Citation: 2013 TCC 253
Date: 20130820
Docket: 2009-1943(IT)G
BETWEEN:
ROBERT MURRAY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
D'Auray J.
OVERVIEW
[1]
Mr. Murray is a
status Indian and a member of the Mohawks of Kanesatake First Nation in Quebec.
[2]
In 1993, Mr. Murray
opened an office supply store on the Kanesatake reserve, doing business as Produits
de Bureau MTC.
[3]
In 1995, the federal
government decided to privatize 17 of its office supply stores. Mr. Murray
acquired one of these stores in Gatineau.
[4]
In 1996, the federal
government implemented the Aboriginal Business Procurement Policy (the ABPP),
the purpose of which was to increase the participation of Aboriginal business
in the procurement process by encouraging and, in certain situations, requiring
federal departments and agencies to grant contracts to Aboriginal businesses.
[5]
During the period in
question, the 2001, 2002 and 2003 taxation years, Mr. Murray was the sole
shareholder and director of the companies The Mohawk Trading Company Inc. / La
Compagnie de Commerce Mohawk Inc. (MTC) and Mohawk Contract Furniture Inc. /
Les Meubles de Bureau Mohawk Inc. (MCF). MTC sold office supplies and MCF, office
furniture. The primary places of business of both companies were in Gatineau.
[6]
Because of Mr. Murray's
business sense and incentives offered through the ABPP to Aboriginal
businesses, MTC and MCF became successful and reached sales levels that surpassed
all expectations.
[7]
Mr. Murray received
management fees from the companies at the end of each fiscal year. The amount
of the management fees Mr. Murray received was equal to the retained earnings
of the companies, namely, profits minus personal expenses incurred by the companies
for Mr. Murray.
[8]
Mr. Murray argues
that the management fees received were only for the work he carried out on the
reserve. He submits that the management fees are located on the reserve. As a
result, pursuant to his Indian status, he did not have to pay taxes on these
fees, which could be considered property. As for the personal expenses paid by
the companies, he submits that he cannot be assessed on personal taxable
benefits received when the amounts that constituted these taxable benefits were
tax exempt.
[9]
The Minister of
National Revenue (the Minister) notes that the exemption provided under the Income
Tax Act (ITA) and the Indian Act (IA) does not apply to the
management fees. As for the taxable personal benefits conferred by MTC and MCF,
the Minister submits they were rightly included in the calculation of
Mr. Murray's income.
ISSUES
[10]
Were the management
fees Mr. Murray received from MTC and MCF for the 2001, 2002 and 2003 taxation
years, under the combined application of section 87 of the IA and section 81 of
the ITA, tax exempt as personal property situated on a reserve?
[11]
Were the amounts
included in the calculation of Mr. Murray's income as taxable benefits also tax
exempt as personal property situated on a reserve?
[12]
Were the penalties
imposed by the Minister for the late filing of tax returns for 2001 and 2002
warranted?
FACTS
[13]
Mr. Murray was
born on the Kanesatake reserve at 204 Sainte-Sophie Street, and lived there
until he was around 16. At 16, he left the reserve to work in a circus in Saint-Eustache.
[14]
Later, he lived in Ottawa,
Montréal, Calgary and the United States, and held various jobs. In the 1980s,
Mr. Murray left Canada for Florida. From 1980 to 1985, he worked in bars
and motels in Miami Beach as manager, bartender and doorman. During this
period, he became the owner of many restaurants. Between 1985 and 1990, he left
Florida to work in Texas for a friend's oil company. It was also during this
period that he met his wife, Glynn House Murray. Mr. Murray's absence
lasted a total of more than 15 years.
[15]
In 1988, he began thinking
about returning to his home reserve to encourage economic development. In 1990,
at around 33, he left the US and moved to Montreal to study management at
McGill University. Through various research and readings, he realized there was
a demand for office supply businesses. Moreover, he was familiar with this field
because his wife worked for a company that sold paper.
[16]
In 1991, he returned to
the reserve to live with his wife in his family home at 204 Sainte-Sophie Street,
in Oka, where his mother also lived.
[17]
In 1992, he purchased a
building at 84 Notre-Dame Street, in Oka, and began operating a paper supply
business. At that time, the business, Produits de Bureau MTC, was operated as a
sole proprietorship.
[18]
In 1993, Mr. Murray
purchased the house and ancestral land (ancestral home) at 204 Sainte-Sophie
Street, in Oka, from his mother for one dollar.
[19]
From 1993 to 1999, he
lived in a house with his wife at St‑Paul Street in the village of Oka. During
this period, Mr. Murray was still the owner of the ancestral home, but did
not reside there. His mother lived there until her death, after which Mr. Murray's
niece moved in with her six children.
[20]
In 1995, the federal
government decided to privatize 17 of its office supply stores. On April 17,
1995, Mr. Murray acquired one of these stores, located at 1 Promenade du
Portage, at Terrasses de la Chaudière, in Gatineau.
[21]
On March 8, 1996, Mr. Murray
incorporated 3236871 Canada Inc., which would then become MTC. MTC conducted
retail sales of office supplies.
[22]
On March 27, 1996, the
federal government announced the ABPP.
[23]
The ABPP is described in
Contracting Policy Notice 1996-2, as an initiative "to promote Aboriginal
business participation in government procurement." This initiative
consists of the following elements:
•
greater emphasis on Aboriginal economic
development when planning procurements;
•
mandatory setasides in procurements above a
threshold which are destined for Aboriginal populations;
•
selective setasides for specific procurements;
•
provision for subcontracting with Aboriginal
firms when the primary requirement is outside of NAFTA and WTOAGP;
•
related changes to the Contracting and
Procurement Review policies to support these initiatives; and
•
under phase two of this initiative, each
department and agency with an annual contracting budget in excess of $1.0
million shall develop multiyear performance objectives for contracting with
Aboriginal businesses. Details of how this goal will be pursued will be
announced in the near future.
