation find expression in statutory constraints on the alienability of reserve lands, and statutory protection from seizure of property of an Indian situated on a reserve.

It has not always been clear how section 87 should apply to income tax on employment income earned by an Indian. Before 1972, the Crown’s po- sition was that the employment income of an Indian was exempt from taxation only if the Indian lived and worked on a reserve.

In 1972 the Crown adopted another position, as indicated by Interpretation Bulletin IT-62 dated August 18, 1972 entitled “Indians”. [2] Based on that bulletin, the focus became the place where the duties of employment were performed. The place of residence of the employee was irrelevant, as was the location of the employer.

Later, the location of the employer became the focus because of the decision of Thurlow A.C.J. in R. v. National Indian Brotherhood (1978), [1979] I F.C. 103 (Fed. T.D.). The issue in that case was whether income tax was payable on salaries earned by Indian employees of National Indian Brotherhood.

National Indian Brotherhood was a corporation with a head office in Ottawa and activities throughout Canada. Its objects and activities were aimed at the betterment of Indians throughout Canada. The employees who were Indians had resided on reserves before becoming employees and would probably reside on reserves if they ceased to be employees. While employed by the corporation they resided for the most part in Ottawa. They performed their duties throughout Canada, both on and off reserves.

Thurlow A.C.J. concluded that in the context of section 87, employment income should be treated as a right to salary, and thus a simple contract debt or chose in action. Under the principles of private international law, the location of a simple contract debt is the location of the debtor. Thurlow A.C.J. reasoned that the same principle could be applied to attribute employment income to the location of the employer. As National Indian Brotherhood was a corporation that was not located on a reserve, he concluded that the salaries it paid could not be considered to be located on a reserve.

In Nowegijick v. /?., [1983] 1 S.C.R. 29 (S.C.C.), the issue was whether section 87 applies to employment income at all (a point not debated in the National Indian Brotherhood case).

Mr. Nowegijick was an Indian who was employed as a logger by Gull Bay Development Corporation, a corporation without share capital that had its head office and administrative offices on the Gull Bay reserve. The corporation conducted a logging operation 10 miles from the reserve, which is where Mr. Nowegijick performed his duties of employment. He lived on the reserve. It had been conceded by the Crown that the employer was located on the reserve and that if Mr. Nowegijick’s employment income was personal property within the meaning of section 87, the exemption would apply.

The Supreme Court of Canada held that, for purposes of section 87 of the Indian Act, income from employment is personal property. It followed that Mr. Nowegijick was entitled to the exemption from income tax on his employment income.

Although the principal point raised in the Nowegijick decision is no longer in controversy, two aspects of the decision must be closely examined. One is the general statement of principle relating to the interpretation of section 87. The other is a comment on the location of employment income, on which counsel for Ms. Shilling relies to argue that the Supreme Court of Canada approved the situs-of-the-debtor rule.

I will deal first with the general principle of interpretation. It is expressed in these words of Dickson J., speaking for the Court (at page 36):

It seems to me [...] that treaties and statutes relating to Indians should be liberally construed and doubtful expressions resolved in favour of the Indians. If the statute contains language which can reasonably be construed to confer tax exemption that construction, in my view, is to be favoured over a more technical construction which might be available to deny exemption. In Jones v. Meehan, 175 U.S. 1 (1899), it was held that Indian treaties “must ... be construed, not according to the technical meaning of [their] words ... but in the sense in which they would naturally be understood by the Indians”.

Dickson C.J. repeated this principle in Mitchell v. Sandy Bay Indian Band, [1990] 2 S.C.R. 85 (S.C.C.) [3] at page 98, speaking only for himself. Two other judgments were written in the Mitchell case, one by La Forest J. (for himself, Sopinka and Gonthier J J.) and the other by Wilson J. (for herself, Lamer and L’Heureux-Dubé JJ.). Wilson J. did not address the applicable principles of interpretation, but expressed her agreement with the conclusion reached by La Forest J. on the interpretation question. At page 142, La Forest J. says this about the principle of interpretation stated in Nowegijick (emphasis added):

...1 do not take issue with the principle that treaties and statutes relating to Indians should be liberally construed and doubtful expressions resolved in favour of the Indians. In the case of treaties, this principle finds its justification in the fact that the Crown enjoyed a superior bargaining position when negotiating treaties with native peoples. [...]

