Citation: 2012 TCC 242
Date: 20120710
Docket: 2008-2808(IT)G
BETWEEN:
REYNOLD DICKIE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Pizzitelli J.
[1]
The Appellant, a status
Indian, operated a proprietorship from a location on the Fort Nelson Indian
Reserve #2 (the “Reserve”), of which he was a member and resident of, under the
name Deer River Ventures in 2003 which carried on the business of essentially
clearing and slashing timber and brush for oil and gas companies based off
reserve to enable the latter to conduct seismic surveys in search of minerals
and oil and gas or permit pipelines (the “Business”). The Appellant was
reassessed to include his business income as taxable income. The main issue to
be decided in this case is whether the business income from the Appellant’s
Business was exempt from income tax in 2003 as being personal property situated
on a reserve within the meaning of paragraph 87(1)(b) of the Indian
Act (the “Act”) and hence exempt from taxation under paragraph 81(1)(a)
of the Income Tax Act (“ITA”). If it is found the Appellant’s
business income was not so exempt, then the Court must determine whether the
Appellant was entitled to deduct all or any portion of the sum of $161,000 as a
management fee allocated to his spouse during the 2003 year.
[2]
The relevant provisions
of the Act and ITA are as follows.
[3]
Paragraph 87 of the Act
reads as follows:
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 and
Statistical 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.
(3) No succession duty, inheritance tax or
estate duty is payable on the death of any Indian in respect of any property
mentioned in paragraphs (1)(a) or (b) or the succession thereto
if the property passes to an Indian, nor shall any such property be taken into
account in determining the duty payable under the Dominion Succession
Duty Act, chapter 89 of the Revised Statutes of Canada, 1952, or the tax
payable under the Estate Tax Act, chapter E-9 of the Revised Statutes
of Canada, 1970, on or in respect of other property passing to an Indian.
[4]
Paragraph 81 of the ITA
reads as follows:
81(1) There
shall not be included in computing the income of a taxpayer for a taxation
year,
(a) statutory exemptions [including
Indians] - 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; . . .
[5]
Paragraph 81(1)(a)
of the ITA effectively excludes from the computation of a taxpayer’s
income, any amount that is declared to be exempt from income tax by any other
enactment of Parliament, such as the Act.
[6]
I would propose to deal
with the issue of the applicability of the above mentioned Act exemption
to the Appellant’s business income first, as its applicability may render the
second issue redundant.
[7]
The facts surrounding
the first issue, of the applicability of the above mentioned Act
exemption are generally not in dispute. The Appellant, a status Indian, was a
member of and lived on the Reserve in 2003. The Appellant’s home contained the
office of the Business and the Appellant also had a shop building for the
Business next to his house on the same property as well as stored his
equipment, including Bobcat machinery in his home yard. There is no dispute
that the Appellant’s administrative centre for the business was his home
address on the Reserve. The Appellant received mail for the business at his
home office, had computers and other business equipment for the Business
stationed and operating on behalf of the Business from that location, received
inquiries by phone or email or personal visits by potential workers who wished
to work for the Business there, conducted orientation for projects for work
crews from his home office and held safety meetings there (in addition to those
held on site) before crews departed for specific work sites, negotiated the
majority of his contracts there or received requests to tender for work there,
completed the tender packages and forwarded the tender bids from that location,
received the vast majority of payment for services at such location through the
mail and paid bills from there and that is the location where his spouse, L.D.,
also a status Indian from a Vancouver Island Band, resided and performed her
duties as the bookkeeper, office manager and safety coordinator of the Business,
basically performing the role of the Appellant’s “right-hand man”. The evidence
is overwhelming that the Appellant’s home on the Reserve was the head office
and administrative centre of the Business.
[8]
While the Appellant
clearly negotiated and received accepted contracts for work from the Reserve
location, it is clear that 99% of the work was conducted off Reserve, within an
80-kilometre radius of the Reserve. In 2003, the Appellant had over 140 workers
engaged for his Business and had revenue of approximately $3.4 million.
The Appellant testified he hired mainly aboriginal workers, 16 in all from the
Reserve, and others from Reserves in other parts of British Columbia, Alberta,
Saskatchewan and even as far away as Newfoundland and Labrador. In all,
the evidence is that approximately 105 of the 140 workers were aboriginal
workers.
[9]
The Appellant testified
that the Business would bid on between 20 to 25 tenders a year and was usually
successful 20% of the time, hence was awarded four to five contract bids a
year. He also testified a small portion of the work of the Business was from
small job requests but that the great majority of the Appellant’s Business revenue
was from the larger bid contracts. The evidence is clear that all of the clients
of the Business, generally oil and gas exploration or distribution companies,
were not located or based on the Reserve and in fact most were based in Calgary, Alberta, the place of their office. The Appellant also testified that in 2003 the
Business was a competitive one, evidenced also by the fact he was only
successful on 20% of his bids.
[10]
Although the
requirements of the clients of the Business differed, the larger clients would
often send out pre-qualifying questionnaires to various competitors of and to
the Business, if interested have them enter into a general master services
agreement which set out general terms and conditions, including warranties for
work and indemnity clauses for improper performance, and then seek bids on
tenders let out and award the contract. Entering into a master services
agreement with a client did not guarantee any work but served more of acting as
standard contract terms for those contractors it pre-qualified, if a job was
awarded. Once a contract was entered into, the Appellant would assemble the
required crew by generally phoning from his Reserve office to engage workers
who were on his list generally and of course put together the necessary
equipment and tools needed to do the job, often renting additional equipment
needs from an equipment rental business in Fort Nelson, off reserve.