[24]
Because of the ABPP, MTC
grew by leaps and bounds. Through the ABPP, MTC was able to participate in
offers reserved for Aboriginal businesses, which was very lucrative for MTC.
[25]
On June 25, 2002, Mr. Murray
incorporated a second company, 4087771 Canada Inc., which would become MCF. MCF
sold office furniture.
[26]
During the years in
question, the companies had three stores, one showroom and one warehouse. Two
of the three stores were in Gatineau: one in the Terrasses de la Chaudière building
at 1 Promenade du Portage, and the other at Place Vincent‑Massey at 351
St‑Joseph Boulevard. The third store was on the reserve at 84 Notre-Dame
Street, in Oka. The showroom was at 25 Eddy Street, in Gatineau, and the
warehouse, at 35 and 45 Villebois Street, in Gatineau.
[27]
The sales figures for MTC
and MCF in Gatineau were $7,774,796 in 2001, $11,849,459 in 2002 and $3,763,130
in 2003, whereas sales at the Oka store were around $300,000, according to Mr.
Murray's testimony.
[28]
During the 2001, 2002
and 2003 taxation years, the companies paid Mr. Murray management fees and
paid for his personal expenses. Mr. Murray did not include these amounts
in the calculation of his income, claiming to be entitled to an exemption in
view of his Indian status. In notices dated March 30, 2006, the Minister
assessed Mr. Murray as follows:
|
2001
|
|
|
|
Benefits
conferred
|
|
$243,594.00
|
|
Management
fees
|
|
$532,000.00
|
|
Total
|
|
$775,594.00
|
|
CPP and QPP
deductions
|
|
$1,496.00
|
|
Total income
|
|
$774,098.00
|
|
|
|
|
|
2002
|
|
|
|
Benefits
conferred
|
|
$218,281.00
|
|
Management
fees - MTC
|
$932,574.00
|
|
|
Management
fees - MCF
|
$98,143.00
|
$1,030,717.00
|
|
Total
|
|
$1,248,998.00
|
|
CPP and QPP
deductions
|
|
$1,673.00
|
|
Total income
|
|
$1,247,325.00
|
|
|
|
|
|
2003
|
|
|
|
Income as
reported
|
|
$648,570.00
|
|
Benefits
conferred
|
|
$94,400.00
|
|
Total
|
|
$742,970.00
|
|
CPP and QPP
deductions
|
|
$1,802.00
|
|
Total income
|
|
$741,168.00
|
[29]
Two witnesses appeared
at the hearing: Mr. Murray and Ms. Thibeault, the Canada Revenue Agency auditor
responsible for the file.
[30]
Mr. Murray was
honest and the majority of his testimony was clear and credible. However,
certain uncollaborated statements were contradictory or unlikely in the light
of the circumstances.
[31]
For example, he
considers 204 Sainte-Sophie Street, in Oka, to be his residence, even though he
lived in the US for 10 years.
From the start, Mr. Murray admitted that he knew of the tax exemption for
registered Indians and the importance of maintaining a connection with the
reserve.
[32]
Mr. Murray stated
that during the years in question, he received management fees from the companies
for his work with the financial and strategic planning of the companies.
Although he made decisions both on and off the reserve, he did not keep any
records, reports or time sheets showing the proportion of work performed on the
reserve and that performed off the reserve. He claims that he spent around 25%
of his time on the reserve, whereas the respondent claims that Mr. Murray
spent around 5% of his time on the reserve. Mr. Murray was also unable to state
the hourly wage he was paid for his services, either for those provided on the
reserve or those provided off the reserve. He did not have a contract or
agreement with the companies that set out the terms in this regard. The
evidence showed that the management fees Mr. Murray received yearly were equal
to the retained earnings the companies had accumulated through the year.
[33]
Mr. Murray stated
many times that it was [translation]
"by design" and for tax purposes that he chose to bill the companies only
for the work performed on the reserve. During his testimony, he stated that he
did not receive any compensation for the work performed in Gatineau.
[34]
However, in his
testimony, Mr. Murray was much more specific about the work he performed
in Gatineau. For example, he met with deputy ministers and directors general
from various departments to encourage them to set aside some orders for
Aboriginal businesses pursuant to the ABPP. He implemented marketing strategies
at his Gatineau stores to encourage public servants responsible for procurement
to go to the stores to purchase their office supplies. He oversaw the daily
management of the stores and made the decisions required to increase sales of
office supplies and furniture. He admitted that he was present at the store in
Promenade du Portage almost every day and had an office to work in at the
showroom at 25 Eddy Street. During the audit, Ms. Thibault spent a significant
amount of time there. In her testimony, she stated that Mr. Murray was very
present and active in his business. The clients knew him well and he often knew
them by their first names.
[35]
Mr. Murray stated
that his wife, Mrs. House Murray, also worked at the Gatineau stores. She
was even the vice-president of the companies for a certain period. Mrs. House Murray
did not testify at the hearing to corroborate any of Mr. Murray's
testimony. It must be noted, however, that Mrs. House Murray does not have
registered Indian status. Moreover, she did not receive any compensation for
the work performed for the companies.
[36]
The evidence also
established that during the years in question, Mr. Murray lived in residences
located in the national capital region, namely:
• from 2000 to 2002, in a penthouse
at 259 Champlain Street in Gatineau; Mr. Murray's wife is the owner;
• in 2002, in a rental
apartment at 221 Lyon Street in Ottawa;
• from the winter of 2002
to October 2003, in a country home he rented in Val-des-Monts;
• at the end of 2003, at
113 des Montagnais Road in Gatineau; Mr. Murray and his wife are the
owners.
[37]
The evidence submitted
at the hearing shows that Mr. Murray was present in the national capital region
not only for his business activities, but also for his personal activities. He was
a member of a golf club and a yacht club in Gatineau. The credit card
statements submitted in evidence also show that Mr. Murray spent the majority
of his time in the national capital region. Indeed, from January 1, 2001, to
July 1, 2003, the credit card statements show hundreds of transactions in the
national capital region whereas only eight could be found that were conducted
on or near the reserve.