But as I view the matter, somewhat different considerations must apply in the case of statutes relating to Indians. Whereas a treaty is the product of bargaining between two contracting parties, statutes relating to Indians are an expression of the will of Parliament. Given this fact, I do not find it particularly helpful to engage in speculation as to how Indians may be taken to understand a given provision. Rather, I think the approach must be to read the Act concerned with a view to elucidating what it was that Parliament wished to effect in enacting the particular section in question. This approach is not a jettisoning of the liberal interpretive method. As already stated, it is clear that in the interpretation of any statutory enactment dealing with Indians, and particularly the Indian Act, it is appropriate to interpret in a broad manner provisions that are aimed at maintaining Indian rights, and to interpret narrowly provisions aimed at limiting or abrogating: them. Thus if legislation bears on treaty promises, the courts will always strain against adopting an interpretation that has the effect of negating commitments undertaken by the Crown [...].

At the same time, I do not accept that this salutary rule that statutory ambiguities must be resolved in favour of the Indians implies automatic acceptance of a given construction simply because it may be expected that the Indians would favour it over any other competing interpretation. It is also necessary to reconcile any given interpretation with the policies the Act seeks to promote.

If there is any conflict between the interpretive approach of Dickson C.J. in Nowegijick and that of La Forest J. in Mitchell, T prefer the latter as being both later in time and more fully explained. I conclude that if section 87 of the Indian Act is capable of bearing more than one interpretation, the one that best promotes its objectives must prevail.

What is the objective of section 87 of the Indian Act? La Forest J. reached the following conclusions as to the purpose of section 87 (at page 131, emphasis added):

In summary, the historical record makes it clear that ss. 87 and 89^ [4] of the Indian Act [...] constitute part of a legislative “package” which bears the impress of an obligation to native peoples which the Crown has recognized at least since the signing of the Royal Proclamation of 1763. From that time on, the Crown has always acknowledged that it is honour-bound to shield Indians from any efforts by non-natives to dispossess Indians of the property which they hold gua Indians, i. e. ., their land base and the chattels on that land base.

It is also important to underscore the corollary to the conclusion I have just drawn. The fact that the modern-day legislation, like its historical counterparts, is so careful to underline that exemptions from taxation and distraint apply only in respect of personal property situated on reserves demonstrates that the purpose of the legislation is not to remedy the economically disadvantaged position of Indians by ensuring that Indians may acquire, hold, and deal with property in the commercial mainstream on different terms than their fellow citizens. An examination of the decisions bearing on these sections confirms that Indians who acquire and deal in property outside lands reserved for their use, deal with it on the same basis as all other Canadians.

He also says, at page 133 (emphasis added):

[...] one must guard against ascribing an overly broad purpose to ss. 87 and 89. These provisions are not intended to confer privileges on Indians in respect of any property they may acquire and possess, wherever situated. Rather, their purpose is simply to insulate the property interests of Indians in their reserve lands from the intrusions and interference of the larger society so as to ensure that Indians are not dispossessed, of their entitlements.

and at page 137 (emphasis added):

[...] a review of the obligations that the Crown has assumed in this area shows that it has done no more than seek to shield the property of Indians that has r immediate and discernible nexus to the occupancy of reserve lands from interference at the hands of non-natives.

Put simply, section 87 is intended to protect from taxation the property of an Indian that is “situated on a reserve.” The word “situated” means “located” or “placed.” [5] The phrase “on the reserve” means within the boundaries of the reserve: Union of New Brunswick Indians v. New Brunswick (Minister of Finance), [1998] 1 S.C.R. 1161 (S.C.C.) at page 1183-4. Section 87 is not intended simply to benefit an Indian who has property, or to increase his or her wealth. [6] However, that may be an effect of section 87 if an Indian has property located on a reserve.

