REASONS
FOR JUDGMENT
Woods J.
I. Introduction
[1]
During the relevant period, Helen Bell, a status
Indian, was entitled to a tax exemption under the Indian Act in respect
of personal property situate on a reserve.
[2]
This appeal under the Income Tax Act concerns
Ms. Bell’s entitlement to the exemption with respect to annual bonuses received
by her from Reel Steel Ltd. (“Reel Steel”). The question is whether the bonuses
are situate on a reserve.
[3]
Reel Steel is a construction company that is
owned and operated by Ms. Bell and her spouse, Michael Bell. Mr. Bell is
not a status Indian and does not qualify for the tax exemption.
[4]
Reel Steel is a subcontractor that specializes
in placing rebar (reinforcing steel) in high rise buildings. During the
relevant period, which was from 2005 to 2008, Reel Steel employed up to 50
individuals on various construction sites, mainly in Greater Vancouver and in
the B.C. southern interior. Almost none of the construction sites were located
on reserves.
[5]
Mr. Bell worked on the construction sites in the
Greater Vancouver area. Ms. Bell worked in Reel Steel’s office, which in the
relevant period was located on a reserve.
[6]
Reel Steel paid regular bi-weekly employee
remuneration to Ms. Bell and her spouse. During the years at issue, Reel Steel
also paid the balance of its annual income to Ms. Bell in the form of year end
bonuses.
[7]
For income tax purposes, Reel Steel claimed
deductions for the regular pay and the bonuses and these deductions were
allowed by the Minister. As for Ms. Bell, she claimed the tax exemption
with respect to her regular pay and the bonuses. The Minister allowed the
exemption with respect to the regular pay and disallowed the exemption with
respect to the bonuses.
[8]
The issue to be decided is whether the
Minister’s treatment of the bonuses was correct. The assessed amounts are
slightly less than the actual bonuses paid but nothing turns on this in this
appeal.
[9]
Ms. Bell was also reassessed with respect to
alleged shareholder benefits and this issue was resolved by the parties prior
to the hearing.
[10]
In order to limit confusion in the discussion
below, I will refer to Ms. Bell as the “Appellant” and to Mr. Bell as “Mike.”
II. Legislative
framework
[11]
A tax exemption for property situate on a
reserve is provided for in paragraph 87(1)(b) of the Indian Act.
Subsection 87(1) reads:
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.
[12]
The exemption has proven difficult to apply in
respect of intangible property, and of course the bonuses at issue are
intangible property. The Supreme Court of Canada last provided guidance with
respect to this in Bastien Estate v. The Queen, 2011 SCC 38.
[13]
More recently, the Federal Court of Appeal
encapsulated the general principles from Bastien Estate into seven basic
propositions, although it noted that these are not exhaustive: Kelly v. The
Queen, 2013 FCA 171.
[14]
The seven basic propositions are reproduced
below.
(a)
Always implement the
statutory language.
(b)
In cases of
non-physical property, certain factors, known as connecting factors, are useful
indicia of location.
(c)
The relevance and
weight of the connecting factors depend on the type of property, the nature of
the taxation of the property, and the purposes behind section 87.
(d)
The type of property
must be properly identified and factored into the analysis of relevance and
weight.
(e)
The nature of the taxation
must be properly identified and factored into the analysis of relevance and
weight.
(f)
The purposes of the
section 87 exemption must be properly identified and factored into the analysis
of relevance and weight. In general, the purpose is “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” (Kelly,
para. 42).
(g)
Beware of artificial or
abusive connections. If there is an artificial or abusive connection it may be
appropriate for the substance to predominate rather than the form (Kelly,
para. 48).
III. Background facts
[15]
A Partial Agreed Statement of Facts was filed by
the parties and is reproduced below.
A.
THE APPELLANT
1.
At all times during 2005-2008 (the “Taxation
Years”) and today, the Appellant was and is a status Indian under the Indian
Act (Canada) (the “Indian Act”).
2.
The Appellant is not, and never has been, a
member of the Capilano Indian Band.