[38]
With regard to the
companies' activities, the evidence shows that all or almost all of the sales
are attributable to the two stores in Gatineau. Moreover, the sales generated
at 84 Notre-Dame Street in Oka do not appear to be included in the financial
records presented by the corporation's accountant, because under the inventory
listing, 84 Notre-Dame Street does not appear as one of the companies'
establishments.
PARTIES' POSITIONS
Mr. Murray's position
[39]
Mr. Murray submits
that, in view of the connecting factors stated in Williams v. R, the management
fees and taxable benefits are income earned on a reserve and are, therefore,
tax exempt.
[40]
He also submits that
one of the relevant connecting factors to determine the situs of the
management fees is the place where he made important and strategic decisions
for the companies.
[41]
He also submits that
the important and strategic decisions related to the management fees were made
on the reserve. MTC and MCF had their head offices on the Kanesetake reserve,
where the management fees were generated. Mr. Murray is also connected to
the reserve through the store he ran at 84 Notre-Dame Street. He was the owner
of the building that housed the store and accommodations. At one time, he
allegedly kept the "small apartment" for personal use. He is also the
owner of the ancestral home located on the reserve at 204 Sainte‑Sophie
Street.
[42]
He submits that the
ABPP is another relevant connecting factor because, without it, the companies
would not have been able to participate in setaside orders. MTC's and MCF's
income is from the ABPP. The companies were able to participate in offers set
aside for Aboriginal businesses because of Mr. Murray's Indian status. As
a result, the management fees and benefits conferred were granted because of
his Indian status. Moreover, he submits that the companies' profits related to
the ABPP are not part of the commercial mainstream.
[43]
With regard to the
amounts the Minister included as taxable benefits, Mr. Murray submits that
the companies were only acting as intermediaries and gave him no taxable
benefit. The amounts incurred by the companies to pay his personal expenses are
therefore non-taxable. Moreover, Mr. Murray submits he could have chosen
to pay himself higher management fees instead of paying for his personal
expenses with the credit cards belonging to the companies.
[44]
Mr. Murray also
submits that the management fees and benefits conferred on him were deemed to
be property situated on a reserve under paragraph 90(1)(a) of the IA. He
states that Her Majesty purchased the property, namely office supplies and
furniture, with money or funds destined for the use and benefit of Indians, in
accordance with the ABPP. Therefore, the resulting income, namely, the
management fees and taxable benefits, must be tax exempt.
Respondent's position
[45]
According to the
Respondent, Mr. Murray admitted he deliberately ("by design")
chose not to be compensated for the management work he performed for the companies
outside the reserve, in order to benefit from the exemption under section 87 of
the IA.
[46]
The respondent also
submits that Mr. Murray ignored the corporate structures of MTC and MCF,
claiming that the amounts he took from these companies to pay for personal
expenses are indirect management fees because if not for the expenses paid by
the companies, the management fees would have been higher.
[47]
As for the connecting
factors, the respondent submits that the situs of the management fees
granted to Mr. Murray is Gatineau and not the reserve, for the following
reasons:
• the main establishments
of MTC and MCF are situated in Gatineau;
• the sales for MTC and MCF
are generated in Gatineau;
• the companies' bank
accounts are in Ottawa, at the Royal Bank of Canada;
• the daily management of
and decision making for MTC and MCF and the control of these companies take
place in Gatineau;
• the management fees are
generated by Mr. Murray in Gatineau and deposited by the debtor companies
MTC and MCF to Mr. Murray's bank account at the Royal Bank in Ottawa;
• during the years in
question, Mr. Murray resided in the national capital region and all his activities
and lifestyle are connected to this region.
[48]
Moreover, the
respondent submits that paragraph 90(1)(a) of the IA does not apply for
the following reasons:
• Pursuant to paragraph 90(1)(a),
the property to which the paragraph applies must be defined. In this appeal, it
is the management fees and benefits conferred on Mr. Murray; therefore, even if
the office supplies and furniture had been purchased by MTC and MCF with Indian
moneys by federal departments and agencies, it cannot be claimed that they were
purchased for the benefit of Indians and bands. Additionally, it would be the
office supplies and furniture that were considered to be situated on the
reserve and not the management fees. Therefore, this would not give
Mr. Murray any advantage.
• It cannot be claimed that
Her Majesty purchased the management fees and the taxable benefits Mr. Murray
received. Contrary to Mr. Murray's claims, one cannot lift the corporate veil
and ignore the corporate structure of the companies.
• Section 2 of the IA
defines the words "Indian moneys". This money is subject to a strict
administrative regime under sections 61 to 69 of the IA. The ABPP does not make
any reference to this regime. Mr. Murray did not present any evidence to show
that it was "Indian moneys" within the meaning of the IA that was
used by the public servants to purchase the office supplies and furniture.
• Moreover, there is no
evidence in the record that shows that the funds were voted by Parliament for
the use and profit of Indians or bands.
ANALYSIS
Section 87 of
the IA
[49]
The ITA excludes certain
tax-exempt amounts from a taxpayer's income under specific federal statutes. It
is the interaction between paragraph 81(1)(a) of the ITA and section 87 of
the IA that leads to the tax-exemption of property situated on a reserve and
belonging to a registered Indian:
Income
Tax Act
81. (1)
There shall not be included in computing the income of
a taxpayer for a taxation year,
(a) an amount that is
declared to be exempt from income tax by any other enactment of Parliament,
other than an amount received or receivable by an individual that is exempt by
virtue of a provision contained in a tax convention or agreement with another
country that has the force of law in Canada;
Indian
Act
87. (1)
Notwithstanding any other Act of Parliament or any Act
of the legislature of a province, but subject to section 83 and section 5 of
the First Nations Fiscal
Management Act, the following property is exempt from taxation:
(a) the interest of an
Indian or a band in reserve lands or surrendered lands; and
(b) the personal
property of an Indian or a band situated on a reserve.