I turn next to consider the proposition for which Nowegijick is authority. As stated above, it is undisputed that it stands for the proposition that employment income is personal property. Counsel for Ms. Shilling argues that it also stands for the proposition that the situs-of-the-debtor rule applies to determine the location of employment income for purposes of s. 87. Her argument is based on these comments of Dickson C.J. at page 34 (emphasis added):

One fact might have given rise to argument. Was the fact that the services were performed off the reserve relevant to situs? The Crown conceded in argument, correctly in my view, that the situs of the salary which Mr. Nowegijick received was sited on the reserve because it was there that the residence or place of the debtor [I] was to be found and it was there the wages were payable. / [7]

If the situs-of-the-debtor rule applies for purposes of section 87, employment income would be located on a reserve if the employer is located on a reserve.

Given that the Nowegijick decision gave implicit approval to the National Indian Brotherhood decision, it would have been reasonable to conclude that the Supreme Court of Canada approved the application of the situs-of-the-debtor rule for determining the location of employment income. That is not the end of the matter, however.

Counsel for the Crown argues that even if the situs-of-the-debtor rule was approved in Nowegijick, that approval did not survive Williams v. R., [1992] 1 S.C.R. 877 (S.C.C.). He argues that decision replaced the situs-of- the-debtor rule with a test that requires an analysis in each case of the factors that connect the income to the reserve. Counsel for Ms. Shilling argues that Williams merely supplements the situs-of-the-debtor rule in order to deal with situations where the situs-of-the-debtor rule cannot sensibly be applied.

The issue in the Williams case was whether section 87 applies to unemployment insurance benefits received by an Indian who lives on a reserve, where the qualifying employment income was performed and paid on a reserve. The two employers were a band and a logging company located on a reserve. Gonthier J., speaking for the Court, analyzed the situs-of-the-debtor rule as it had been applied in the National Indian Brotherhood case and said (at page 890-891):

...it is readily apparent that to simply adopt general conflicts principles in the present context would be entirely out of keeping with the scheme and purposes of the Indian Act and Income Tax Act. The purposes of the conflict of laws have little or nothing in common with the purposes underlying the Indian Act. 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 gua Indian on a reserve. The test for situs under the /ndian Act must be constructed according to its purposes, not the purposes of the conflict of laws. Therefore, the position that the residence of the debtor exclusively determines the situs of benefits such as those paid in this case must be closely reexamined in light of the purposes of the Indian Act.

Gonthier J. then said that instead of the situs-of-the-debtor rule in the National Indian Brotherhood case, the situs of income should be determined by balancing all the connecting factors on a case by case basis. The flexibility of this approach was seen as an advantage, subject to certain limitations. This appears at page 892:

It is desirable, when construing exemptions from taxation, to develop criteria which are predictable in their application, so that the taxpayers involved may plan their affairs appropriately. This is also important as the same criteria govern an exemption from seizure.

Furthermore, it would be dangerous to balance connecting factors in an abstract manner, divorced from the purpose of the exemption under the Indian Act. A connecting factor is only relevant in so much as it identifies the location of 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.

However, an overly rigid test which identified one or two factors as having controlling force has its own potential pitfalls. Such a test would be open to manipulation and abuse, and in focusing on too few factors could miss the purposes of the exemption in the Indian Act as easily as a test which indiscriminately focuses on too many.

He concluded, at pages 892-893:

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 purposes 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.

I agree with counsel for the Crown that the Williams decision was intended to replace the situs-of-the-debtor rule with a principle that requires identifying and weighing various factors that connect the employment income to a reserve or elsewhere. The comments of Gonthier J. at page 897 (where he discusses the situs of employment income) would have been pointless if he thought the situs-of-the-debtor rule alone was sufficient to determine the location of employment income for purposes of section 87.