3.
The Appellant is a member of the Dakelh
(Carrier) First Nation and is a member of the Nak’azdli Band.
4.
At all times during the Taxation Years, the
Appellant resided off-reserve for purposes of the Indian Act.
5.
During the Taxation Years, the Appellant was
married to Michael Bell, often known as Mike (“Mike”).
6.
Mike is not an Indian under the Indian Act.
7.
The Appellant and Mike have three daughters:
Angela (born in 1981), Jessica (born in 1983) and Teri-Ann (born in 1985).
8.
During the Taxation Years, the Appellant was the
majority shareholder (51%), the sole director, the President, and an employee
of Reel Steel Ltd. (the “Corporation”).
9.
During the Taxation Years, the Appellant’s
husband, Mike, was a minority shareholder (49%), the Treasurer and Secretary,
and an employee of the Corporation.
B.
THE CORPORATION
10. The
Corporation was incorporated in 1987 under the laws of British Columbia.
11. The
Corporation installs rebar for construction projects, which involves the
placing of steel before concrete is poured.
12. The
Corporation operates in the Greater Vancouver and Southern Interior areas of
British Columbia.
13. Until
November 15, 1996, the Appellant and Mike were equal shareholders of the
Corporation, each owning 50% of its shares.
14. In 1997,
the Corporation moved its office from Coquitlam, British Columbia to 100 Park
Royal South, West Vancouver, British Columbia, V7T 1A2 (the “Office”)
and at all times during the Taxation years, the Office was located at 100 Park
Royal South.
15. At all
times during the Taxation Years and today, 100 Park Royal S. was and is located
on the Capilano Indian Reservation #5, which is a reserve as defined under the
Indian Act.
16. Until June
19, 2002, Mike was the sole director and President of the Corporation. On that
date, Mike resigned and the Appellant became the sole director and President of
the Corporation.
17. At all
times during the Taxation Years, the registered and records office of the
Corporation was located off-reserve in Coquitlam.
18. At all
times during the Taxation Years, and since incorporation, the Corporation’s
bank account was located off-reserve in Coquitlam.
19. During the
Taxation Years, all of the Corporation’s customers were located off-reserve.
20. During the
Taxation Years, the Corporation did not have any First Nations customers.
C. INCOME
OF THE APPELLANT
21. At all
times during the Taxation Years, the Appellant performed most of her duties of
employment on a reserve at the Office.
22. The
Corporation paid the Appellant bi-weekly salary and lump sum amounts during the
Taxation Years in the following amounts:
|
Year
|
Aggregate Bi-Weekly
Salary
|
Lump Sum Amounts
|
|
2005
|
$79,000
|
$351,000
|
|
2006
|
$105,600
|
$257,500
|
|
2007
|
$101,760
|
$715,000
|
|
|
|
|
23. For all
the Taxation Years, the Taxpayer claimed such income was exempt from taxation
pursuant to section 87 of the Indian Act.
24. The lump
sum amounts paid by the Corporation to the Appellant were close to or exceeded
100% of the Corporation’s net income.
25. The
Company’s net income, as per its financial statements, prior to the lump sum
payments was $358,636 , $215,970, $697,870 and $1,959,405 in its taxation years
ending in 2005, 2006, 2007 and 2008, respectively;
26. The
Corporation characterized the lump sum amounts as employment income to the
Appellant.
27. The Corporation
paid Mike bi-weekly salary during the Taxation Years totalling the following
amounts:
|
Year
|
Aggregate Bi-Weekly Salary
|
|
2005
|
$75,150
|
|
2006
|
$101,282
|
|
2007
|
$103,760
|
|
|
|
28. During the
Taxation Years, the Corporation did not pay any lump sum amounts to Mike.
D. REASSESSMENTS UNDER APPEAL
29. On May 27, 2005, June 1, 2006, May 31, 2007, July 17, 2008
and June 15, 2009, the Minister of National Revenue (the “Minister”) initially
assessed the Appellant’s 2004, 2005, 2006, 2007 and
2008 taxation years, respectively, and accordingly issued
notices on those dates.