(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.
[50]
The parties agree that
the management fees and benefits conferred on Mr. Murray by the companies
are property within the meaning of section 87 of the IA.
[51]
In the present appeal,
to decide whether this property is tax exempt, I must determine whether the
management fees and benefits conferred on Mr. Murray were situated on the
reserve.
[52]
In Bastien Estate v.
Canada,
Cromwell J. of the Supreme Court of Canada recently considered the analysis the
courts must conduct to determine whether property is tax exempt under section
87 of the IA.
[53]
In short, Cromwell J.
proposed the following analytical grid, which consists of two parts:
•
The analysis must take
into consideration the substance and the plain and ordinary meaning of the
terms used at subsection 87(1) of the IA. In accordance with the words used at
section 87 of the IA, "personal property of an Indian ...situated on a
reserve", the analysis must address the issue of whether the property is
situated on a reserve.
•
When the location of
the property is objectively difficult to determine because of the nature of the
property or the type of exemption in question, the courts must consider the
connecting factors described in Williams to determine where the property
is situated. These factors are only relevant to the extent that they lead to
the identification of the location of the property for the purposes of section
87.
•
The relevance of the
connecting factors will vary depending on the type of property and the nature
of the tax treatment reserved for this income.
[54]
Once the connecting
factors have been determined, the Court must proceed with a purposive analysis
to determine the weight to grant each connecting factor. There are not
necessarily any overriding factors. All the factors must be analyzed and
weighed, and the location associated with the income must be determined in the light
of the type of property in question and the nature of the taxation of that
property.
[55]
I will begin as
Cromwell J. did in Bastien Estate at paragraph 21, where he began with
determining the purpose of the exemption, the type of property and the nature
of the taxation. Then, he determined the relevant connecting factors and
analyzed them in the light of the purpose of the exemption, the type of
property and the nature of the taxation.
Purpose of the
exemption
[56]
With regard to the
purpose of the exemption, at paragraph 21, Cromwell J. reproduces the comment
made by La Forest J. in Mitchell v Peguis Indian band:
...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.]
Cromwell J. made two additional comments in Bastien
Estate regarding the purpose of the exemption. First, consideration of the
purpose of the exemption does not give the court licence to ignore the words of
the Act.
Second, the application of the exemption does not depend on the issue of
whether the property is integral to life on the reserve or to the preservation
of the traditional Indian way of life. Thus, the words "property which
Indians hold qua Indians" should be interpreted on the basis of 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 IA.
The type of
property
[57]
As mentioned above, the
case law clearly holds that, for the purposes of section 87 of the IA, income
is personal property.
[58]
In their pleadings and
at the hearing, the parties made submissions to the effect that the management
fees and benefits conferred on Mr. Murray constituted employment income.
Considering the evidence, and with respect, it seems to me that in this
specific case, the management fees Mr. Murray received should instead be
considered business income.
[59]
Under article 2085 of
the Civil Code of Québec:
A contract of employment is a contract by which a
person, the employee, undertakes for a limited period to do work for
remuneration, according to the instructions and under the direction or control
of another person, the employer.
Also, section 248 of
the ITA defines the words employment and business:
“employment” means the position of an individual in the service of some other
person (including Her Majesty or a foreign state or sovereign) and “servant” or “employee” means a person
holding such a position;
“business” includes a profession, calling, trade, manufacture or undertaking
of any kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2, subsection
95(1) and paragraph 110.6(14)(f),
an adventure or concern in the nature of trade but does not include an office
or employment;
[60]
In view of the
evidence, the parameters of the relationship between Mr. Murray and the companies
do not match those normally found in a contract of employment. First, there is
no contract in this case. Second, there is no pre‑determined compensation
and no work schedule. Concretely, Mr. Murray is the sole shareholder,
director and officer of the companies. His compensation, every year, consists
of the companies' profits minus personal expenses incurred by the companies for
Mr. Murray (which, moreover, constituted taxable benefits pursuant to the
ITA). Therefore, in the light of the evidence, the management fees are, for
Mr. Murray, considered business income. It was as business income that the
fees were included in Mr. Murray's income when the first draft assessment was
made.
[61]
As mentioned above, the
evidence presented at the hearing shows that the management fees essentially
correspond to the companies' annual profits. These fees were paid as follows: through
the year, Mr. Murray paid his own personal expenses with the corporation's
liquid assets, mainly using credit cards belonging to the companies; at the end
of the year, the companies paid Mr. Murray the difference between the annual
profit and the personal expenses incurred throughout the year. This
"balance" corresponded to the management fees Mr. Murray chose to
exclude from the calculation of his income.
[62]
First, I will conduct
an analysis considering the management fees as business income, and second, considering
them as employment income. As for the benefits, I will analyze them as benefits
conferred on a shareholder pursuant to section 15 of the ITA and then as
benefits in respect of employment pursuant to section 6 of the ITA.
[63]
It is also important to
determine the nature of the management fees and benefits conferred on Mr.
Murray. The management fees were received by Mr. Murray for the work he
performed for the companies MTC and MCF. This includes all the duties Mr.
Murray carried out for the companies such as meetings with deputy ministers and
directors general to promote the companies, developing marketing strategies,
daily management of the stores by being present in the Gatineau stores, making
strategic decisions, financial planning, developing financial strategies
(including income and expenditure projections) and preparing submissions for
the selective tendering set aside for Aboriginal businesses. With regard to the
benefits conferred, they were personal expenditures paid for by the companies.
Contrary to Mr. Murray's submissions, the management fees he received cannot be
only from the work he performed on the reserve. I will address Mr. Murray's
submissions on this subject below, in these reasons.