At the same time I agree with counsel for Ms. Shilling that the Williams case leaves open the possibility that there may be situations where the connecting factors test leads to the same result as the situs-of-the-debtor rule. As Gonthier J. said at page 891:

It may be that the residence of the debtor remains an important factor, or even the exclusive one.

The remainder of the Williams case demonstrates how the connecting factors test should be applied. The income in issue in Williams was income received under the Unemployment Insurance Act. The payer of the income was the Crown, and the entitlement to the income arose from premiums paid by Mr. Williams in his prior qualifying employment. The potential connecting factors were identified as the residence of the person paying the income, the residence of the recipient, the place of payment, and the location of the qualifying employment income.

Of these potential connecting factors, only the last was given significant weight. It was undisputed that the qualifying employment income was tax exempt because of section 87. The Court recognized the tie between the qualifying employment income and the unemployment insurance benefits, and concluded that the purpose of section 87 would not be achieved if the benefits were taxable while the employment income was not (page 894- 897).

The residence of the recipient was held to be “only potentially significant if it points to a location different from that of the qualifying employment” (page 897). The other suggested factors, the residence of the payer and the place of payment, were given little or no weight. That is because the Crown was the debtor, and the income in question was available anywhere in Canada to anyone who qualified for them (page 893-894).

Thus the location of the qualifying employment income determined the location of the unemployment insurance benefits. The next step would have been to find the location of the employment income. However, on that point there was no controversy. The parties had agreed that the employment income was located on the reserve. Even though they apparently reached that conclusion on the basis of the situs-of-the-debtor rule, every possible connecting factor pointed to the reserve in any event. The result would have been the same regardless of the test applied.

As I read the decision of Gonthier J., if it had been necessary to determine the location of the qualifying employment income, he would have analyzed each potential connecting factor for that income in light of the three considerations identified at page 892 (quoted above). That is what I must do in this case.

Some of the argument before me referred to the “Guidelines” issued by Revenue Canada in 1994, following the Williams decision. As I understand it, the Guidelines are an attempt by Revenue Canada to explain its understanding of the application of the Williams principle in the context of income from employment. Because Canada depends upon a self-assessing system of income taxation, and income tax rules are difficult to understand and apply, such publications are an important aspect of Revenue Canada’s duty to assist taxpayers to comply with their tax obligations. There is particular need for such assistance in the application of section 87 of the Indian Act, because the exemption is stated in broad, general language and Parliament has not enacted detailed rules, and because the case law has evolved in ways that have required major changes in assessing policies.

However, the Guidelines are not law. They do not purport to be law. They should not be read as though they are law. As will be apparent from the discussion below, I question some of the assumptions underlying the Guidelines, for example, the stress placed on the residence of the employee as a connecting factor. If I am correct, the Guidelines may have to be amended.

Applying the law to the facts

The connecting factors that are potentially relevant must be identified in light of (1) the purposes 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 what weight should be given to that factor in determining whether the tax would amount to the erosion of the entitlement of the Indian qua Indian with respect to that property.

Residence of the employee

The written argument of counsel for the Crown suggested that the place of residence of Ms. Shilling is a potential connecting factor. Counsel for Ms. Shilling argued that her place of residence is irrelevant. At the hearing counsel for the Crown conceded this point.

Counsel for Ms. Shilling argued that residence on a reserve may serve to prove a connection to a reserve, but residence off reserve cannot prove the contrary. Therefore, the place of residence of the employee should not be considered a connecting factor where the question is the location of employment income. She also argued that to the extent that Ms. Shilling’s personal circumstances are to be taken into account, weight should be given to her family and social connections to her home on the Rama reserve, rather than her place of residence. There is some force in this argument. For many Indians, including Ms. Shilling, residence off the reserve is not a choice taken willingly, but one compelled by circumstances rooted in the social and economic disadvantages of life on some reserves. That is a fact recognized in the decision of the Supreme Court of Canada in Corbiere v. Canada (Minister of Indian & Northern Affairs) (May 20, 1999), Doc. 25708 (S.C.C.), which held that the exclusion of band members residing off reserve from voting privileges on band governance is inconsistent with section 15(1) of the Charter of Rights.