30. On April 3, 2009, the Minister reassessed the Appellant’s
2004, 2005 and 2006 taxation years and on March 25,
2010, the Minister reassessed the Appellant’s 2007 and 2008 taxation years, and accordingly issued notices on those
dates, among other amounts no longer in issue in this appeal, so as to include
in her taxable income in the lump sum amounts paid to the Appellant by the
Corporation in the amounts of $351,000, $257,500, $613,240 and $1,804,850 for
2005, 2006, 2007 and 2008, respectively, under section 5 of the Income Tax
Act.
31. The
Minister allowed the bi-weekly salary amounts paid to the Appellant by the
Corporation to be exempt pursuant to section 87 of the Indian Act.
32. For each
of the relevant Taxation Years 2005, 2006, 2007 and 2008, the Minister assessed
or reassessed the Corporation on the basis that the bi-weekly salary and lump
sum amounts paid to the Appellant were deductible from the Corporation’s income
under the Income Tax Act.
33. On June 30, 2009, the Appellant served on the
Minister a notice of objection to the above reassessments with respect to the
2004, 2005 and 2006 taxation years and on June 18, 2010, the appellant served
on the Minister a notice of objection to the above reassessments with respect
to the 2007 and 2008 taxation years.
34. On February 19, 2013, the Minister confirmed the above reassessments, and accordingly issued
a notification on that date which stated that the lump sum amounts “have been
concluded to constitute business income, shareholder benefit or appropriations,
or dividends”.
[16]
I will supplement the agreed facts with some
background.
[17]
Reel Steel had a modest beginning as a 2 person
company, Mike and the Appellant. Mike had been a rebar installer from a young
age and in 1986 he was off work due to injury. After about six months, Mike was
not given clearance to return to employment. This led to the decision that he and
the Appellant start a rebar installation business together.
[18]
The idea was that Mike would work in the field
placing rebar and the Appellant would take care of everything else that had to
do with the legal and financial aspects of starting a company.
[19]
Initially, Reel Steel did small residential jobs
for a corporation called Heritage Steel, following a lead from the Appellant’s
brother.
[20]
Reel Steel then decided to undertake larger jobs
and shifted its work from Heritage Steel to Lafarge and then its successor
Harris Steel. In the relevant period, Harris Steel and its affiliates (collectively,
“Harris Steel”) were Reel Steel’s main customers.
[21]
Reel Steel’s projects during the period at issue
consisted mainly of high rise office and residential towers, and they had up to
50 employees working in the field. The business grew by word of mouth and Reel
Steel had an excellent reputation in the industry. This was no doubt due to
many factors but one thing stood out from the testimony – Mike had a prodigious
work ethic and he expected much of himself and the other employees working in
the field. Throughout Reel Steel’s history, all of the field employees,
including Mike, continued to work as installers in addition to other duties
they may have had (e.g. foremen, field supervisors).
[22]
In 2007 and 2008, Reel Steel obtained a very
large project through Harris Steel which involved placing rebar for 10 high
rise residential buildings as part of the Olympic Village for the Vancouver Olympic
games. This project was responsible for Reel Steel’s significant jump in
earnings in 2008.
[23]
As for the Appellant, for the first ten years of
Reel Steel’s existence, she worked at various office locations for Reel Steel in
Coquitlam, B.C., where the Bells resided.
[24]
The Appellant had been advised that her
remuneration from Reel Steel would qualify for a tax exemption under the Indian
Act if she worked on a reserve. She decided to act on this in 1996 at which
time she obtained her status card as an Indian and Reel Steel’s office was
moved to the Capilano Indian Reservation #5 (the “Capilano Reserve”) in West
Vancouver. The location was not as convenient for the business but it was
manageable. The Appellant did not have a prior connection with this reserve.
[25]
As mentioned earlier, Reel Steel’s construction
work was located in two main locations – the Greater Vancouver area and the
B.C. Southern Interior. Almost none of this work took place on a reserve.