Nature of the
taxation
[64]
If not for the
exemption, the business income that the management fees represent would have
been included in Mr. Murray's income under the joint application of sections 3
and 9 of the ITA. If, as Mr. Murray submitted at the hearing, the management
fees constituted employment income, they would be taxable under the joint
application of sections 3 and 5 of the ITA. As for the benefits conferred on
Mr. Murray, namely the personal expenditures paid for by the companies, if not
for the exemption, these would have been taxable, either as a benefit conferred
on a shareholder pursuant to subsection 15(1) of the ITA, or as an employment
benefit pursuant to subsection 6(1) of the ITA.
Analysis of
connecting factors from the business income perspective
[65]
The Supreme Court has
not yet had an opportunity to analyze the relevant connecting factors when
determining the situs of business income. The Federal Court of Appeal,
however, has had to propose and apply certain factors in Southwind. These
factors were also considered by the same court in Ballantyne v Canada and Canada
v Robertson,
both of which followed Bastien Estate.
[66]
In a recent unanimous
Federal Court of Appeal decision, Kelly v Canada, Stratas
J.A. not only provides a detailed analysis of Bastien Estate, but also
guidelines regarding the analysis for business income.
[67]
In the light of this
case law, I will review the following connecting factors to determine the situs
of the management fees and benefits conferred on Mr. Murray by the companies:
(i)
place of operation of
the management services business;
(ii) place where the
services were provided and type of services provided;
(iii)
place where the
management fees are generated;
(iv)
place where the
decisions are made;
(v)
location of the debtors
(clients), location of those receiving the services, place payments are made;
(vi)
place of residence of
the person operating the business;
(vii)
place where the books
are kept and location of the banks holding the bank accounts;
(viii)
the commercial
mainstream.
[68]
From the start, it is
important that the following clarification be made. The business income to be
qualified as "on or off reserve" is the income Mr. Murray receives
for the activities he carries out for the companies. These should not be
confused with the companies' activities, as they have a distinct legal
personality and separate assets.
In the light of the above, it is Mr. Murray's management services business that
must be analyzed, not the companies' activities of selling office supplies and
furniture. This must be done with care. It is impossible to analyze Mr. Murray's
management activities in a vacuum, ignoring the context in which the activities
are carried out. These activities consist of operating a business that sells
office furniture and supplies almost exclusively off reserve by a sole
director, shareholder and manager.
[69]
I will review the first
three connecting factors together because they are interrelated:
(i) place of operation
of the management services business;
(ii) place where the
services were provided and type of services provided;
(iii) place where the
management fees are generated.
[70]
Mr. Murray performs
various management duties for the two companies. The nature of these activities
are inherently connected to Mr. Murray because he personally provides the
services, so the business is operated at the place Mr. Murray can be
found, where he makes his decisions and where he takes care of the management
of the companies in order to generate income. There is no distinct physical
location where the business can be situated.
[71]
The evidence shows that
Mr. Murray operates his management services business in the Outaouais region.
He spends the vast majority of his time carrying out his management activities
in the Gatineau stores. According to the evidence, the time he spends working
for the companies on the reserve is closer to 5% than the 25% Mr. Murray stated.
At any rate, even if I accepted Mr. Murray's 25%, the majority of his work was
carried out off reserve. It is simply not logical or likely that Mr. Murray,
the majority of whose personal and professional activities were conducted in
the Outaouais, would return to his store on the reserve at 84 Notre-Dame Street
when important decisions had to be made, or to carry out management duties. Mr.
Murray's sister Ginette was the one who took care of the daily management of
the store on the reserve. I am not saying that Mr. Murray did not go to the
reserve to carry out management duties and ensure the store was operating
properly on the reserve. However, with reference to the evidence that the
management services Mr. Murray provided for the companies were entirely or
almost entirely provided in Gatineau, I find that Mr. Murray's business was operated
in Gatineau.
[72]
The near majority of
the companies' clients, federal departments and agencies, are located in the
Outaouais region and it is with and for these clients that Mr. Murray performed
his management activities.
[73]
Having determined that
Mr. Murray's business is operated in Gatineau, I also find that the management
fees and benefits conferred on Mr. Murray are generated in Gatineau; this is
where the management fees are earned. The management fees Mr. Murray
received are equal to the retained earnings that are almost entirely generated
by the profits of the Gatineau stores. Mr. Murray spends by far the majority of
his time in the Gatineau stores. It follows that the management fees are
generated through the management services physically provided by Mr. Murray in
Gatineau. The benefits conferred on Mr. Murray are also located in Gatineau;
the source of these benefits is the income from the stores that operate and are
located in Gatineau. As for the destination of these benefits, the bulk of the
expenses incurred by Mr. Murray occur in the national capital region and
not on the reserve.
(iv) Place where the decisions
are made
[74]
The majority of the
decisions for the companies are made in Gatineau. Mr. Murray was
physically present in the stores and made decisions there that were required
for the companies to function properly. I do not accept Mr. Murray's testimony
that (indicated) he went to the reserve to make important decisions and carry
out management duties. First, he became much more talkative when speaking about
his management activities in Gatineau than those carried out on the reserve. As
indicated above, Mr. Murray did not leave Gatineau every time an important
decision had to be made.
[75]
I also do not accept
Mr. Murray's claim that he received management fees only for the management
activities carried out and decisions made on the reserve. In my opinion, he
created an economic fiction that is not supported by the evidence. I cannot
accept this practice that does not reflect reality.
[76]
Moreover, Mr. Murray
did not have any records regarding the management activities carried out on the
reserve and off reserve. Aside from Mr. Murray's testimony, there is no
evidence regarding the proportion of activities performed on or off reserve.
Additionally, since Mr. Murray was paid all the retained earnings as management
fees at the end of each year, it is impossible for me to attribute certain amounts
to the place the management activities were performed.