In my view, the determination of the location of employment income for purposes of section 87 should not depend in any way upon the location of the employee’s residence, or the employee’s personal and family connections to a reserve. I see no logical connection between those personal characteristics and employment relationship, or the location of employment income for purposes of section 87.

The location and nature of the work, and the manner in which it benefits a reserve

Counsel for the Crown would break this into three categories: the type of work being performed, the location where the work is done and the nature of the benefit to the reserve: Clarke v. Minister of National Revenue, [1997] 3 F.C. 269 (Fed. C.A.). He argues that in this case, unlike Clarke, a consideration of these factors would point to a location for the employment income that is not on a reserve.

Counsel for Ms. Shilling argues that the fact that the income is earned as a result of performing services for native people should be considered a connecting factor. In my view this is not correct, because it does not recognize the need for a connection to the reserve as a physical place. Section 87 is not intended to benefit Indians generally, or to encourage their values and culture. It is intended to protect the property of Indians located on a reserve.

Ms. Shilling performs the duties of her employment mostly in Toronto and sometimes on one of a number of reserves. Her work benefits AHT, a Toronto organization with significant connections to various reserves, and of course the clientele of AHT. AHT operates off reserve because its clients live off reserve. Counsel for Ms. Shilling argues that the connection between the reserves and AHT is sufficiently strong that I should decide, as did the Federal Court of Appeal in Clarke, supra, that they override the fact that Ms. Shilling’s duties are performed off reserve.

In Clarke, the issue was the location of employment income of Indians employed at a government hospital that served mostly the residents of a nearby reserve. The hospital had previously been located on the reserve, but was destroyed by fire and rebuilt outside the reserve boundaries, with no thought given to the potential legal consequences of the relocation. But the hospital remained primarily a reserve hospital, and that was sufficient for the Federal Court of Appeal to disregard its off reserve location as a mere technicality that should not override all the other connections between the hospital and the reserve it served.

The facts of this case are quite different. They cannot support the reasoning that was applied in Clarke. There is no factual basis for a conclusion that the services of AHT, or the work done by Ms. Shilling, benefit any particular reserve. Nor is it reasonable to conclude that the relatively small amount of work that Ms. Shilling does on various reserves is a sufficient basis for locating her employment income there. Therefore, if the place where Ms. Shilling’s services are performed has any relevance, it must be considered a factor that connects her employment to a location that is not on a reserve.

However, there is another way of connecting Ms. Shilling’s services to a location. Her employer is NLS. It is admitted that NLS is a business, and from that I infer that its activities are undertaken for the purpose of profit. I also infer that Ms. Shilling’s work for NLS brings profits to that business, and therefore Mr. Obonsawin. That is a tangible advantage to a reservebased business. In my view, if the benefit to a reserve is to be taken into account, the advantage to NLS must be considered to be a factor that connects Ms. Shilling’s employment income to a reserve.

Location of the employer

Both parties agree that the location of the employer should be a connecting factor. It is undisputed that the employer is NLS and that NLS is located on a reserve.

Counsel for the Crown argued that in this case, the location of the employer should be considered to be only a weak connecting factor because of the manner in which the employment relationship arose. He points out that Ms. Shilling found employment with AHT but instead of entering into an employment relationship with AHT, became an employee of NLS. He argues that, because she did so for the tax advantages, the location of NLS should be discounted.