[26]
In addition to the office on the reserve, Reel
Steel had use of storage facilities on reserves. The main storage facility was a
rental unit adjacent to the office which was used for general office storage
and construction supplies. Another storage facility was rented on a reserve in
the southern interior for the work in that part of the province.
[27]
Reel Steel also employed a long-time administrative
assistant for the Appellant. The assistant, Lil Saranchuk, was originally a
friend of the Appellant’s and she was employed full time in the office during
the period at issue.
[28]
From the time of its incorporation, Reel Steel’s
shares were held by the Appellant and Mike on a 50/50 basis. At that time, Mike
was the sole director and President.
[29]
Beginning around the time of the move of the
office to the reserve, certain changes were made to the management structure,
as follows.
(a)
In November 1996, the
shareholdings of Reel Steel were changed from 50/50 to 51 percent for the
Appellant and 49 percent for Mike.
(b)
In 2002, the Appellant became
the sole director and President of Reel Steel, replacing Mike in these roles.
(c)
Effective January 1,
1997, the Appellant and Mike each entered into services agreements with Reel
Steel. Under these agreements, the Appellant’s services were to include the supervision
and management of the business and financial activities of Reel Steel and
Mike’s services were to include the planning and scheduling of the rebar
activities and placing the rebar. For these services, the Appellant and Mike
were each to be paid an equal sum of $4,500 per month, plus benefits. In
addition, the Appellant was to be paid 50 percent of Reel Steel’s estimated
annual income by way of bonus. Mike’s contract did not provide for bonuses.
[30]
The actual amounts paid as bonuses to the
Appellant in the taxation years at issue were 100 percent of estimated income,
which is twice the amount provided for in the 1997 agreement.
[31]
The bonuses were not paid in cash, but were made
by way of an increase to the Appellant’s shareholder loan account with Reel
Steel. This increase in debt was implemented by way of a ledger entry made by
the accountant who annually prepared Reel Steel’s general ledger, financial
statements and tax returns.
IV. Issue
[32]
The only issue to be decided is whether the
bonuses are sufficiently connected to the Capilano Reserve so as to be situated
on a reserve for purposes of the exemption.
V. Positions
of the parties
A. Position of the Respondent
[33]
The Respondent submits that the bonuses are not remuneration
from employment but are business earnings from a rebar installing business.
These earnings are included in the Appellant’s income as business income under
section 9 of the Income Tax Act.
[34]
The Respondent further submits that the bonuses are
not situate on a reserve regardless of whether they are characterized as
employment income or business income.
[35]
The Respondent submits that, if the bonuses are
characterized as business income, the business income lacks sufficient connecting
factors to a reserve because Reel Steel’s business activities did not take
place mainly on reserves.
[36]
The Respondent also submits that, if the bonuses
are characterized as employment income, they are not strongly connected to a reserve.
It is suggested that since the establishment of the office on the reserve was
tax-motivated, it was an improper manipulation of the connecting factors test
and the office should not be considered a significant connecting factor.
B. Position of the Appellant
[37]
The Appellant submits that the Respondent should
not be permitted to argue that the bonuses are business income. She submits
that this would be unfair because she was assessed on the basis that the
bonuses were employment income and the Respondent did not take a different
position in the Reply.
[38]
As for whether the bonuses are situate on a
reserve, the Appellant submits that the connecting factors point more toward
the bonuses being situate on the Capilano Reserve. It is there, the Appellant
suggests, that she predominately performed her employment duties and where
important management decisions took place.
[39]
Finally, the Appellant submits that issues of
impropriety and artificial connections have no bearing on a case such as this.
They are only relevant if the Crown alleges sham or that the general
anti-avoidance rule applies: Shilling v. The Queen, 2001 FCA 178.
VI. Analysis
[40]
In order for the Appellant to succeed in this
appeal, there must be significant substantive connections between the bonuses
and the Capilano Reserve.