(v) Location of the debtors (clients) and place
payments are made
[77]
Mr. Murray received
management fees from the companies in consideration for the management
activities he performed. To analyze this connecting factor, it must be
determined whether the companies are located on reserve or off reserve. At the
hearing, the parties made submissions regarding the residence of the companies.
Determining the residence of a corporation is essentially a question of facts
and circumstances. According to De Beers Consolidated Mines Ltd v How, "a
company resides for purposes of income tax where its real business is carried
on ... and the real business is carried on where the central management and
control actually abides." This criterion refers to the power to control
and manage the corporation that is held by the board of directors at the
location where important decisions are made.
[78]
Mr. Murray was the
sole director of the companies, except for a short period during which he had
appointed his wife as vice-president. The evidence shows that he was the only
one who made the important decisions regarding the companies. As mentioned
above, the evidence shows that Mr. Murray spent the majority of his time off
the reserve in the Outaouais region. He even admitted that he made most of his
decisions off reserve because he not only lived in the Outaouais region but was
also present in his Gatineau stores or office. Therefore, in view of the
evidence, I am convinced that the central management and control of the companies
was off reserve, namely in Gatineau. As a result, the residence of the debtors
of the management fees, namely the companies MTC and MCF, were located off
reserve.
[79]
As for where the
payment of the management fees took place, the evidence shows that they took
place in Mr. Murray's bank account at a branch of the Royal Bank in Ottawa. The
funds remained in that account. Moreover, the evidence showed that the
accountants who acted for the companies and for Mr. Murray were also located in
Ottawa.
(vi) Residence of the person operating the
business
[80]
At the hearing, the
parties did not hold back in their efforts to present a variety of evidence regarding
Mr. Murray's residence. However, I must note certain contradictions
between Mr. Murray's pleadings and his testimony:
• In his first notice of
appeal dated May 27, 2009, Mr. Murray stated at subparagraph 6(f) that he
resided on the reserve at 204 Sainte-Sophie Street, in Oka.
• In his re-amended notice
of appeal dated September 17, 2012, Mr. Murray stated he resided on the
reserve in the family home at 204 Sainte‑Sophie Street and/or at 84
Notre-Dame Street, in Oka.
• At the hearing, Mr. Murray
stated he owned the ancestral home and store located at 84 Notre-Dame Street.
However, he resided in the Outaouais region, but only received management fees
for the management activities her carried out when physically present on the
reserve.
[81]
As to the determination
of the situs of business income, the residence of the debtor is not a
preponderant factor.
It is, however, important to take it into consideration for the analysis. The leading
case on this issue is Thomson v Canada in which the Supreme Court of
Canada indicated that the residence of a taxpayer is an issue of fact that
depends on the specific circumstances of each case. Although the criteria
usually apply in an international context, I believe it is possible to apply
them here. Among the criteria that help determine whether a person resides or
usually resides in a place, the general way of life and physical presence must
be considered. In an article called "La résidence des particuliers au
Canada : critères jurisprudentiels" ["Residence
of taxpayers in Canada: legal criteria"], Professor Marie‑Pierre Allard
makes a distinction between [translation]
"significant connections"
and [translation] "secondary connections" regarding
residence. After analyzing all the case law regarding the residence of
taxpayers in the past 20 years, she comes to the conclusion that the courts
almost always base their decision on the primary connections and that secondary
connections are not considered deciding factors in themselves when there are no
strong primary connections. Therefore, primary connections including available
accommodations, presence of a spouse or dependent children and place of
employment are very important factors when determining the residence of a
taxpayer.
[82]
The evidence shows that
Mr. Murray always maintained an available residence at 204 Sainte-Sophie Street
on the reserve. However, from 1999 to 2003, he lived in many residences off
reserve, mainly in the Outaouais region. Throughout his testimony, Mr. Murray
emphasized the fact he considered his residence to be, and to always have been,
the ancestral house at 204 Sainte-Sophie Street, even during his stay in the United
States. He stated that his intention is for this to be his residence for his
entire life. Mr. Murray's intention, however, is not supported by the facts. On
one hand, the evidence shows that Mr. Murray is very rarely present at 204 Saint-Sophie Street. During the years in question, he resided in four houses or
apartments, all located in the national capital region. On the other hand, during
the years in question, Mr. Murray's wife and her daughter also lived in
properties off reserve. In terms of secondary connections, the evidence showed
that Mr. Murray's entire way of life revolved around the national capital
region. His various affiliations with sporting clubs, his bank accounts and his
numerous credit card statements submitted to evidence all clearly show that Mr. Murray's
general and usual way of life was very closely linked to this region.
Therefore, in light of the evidence, I find that Mr. Murray resided in the
Outaouais region. Although he has a driver's licence and health insurance card
indicating 204 Sainte-Sophie Street, I feel that 204 Saint-Sophie is merely a
postal address for Mr. Murray. All the determining factors for a residence
point in the same direction and situate Mr. Murray's residence in the Outaouais
region for the years in question.
(vii) Place where the books are kept
and location of the banks holding the bank accounts
[83]
Aside from a few
documents submitted during the hearing, Mr. Murray did not keep any records
or books regarding the operation of his management services business for the companies.
This factor, therefore, does not apply in this case. Mr. Murray stated
that the companies' books and records were located on the reserve, but did not
specify which ones. According to Ms. Thibault's testimony, the books and
records were kept at the offices at 25 Eddy Street, in Hull. Moreover, the
evidence showed that the companies' affairs were administered by accountants in
Ottawa. Mr. Murray had even hired a comptroller who also worked in the
stores located in the Outaouais.