I do not accept this argument. I start from the premise that everyone is entitled to arrange their affairs to take advantage of statutory tax relief, and that this may be done by creating legal rights and relationships that have no purpose but to obtain that relief. The most recent expression of this principle is found in Neuman v. Minister of National Revenue, [1998] 1 S.C.R. 770 (S.C.C.) at 785:

...taxpayers can arrange their affairs in a particular way for the sole purpose of deliberately availing themselves of tax reduction devices in the [Income Tax] Act.8 [8]

This principle must apply equally to Indians who seek the tax advantage of section 87 of the Indian Act and are prepared to enter into legal relationships with that as their only objective: Recalma v. R., [1998] 3 C.N.L.R. 279 (Fed. C.A.) at page 281. This is consistent with the comments of Gonthier J. in Williams, at page 887:

Under the Indian Act, an Indian has a choice with regard to his personal property. The Indian may situate this property on the reserve, in which case it is within the protected area and free from seizure and taxation, or the Indian may situate this property off the reserve, in which case it is outside the protected area, and more fully available for ordinary commercial purposes in society. Whether the Indian wishes to remain within the protected reserve system or integrate more fully into the larger commercial world is a choice left to the Indian.

To accept the argument of counsel for the Crown would mean that the tax liability of Indians could vary depending only on whether the location of their property on a reserve arose with or without planning. Such a distinction makes no sense.

In my view, the location of the employer as a connecting factor must be considered without regard to the fact that the location was dictated by a deliberate tax planning choice.

I consider the analysis in Recalma (supra), to be instructive. In that case, an Indian claimed the benefit of a tax exemption under section 87 for the investment income he earned on financial instruments purchased at a branch of a financial institution located on a reserve. The exemption was denied because the investments he had chosen as the source of his investment income depended upon income generating activity in the “commercial mainstream”, in locations all over the world.

Ms. Shilling has made the opposite choice. She chose an employment relationship with NLS. That choice has substantive legal and commercial consequences that give her employment relationship an undeniable tie to a reserve. If the employment relationship breaks down, the only recourse of Ms. Shilling is to Mr. Obonsawin. If Mr. Obonsawin becomes insolvent, Ms. Shilling may not be paid. On the other hand, Ms. Shilling will not necessarily be adversely affected if AHT ceases to operate or becomes insolvent, because her employment relationship is with NLS.

It is not relevant that the reserve in question is the one where Mr. Obonsawin and NLS are located rather than the Rama reserve. The language of section 87 is very broad, and refers to property situated on “a reserve”, not “the reserve”, and not “the reserve belonging to the band of which the Indian is a member”. What is relevant is that because of her choice of employer, Ms. Shilling cannot look to anyone but Mr. Obonsawin, who is located on the reserve, for payment of her salary, which is the source of her livelihood and her ability to support her son.

The fact that Ms. Shilling’s employer is located on a reserve is a factor that must be given considerable weight in determining the location of her employment income. Because the source of Ms. Shilling’s employment income is a business located on a reserve, to impose income tax on that employment income would tend to erode her entitlement gua Indian on a reserve.

Other considerations

Both parties agreed that the place of payment of Ms. Shilling’s salary is irrelevant. No other connecting factors were suggested.

Conclusion

The most important factor to be taken into account in determining the location of Ms. Shilling’s employment income is the location of her employer. Because of the substantive legal and economic consequences of her employment relationship, that factor is entitled to considerable weight. Her employer is located on a reserve, which favours the conclusion that her employment income is located on a reserve.

A related factor that points to a location on the reserve is the fact that her work benefits the business of her employer, which is a reserve based business.

The factors that point to the opposite conclusion are that she performs the duties of her employment in Toronto. Her work benefits AHT, a Toronto based organization which in turn benefits Indians residing in Toronto, but does not benefit any particular reserve. However, those factors are not of sufficient weight to override the factors that connect Ms. Shilling’s employment income to a reserve.

I conclude that Ms. Shilling’s employment income is located on a reserve, and is exempt from income tax by virtue of section 87 of the Indian Act.

The question to be answered was stated as follows (with amendments required to take into account the remission orders for 1993 and 1994):

Is Rachel Shilling entitled by operation of section 87 of the Indian Act to exemption from income tax with respect to the salary paid to her by Native Leasing Services for the years 1995-1996 in the circumstances described in the Agreed Statement of Facts (Schedule B to the within motion and pages 8 - 22 of the Plaintiff’s Motion Record?)

The answer is yes.

Appeal allowed.