[41]
The Appellant submits that the duties she
performed at the office and the important meetings that took place there
between the Appellant and Mike are sufficient significant connections.
[42]
The relevance and weight of connecting factors depend
on the type of property at issue, the nature of the taxation of the property,
and the purpose of the exemption.
A. Type of property
[43]
The property at issue is the bonuses that were
paid to the Appellant in an amount equal to the balance of the estimated annual
income of Reel Steel.
[44]
The Respondent submits that the bonuses are
business income which are taxed under section 9 of the Income Tax Act. This
argument, as I understand it, is that the Appellant was carrying on the rebar installing
business that produced the income that enabled the bonuses to be paid.
[45]
The problem with this argument is that the rebar
business was carried on by Reel Steel and not by the Appellant. This is a
classic case of piercing the corporate veil which is not appropriate unless
there are facts to support the finding that the Appellant was actually carrying
on the rebar business. The evidence does not support this.
[46]
I would also comment that the judicial decision
that the Respondent relied on was based on different facts. In that case, the
taxpayer actually was carrying on a business: Pilfold Estate v. The Queen,
2013 TCC 181, aff’d. 2014 FCA 97. These are not the facts in this case.
[47]
Further, this argument is not in the Reply. To
the contrary, there is an admission in the Reply that the bonuses are paid by
virtue of employment (para. 1 of Reply). It would be unfair for the Respondent
to take a different position at trial without setting forth the argument in the
pleadings.
[48]
The Respondent submits that admissions are not
binding on the Court (Hammill v. The Queen, 2005 FCA 252). This is no
doubt true, but it does not address the problem that the issues between the
parties should be set out in the pleadings. This was not done in this case with
respect to the type of property. I would also note that in Hammill the Court
comments that Courts will not generally look behind admissions made by a party.
[49]
For these reasons, I conclude that for the
purpose of this appeal the property at issue is remuneration from employment.
B. Nature of taxation of property
[50]
The bonuses are included in the Appellant’s
income under subsection 5(1) of the Income Tax Act, which reads:
5 (1) Subject
to this Part, a taxpayer’s income for a taxation year from an office or
employment is the salary, wages and other remuneration, including gratuities,
received by the taxpayer in the year.
C. Purpose of the exemption
[51]
As noted above, the general purpose of the
exemption in paragraph 87(1)(b) of the Indian Act is “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” (Kelly, para. 42).
D. Weight of employment connecting
factor
Overview
[52]
The Appellant submits that her employment duties
carried out at Reel Steel’s office are a strong connecting factor that link the
bonuses to a reserve.
[53]
The problem with this submission is that, as
discussed below, the Appellant already received adequate compensation for her
employment in the form of bi-weekly pay. The bonuses are on top of reasonable
compensation.
[54]
The purpose of the exemption is to protect an
Indian’s entitlements from reserve land. On the facts of this case, the bonuses
are not an entitlement from reserve land by virtue of the Appellant’s
employment because there is no substantive connection between the land and the
bonuses.
[55]
Further, I find that it is abusive of the
exemption for the Appellant to receive bonuses which exceed reasonable
remuneration. Reel Steel has undertaken a transaction
that has the appearance of a strong connection between the bonuses and the employment.
In reality, there is no substantive connection. This is abusive.
Bonuses are not
reasonable remuneration
[56]
In the previous section, I comment that the
bonuses exceed reasonable remuneration. I now set out my reasons for this
conclusion.
[57]
First, there was no evidence to support that the
bonuses were reasonable remuneration or that the bonuses were even intended by
the parties to reasonably compensate the Appellant for her duties of employment.
The reasonable implication in all the circumstances, including the amount of
the bonuses, is that they were paid for tax reasons, namely, to avoid income tax
at both the corporate and shareholder level.
[58]
Second, the Appellant received remuneration through
her bi-weekly pay that was roughly equivalent to Mike’s remuneration, except
for 2008 when the Appellant’s regular pay exceeded Mike’s. In order for the
bonuses to be reasonable in the circumstances, the Appellant should have made a
greater contribution to Reel Steel than Mike. As discussed below, I find that
the evidence does not support this.