(viii) The
commercial mainstream
[84]
In Bastien Estate,
Cromwell J. warns against using the "commercial mainstream" ("marché
ordinaire") principle as a key connecting factor when determining that
income is not situated on a reserve. At paragraph 54, the Court indicates that
even if earned in the commercial mainstream, the income could be sufficiently
connected to the reserve to be tax exempt. Mr. Murray notes that this
connecting factor is not relevant because, in the light of the ABPP, the companies
are not part of the commercial mainstream. I agree with Mr. Murray that this
connecting factor is not relevant. However, the companies MTC and MCF must not
be confused with Mr. Murray's management services business. The ABPP applies to
the companies and not to Mr. Murray's management services business. The
contracts resulting from the setasides under the ABPP are entered into by the companies
MTC and MCF and a federal government department. I do not have to determine the
situs of the companies' income in this appeal; therefore, I do not have
to determine whether the income of the companies is part of the commercial
mainstream. At any rate, if the connection between the management fees and the
reserve were strong enough for me to confirm that they are situated on the
reserve, the management fees would be tax exempt regardless of whether they are
part of the commercial mainstream or not.
The ABPP as connecting factor
[85]
Mr. Murray submits
that the ABPP is also a relevant connecting factor since it was because of the
ABPP that MTC and MCF were profitable and he received the management fees. According
to Mr. Murray, the ABPP encourages Aboriginal businesses; it thereby encourages
Aboriginal development and the resulting income should not be taxed.
[86]
The ABPP is not a
connecting factor in this appeal.
[87]
The ABPP policy
established by the Treasury Board aims to encourage the development of
Aboriginal businesses by increasing their share of the contracts entered into
with federal departments and organizations. This is a policy that appeals to
the federal government procurement system to help Aboriginal businesses expand.
Under it, federal departments and organizations are required to set aside
orders for Aboriginal businesses if the goods and services are destined for
Aboriginal populations and if their value is greater than a given threshold. In
cases where the goods and services are not destined for Aboriginal populations,
the policy allows for setasides; in these cases, the departments can set aside
orders for the Aboriginal businesses, but it is not mandatory. That being said,
departments are encouraged to participate and must establish objectives with
regard to this policy. In the present appeal, the companies bid on setasides,
since the products sold by MTC and MCF were not destined for Aboriginal markets.
[88]
According to the
policy, it is not essential for the setaside bidders to be situated on a
reserve. The ABPP does not require that the goods be sold on a reserve or for
the income from these goods to be generated on a reserve.
[89]
Additionally, Mr.
Murray's claim disregards the corporate and legal reality of the companies. It
was the companies that bid on the contracts under the ABPP, not Mr. Murray. The
companies are legal vehicles and have a character that is different from that
of their shareholders and directors. Mr. Murray, as the companies' shareholder,
cannot rely on the ABPP, even if it connected the companies' income to the
reserve. The companies' profits are not legally equivalent to the management
fees and benefits conferred on Mr. Murray; their tax treatment is different.
Analysis of
connecting factors from the employment income perspective
[90]
At paragraphs 58 et.
seq. of these reasons, I concluded that, under the circumstances of this
case, the property in question must be considered as business income rather
than employment income. However, even if the property were considered
employment income, this income would still be situated off reserve according to
the criteria established by the case law.
[91]
By applying the specific
connecting factors to employment income, we reach the same conclusion. On one
hand, the place the management duties were performed has already been
established. The vast majority of management duties were performed in the
Outaouais region. The nature of the duties and the circumstances, namely the
management of the off-reserve companies, were similarly performed. The
activities generating employment income also take place off reserve in Gatineau.
[92]
The location of the
debtor companies is off reserve in Gatineau. The majority of the companies' income
is generated by the Gatineau stores. The nature of the work Mr. Murray
performed is such that he is present in his Gatineau stores. Because of the magnitude
of the Gatineau establishments' income, Mr. Murray must ensure their proper
operation and must be physically present in Gatineau. His employment income was
generated by the work performed at the Gatineau establishments. Mr. Murray
makes more decisions in Gatineau than on the reserve. The companies' and Mr.
Murray's bank accounts are at a branch of the Royal Bank in Ottawa. The debtor
companies MTC and MCF deposited the management fees to Mr. Murray's bank
accounts in Ottawa. The companies' and Mr. Murray's accountants are also in
Ottawa. During the years in question, Mr. Murray also resided off reserve
in the national capital region.
[93]
The benefits conferred,
or their source, come from the income of the Gatineau companies. Moreover, the
expenses were incurred for Mr. Murray's benefit. As shown by the evidence,
almost all the expenses were incurred by Mr. Murray off reserve.
[94]
Regardless of the
significance of one or the other of these various factors, they all situate the
employment income off reserve. Finally, the argument regarding the ABPP cannot
apply in an employment income context. Therefore, my finding in this case would
not be different even if it were employment income.
Section 90 of
the IA
[95]
Subsection 90(1) of the
IA provides for a presumption under which certain property, in certain
circumstances, are situated on a reserve:
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.
[96]
The words "Indian
moneys" is defined as follows at section 2 of the IA:
“Indian moneys” means all moneys collected, received or held by Her Majesty for the
use and benefit of Indians
or bands.
[97]
In the present appeal,
for paragraph 90(1)(a) of the IA to apply, Mr. Murray must show that the
management fees and advantages conferred were purchased by Her Majesty with
Indian moneys or moneys appropriated by Parliament for the use and benefit of
Indians or bands. My view is that paragraph 90(1)(a) does not apply in
the present appeal.
[98]
First, Mr. Murray did
not submit any evidence that the money used by the federal departments and
agencies to purchase the office supplies and furniture was "Indian moneys"
according to the definition at section 2, namely moneys collected, received or
held by Her Majesty for the use and benefit of Indians or bands.
[99]
Second, no evidence was
submitted during the hearing showing that the moneys were appropriated by
Parliament for the use and benefit of Indians or bands pursuant to the ABPP.
The ABPP is a Treasury Board policy that encourages federal departments and
agencies to participate in the development of Aboriginal businesses by
purchasing from these businesses. There is no mention in this policy that
moneys had been voted by Parliament for the purposes of the ABPP. Considering
the lack of such evidence, it is logical to assume that the amounts the federal
departments and agencies used to purchase the furniture and supplies from the
Aboriginal businesses were amounts that were part of the "existing"
budget envelope of these departments and agencies.