[59]
Both the Appellant and Mike had important roles
in Reel Steel. It was the combination of their hard work that made Reel Steel a
success. But the evidence does not support that the Appellant’s role was
greater.
[60]
Mike’s role, in addition to placing rebar
alongside the other construction employees, was to manage the construction
work, including dealing with customers, making sure that the projects were
appropriately staffed which including the hiring of construction workers, and
providing overall management at the sites.
[61]
The Appellant generally had two major roles. One
was to be responsible for administrative functions, such as purchasing,
invoicing, payables, receivables, payroll, banking and accounting. The other
significant role was to look after the welfare of the employees, including arranging
benefits, safety training, and reporting of injuries. The Appellant’s
contribution with respect to employees went beyond this in that she was very
active in instilling a positive corporate culture. The Appellant organized many
social events such as dinners and lunches, and she even arranged flowers for
spouses and girlfriends on Valentines’ Day.
[62]
As for the interaction between Mike and the
Appellant, the evidence suggests that they worked closely together, mainly by
phone, on daily administrative matters, such as purchasing construction-related
items, renting trailers for the job sites, and arranging employee travel for
out of town work. The nature of the business was that there were many
administrative details – and Mike clearly depended on the Appellant to provide support.
[63]
Counsel for the Appellant submitted that the
Appellant and Mike made important business decisions together. This somewhat
overstates the Appellant’s role, in my view.
[64]
It is true that Mike valued the Appellant’s
input on complex business decisions but I am not convinced that these types of
decisions were made very often. There were two complex business decisions that
Mike testified to – the contract for the Olympic Village, which occurred during
the period at issue, and a potential contract for the Brentwood Mall, which arose
more recently.
[65]
Reel Steel has operated for almost 30 years. My
sense is that the vast majority of the construction work did not involve
complex business decisions, and the decisions were made by Mike, with
administrative input from the Appellant.
[66]
The testimony below by Mike illustrates this
point (Transcript, p. 333-334).
Q Okay. And at that time, what was your process involved in
deciding whether or not you wanted to take a job or not from Harris?
A Same scenario. He would -- we would -- I would look at the
drawings, we'd determine whether or not it was something we were interested in.
The timing was always a big thing, scheduling of jobs was a big thing. And then
working it back to our man-hours per tonne. If we were doing residential jobs,
and then we were doing five in a row, you already know by the first one where
your tonnage has to be, allowing a little bit for, you know, price increase,
wage, cost of living increase. So you'd be able to figure it out whether or not
it made sense to do more at that same number, or if that number needed to
change.
Q And who was involved in that process?
A Mostly me. Mostly, yeah.
Q Okay. You would do it on your own, mostly? Or --
A The actual -- if it was a residential building that was going,
right, and we were just going to continue on, yes, I would be involved. If
there was something that was different, a hiccough, we did some out of town
work. When we get into stuff like that, with Harris, everything changes,
because how you have to cost out living out, and you have to cost out all of
that. And that was all done by Helen in the office. We'd do it together.
Q Okay. And how would you do it together?
A At the office, normally, or over the phone. I would phone her
and say, "This is what we're going to be doing. We have to look at finding
a place for a year in this town." I know we've rented -- or she rented,
sorry, some out-of-town properties. We did some work in Vernon, some in
Princeton, some in Whistler. And those were things that the company had to --
lodging for our guys while they were there.
Q Okay. And that's the process involved in how you got jobs from
Harris through 2005 to 2008.
A Yes. Yeah.
[67]
I conclude that the Appellant played an
administrative role with respect to the construction contracts, with very limited
exceptions.
[68]
The key factual findings above are based to a
large extent on Mike’s testimony, which I find to be generally reliable. On the other hand,
I did not find the Appellant’s testimony to be generally reliable. She had a
tendency to grossly downplay Mike’s role and to exaggerate her own role to the
point that I had little confidence in key parts of her testimony.
[69]
Below are a few examples:
(a)
The Appellant testified
that she was the owner of Reel Steel (Testimony, p. 32). This downplays Mike’s
ownership interest.
(b)
The Appellant stated
that Reel Steel got its jobs at first through cold calls (Testimony, p. 42).
This was not mentioned in Mike’s testimony. He testified that Reel Steel’s
business started with a contract with Heritage Steel following a lead from the
Appellant’s brother.
(c)
The Appellant testified
that construction workers were hired by field supervisors or foremen
(Testimony, p. 46). According to Mike’s testimony, he was generally responsible
for hiring the workers and determining their remuneration (Testimony, p. 343,
346).
(d)
The Appellant testified
that she “ran” Reel Steel from the office. She then
testified that Mike’s role was to lay rebar (Testimony, p. 57). The Appellant’s
counsel then prompted the Appellant to answer more completely and he asked a
question to confirm that Mike was also dealing with customers. These types of leading
questions by the Appellant’s counsel to rein in her exaggerated testimony
occurred more than once.
(e)
The Appellant referred
to Reel Steel as “my” business (Testimony, p. 74).
(f)
Regarding the Olympic
Village contract, the Appellant testified that she and Mike met at the office
for two days to discuss whether it was feasible (Testimony, p. 88, 89). I
accept this testimony, but the Appellant omitted to say that Mike also
discussed the feasibility of the job with the other employees.
[70]
In light of this difficulty, I was skeptical of
relying too much on the Appellant’s testimony for the key issues in this appeal.
[71]
I also comment that two witnesses who were
employees of Reel Steel had a tendency to exaggerate the Appellant’s role in
Reel Steel or to downplay Mike’s role. This is understandable given the
employment relationship.
[72]
One of these witnesses was the administrative
assistant, Lil Saranchuk. She testified that the Appellant made all the
decisions and Mike answered to the Appellant (Transcript, p. 436, 437). The
other witness was Glenn Watkins, a long time foreman with Reel Steel. He
testified that the Appellant’s job consisted of everything to do with the
business that does not involve picking up rebar and putting it into the slab.
This testimony clearly exaggerates the Appellant’s role and understates Mike’s
role.
[73]
Regarding the formalities of decision-making,
the Appellant became the sole director and President of Reel Steel in 2002 and
she signed an employment agreement effective in 1997 that stated she was to
supervise and manage the business. I find that this paperwork did not reflect
reality. When Reel Steel was incorporated, the Bells decided how the business
would be operated and this division of duties did not materially change when
the Appellant became the sole director and President in 2002. One exception to this was the signing of cheques, which was done
less frequently by Mike (Testimony of Ms. Saranchuk). The decision for Mike to
sign fewer cheques was likely influenced by the inconvenient location of the
office.
[74]
It is also worth mentioning that Mike worked
long hours in the business and there is no reliable evidence as to how many
hours the Appellant worked. The Appellant was clearly very involved in the
business, but it is not clear that her effort, in terms of hours, was nearly
the same as Mike’s. I would note that the Appellant had other interests in
addition to Reel Steel, including attending university and operating a leasing
business with her daughter. In addition, Glenn Watkins
testified that either the Appellant or Ms. Saranchuk were in the office on
any given day.
[75]
Counsel for the Appellant comments that Reel
Steel was permitted to deduct the bonuses in computing its income. This does
not assist the Appellant in this appeal because the Minister allowed Reel Steel
to deduct the bonuses even though, in the Minister’s view, they were not
reasonable in relation to the duties performed.
[76]
Based on the evidence as a whole, I have
concluded that the bi-weekly pay that the Appellant received was adequate (or
more than adequate) compensation for the duties that she performed.
Employment is not
a significant connecting factor for bonuses
[77]
Based on the evidence as a whole, I find that
the Appellant’s employment is not a strong connecting factor for the bonuses.
As mentioned earlier, it would run counter to the purpose of the exemption in
the Indian Act to give weight to remuneration that exceeds what is
reasonably earned on the reserve.