[100]
Moreover, as the
respondent noted, even if the federal departments and agencies had been considered
to have used Indian moneys within the meaning of section 2 to purchase
office supplies and furniture from the companies, it would be this property that
is deemed to be situated on the reserve and not the management fees and
benefits conferred on the shareholder. Once again, the corporate structure of
the companies cannot be ignored.
[101]
Lastly, a point to
remember is that the property that must be situated on the reserve consists of
the management fees and benefits conferred on Mr. Murray and not the office
supplies and furniture sold by the companies. Section 90 simply does not apply
in this case.
Conclusion
[102]
To determine whether
the management fees and amounts representing the benefits conferred on Mr.
Murray are situated on the reserve, I reviewed and assessed the weight to be
granted to the relevant connecting factors, while keeping in mind the purpose
of the exemption, the type of property in question and the nature of the
taxation of that property.
[103]
The connecting factors
that are relevant in the present appeal, those that will assist us in
determining the location of the management fees and benefits conferred on Mr.
Murray, are the place where the income is generated, the place the business
operates, the place where services are rendered, the location of those
receiving the services, the location of the debtor businesses, the place where
payments are made and the place where decisions are made. The other connecting
factors, such as Mr. Murray's residence and the place the companies' books
are kept, do not play an important role in this appeal, although they help
confirm the decision made regarding the situs of the property.
[104]
Contrary to the Supreme
Court of Canada decision in Bastien Estate, which held that the place the
income is generated was not a relevant connecting factor, I am of the view that
the place where the income is generated is an important connecting factor in
this appeal. This is not passive income as was the case in Bastien Estate,
but business or employment income, or "active income".
[105]
Mr. Murray spends
the majority of his time in the Outaouais; he lives in the Outaouais and the
nature of his management activities requires him to be close to his businesses.
The majority of the work that leads to the management fees is performed in the
stores located in Gatineau. As I have indicated above, the activities that
generate Mr. Murray's business income are, by their very nature, inseparable
from the individual.
[106]
As for the other
relevant connecting factors, I found that the majority of the management
services were performed in Gatineau by Mr. Murray. The same reasoning
would apply if it were employment income. Mr. Murray worked mainly in Gatineau for
the benefit of the companies MTC and MCF. We must note that the debtor
companies MTC and MCF not only had their business establishments in Gatineau, but
they were also residents of Gatineau. These establishments generated nearly all
of the income for the years in question. It would be difficult to find that the
management services were not performed predominantly for the companies in Gatineau,
particularly because the evidence established that Mr. Murray spends the
majority of his time in the Outaouais. With regard to the decision making,
Mr. Murray admitted he made more decisions off reserve than on reserve.
Moreover, the companies MTC and MCF deposited the management fees to Mr. Murray's
bank account situated in Ottawa. The clients of the debtor companies MTC and
MCF, the federal departments and agencies, are also situated in the Outaouais
region.
[107]
As for the other
connecting factors, such as Mr. Murray's place of residence, the companies'
books and bank accounts, the applicability of section 87 depends on whether the
property in question, not its owner, is situated on a reserve. Therefore, Mr.
Murray's place of residence is not a determining connecting factor although the
evidence shows that, during the years in question, Mr. Murray resided in the
national capital region. As for the companies' bank accounts, the evidence also
shows that they are situated in Ottawa. With regard to the companies' books,
the evidence is contradictory. Although these connecting factors are not determinative
because they do not help determine whether the property is situated on reserve,
they support my finding that the income Mr. Murray earned was not situated on a
reserve.
[108]
With regard to the ABPP
as a connecting factor, I explained in these reasons why I am of the view the
ABPP is not a connecting factor. I also explained in these reasons why section
90 does not apply in the present appeal.
[109]
The only connecting
factors between Mr. Murray and the reserve are the companies' head offices,
which are situated on the reserve, the fact Mr. Murray is the owner of the
ancestral house situated on the reserve and the fact the companies operate an
office supplies store on the reserve in a building owned by Mr. Murray. The
first two connecting factors are not determinative, because they do not
determine the location of the property.
[110]
With regard to the
business establishment situated on the reserve, unfortunately, aside from Mr.
Murray's testimony alleging that he spent 25% of his time on the reserve
performing management activities, which is challenged by the respondent, there
is no record or description of the on-reserve activities. I cannot make any
determinations about time or finances with regard to Mr. Murray's on‑reserve
activities. Testimony by his sister Ginette and his wife would surely have been
useful here. I also cannot determine whether the management fees are partially
from the store situated on the reserve since the income from this store does
not seem to be included in the companies' financial statements. Therefore, in
the light of the evidence, it is impossible for me to conclude that part of the
management fees were generated on the reserve.
[111]
During the hearing, Mr. Murray
said that it was "by design" that he received management fees only
for the management activities performed when he was present on the reserve, and
he submitted that the Canadian tax law allowed him to organize his business in
such a way as to minimize his taxes.
[112]
I cannot agree with
this argument. As I mentioned above, Mr. Murray's testimony indicates that he
created an economic fiction that does not correspond to factual reality; this
allowed him to obtain a tax-exempt income under section 87 of the IA. In this
appeal, the only issue to address was whether the management fees and amounts
representing the benefits conferred on Mr. Murray were situated on a reserve
pursuant to the method stated by the Supreme Court of Canada in Bastien
Estate.
[113]
Regarding the penalties
for late filing, they are maintained, because Mr. Murray neglected to file
his tax returns for 2001 and 2002 within the prescribed timelines.
[114]
In the light of these
reasons, the appeal is dismissed for the 2001, 2002 and 2003 taxation years,
with costs.
Signed at Toronto, Ontario, this 20th day of August 2013.
"Johanne D’Auray"
Translation
certified true
Francois Brunet,
Revisor
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