[78]
Finally, I would comment that I do not agree
with the Respondent’s submission that it was abusive to move Reel Steel’s
office to a reserve. It is clear on the evidence that the office was moved for
the purpose of taking advantage of the exemption. This is not abusive in my
view. This is not a case where the office has little substance; Reel Steel’s
office was substantial.
[79]
The Respondent’s argument attempts to read a
business purpose test into the Indian Act exemption. This is neither
explicit nor implicit in the legislation. If an Indian chooses to situate
property on a reserve, the income should qualify for the exemption regardless
of the individual’s motivation for doing so.
[80]
I have concluded that the payment of the bonuses
is abusive, but it is not abusive to locate the office on a reserve.
E. Are bonuses connected to
business operations carried out on a reserve?
[81]
The Appellant acknowledges that the operation of
the business may also be an important connecting factor since the bonuses are
between non-arm’s length parties. Counsel submits that important management
decisions were made on the reserve and that this is a key connecting factor
which connects the bonuses to the reserve.
[82]
I agree that the operation of the business is an
important connecting factor in this case. Given my finding that the bonuses are
not reasonable, in substance the bonuses were simply corporate distributions to
a key shareholder. In considering distributions to owner-managers, the
operations of the business should be a key connecting factor for purposes of the
exemption.
[83]
The problem is that I do not agree that the
operations of the business are predominantly linked to a reserve. To the
contrary, the operations are linked more closely to off reserve locations.
[84]
Virtually all of Reel Steel’s business is
generated and performed off reserve. Mike arranges the business contracts and hires
the employees off reserve. Reel Steel’s construction workers work mostly off
reserve. There are only two employees that work mainly on the reserve and their
role is primarily administrative.
[85]
Second, this is not a case in which joint actions
taken by the owner-managers are the key drivers of the business. For the most
part, business opportunities came to Reel Steel and it was not difficult for
Mike to make business decisions with administrative input from the Appellant.
These circumstances may be contrasted with the facts in Pilfold in which
case a key driver of the business was the owner’s efforts to obtain business contracts
which efforts took place on a reserve. Reel Steel’s business operated in an
entirely different manner. For the most part, the work came to Mike and he
arranged for it to be done, with the assistance of the office.
[86]
I find that the operation of the Reel Steel
business was more closely connected to the off reserve locations. This factor
weighs heavily in connecting the bonuses to the off reserve locations where the
construction activities were managed and performed.
F. Other connecting factors
[87]
Counsel for the Appellant referred to other
connecting factors such as the residence of Reel Steel, the residence of the
Appellant, and the location where the Appellant was paid.
[88]
In my view, the residence of Reel Steel is not a
significant connecting factor in this case. The determination of corporate residence,
which is the central management and control test, is a judge-made test designed
to determine nexus for the ability of a country to impose income tax. The exemption in the Indian Act is essentially a search for
substantive connections. This search would be needlessly muddied if the complex
test for central management and control were imported into this analysis.
[89]
In any event, I find that the central management
and control of Reel Steel is split between Mike and the Appellant. Each of them
made decisions within their area of responsibility, and occasionally the
decisions were joint. Further, the director’s role is not a substantive role in
this case. Central management and control is not predominately on the reserve.
[90]
As for the residence of the Appellant, which is
off reserve, I find that this is not a significant connecting factor with
respect to the bonuses. The residence of the Appellant really has very little
connection with the bonuses.
[91]
As for the place of payment of the bonuses, I
find that this is also not a significant connecting factor. The act of paying is
a clerical type of action that is easily manipulated. It would be contrary to
the purpose of the exemption if this were to be given significant weight.
G. Conclusion
[92]
I conclude that the bonuses paid to the
Appellant do not qualify for the exemption in paragraph 87(1)(b) of the Indian
Act. The appeal will be allowed only with respect to the issues agreed between
the parties. The Respondent is entitled to costs.
Signed
at Ottawa, Ontario this 27th day of July 2016.
“J. Woods”
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