[11]
Workers received
orientation before leaving for a job as a crew, usually from the Reserve
offices, and each worker was required to have the necessary safety training
certification, licences to drive a vehicle and operate the necessary tools.
In general, the workers hired were already trained and qualified to
perform the duties required to fell trees and clear the land. Once on site, the
workers appear to be supervised by foremen of the Appellant who worked on site,
one for every twelve men and who acted as liaisons with the office as well as ensured
safety protocols were followed. The client also provided project managers or
supervisors on site to supervise the project.
[12]
The Appellant, through
his spouse’s duties, arranged to shop for and supply the workers with any
personal goods or commissaries they required and requested while on work sites,
the cost of which was deducted from their pay. Any such goods were generally
delivered by the Appellant’s foremen or expediters to the workers. Workers were
paid twice a month, based on hours worked each day, which were tracked by the
Client Supervisor and as well as the Business and remitted daily, and the
Business sent invoices to its clients as per the contract terms.
[13]
Payment by clients in 2003
was overwhelming by the mailing of payment by cheque through the mail addressed
to the Appellant’s Reserve office, with only two clients paying by direct
deposit to the Appellant’s CIBC bank account in Fort Nelson, British
Columbia, in that year accounting for only about $97,000 of the Business’ $3.4
million revenue or just less than 0.3% of the revenue.
Position of the Parties
[14]
The Appellant takes the
position that the facts are to be evaluated from his perspective as a
businessman operating a business from a Reserve and not from the perspective of
his workers or where their work is performed and accordingly his business income
which is his property is situated on a Reserve and hence qualifies for the
exemption under paragraph 87(1)(b) of the Act. The Respondent
takes the position that the situs of the business income is the location
where the activities to earn it occur, and basically argues that since almost
all the Appellant’s work projects are located off the Reserve, the situs
is off reserve.
The Law
[15]
There is no dispute
that business income of the Appellant is intangible property that is personal
property of an Indian.
[16]
There is also no
dispute between the parties that the test in determining whether income is
personal property of an Indian situated on a reserve is the
“Connecting Factors Test” enunciated by the Supreme Court of Canada in Williams v.
Canada, [1992] 1 S.C.R. 877 and confirmed recently by the Supreme Court
of Canada in the cases of Bastien Estate v. Canada, 2011 SCC 38, [2011]
2 S.C.R. 710 and Dubé v. Canada, 2011 SCC 39, [2011] 2 S.C.R. 764.
[17]
As Cromwell J.
confirmed in paragraph 2 of Bastien Estate, the test is a two‑step
analyses:
[2]
. . . First, one identifies potentially relevant factors tending to
connect the property to a location and then determines what weight they should
be given in identifying the location of the property in light of three considerations:
the purpose of the exemption from taxation, the type of property and the nature
of the taxation of that property. . . .
[18]
Cromwell J. stated in
paragraph 15 of Bastien Estate:
[15] The
phrase “on a reserve” refers throughout the Act to the property being within
the boundaries of the reserve. However, different legal tests are used to
determine whether various types of property are so situated for the particular
purposes. . . . An important point, however, is that regardless of the type of
property or the difficulty of ascribing to it a location, the objective must
always be to implement the statutory language, and that requires keeping the
focus on whether the property is situated on a reserve.
[19]
Before determining which
factors are relevant to connecting or not connecting the property to the
location in question, in this case the Reserve, mention must be made of the
three considerations that apply in determining the weight of such factors;
namely the purpose of the exemption, the type of property and the nature of the
taxation of that property.
The Purpose of the Exemption
[20]
Cromwell J. discussed
in detail the purpose of the exemption in Bastien Estate in
paragraphs 20 to 30 and his concerns over the manner historical jurisprudence has
allowed it to evolve; imputing purpose outside the clear wording of section 87
of the Act. In paragraphs 21 and 22, he quoted La Forest J. in Mitchell
v Peguis Indian Band, [1990] 2 S.C.R. 85:
[21] .
. . 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. . . .
[22] However,
La Forest J. was careful to emphasize that even with respect to purely
commercial arrangements, the protections from taxation and seizure always apply
to property situated on a reserve. . . .
[21]
Cromwell J. made it
clear that the expression “Indian qua Indian” referred to by La Forest
J. and Gonthier J. in Williams does not mean one can import into the
purpose of the legislation “an effort to preserve the traditional way of life
in Indian communities” or consider as a relevant factor “whether the investment
income benefits the traditional Native way of life”. While Cromwell J. found
that he did not read the judgments in Mitchell or Williams “as
departing from a focus on the location of the property in question when
applying the tax exemption”, he also found that neither decision mandated an
approach that assessed what is in fact, to use the parlance of the Appellant
here, the “Indianness” of the activity. In paragraph 27 of Bastien
Estate, Cromwell J. stated:
[27] .
. . A purposive interpretation goes too far if it substitutes for the inquiry
into the location of the property mandated by the statute an assessment of what
does or does not constitute an “Indian” way of life on a reserve. . . .
[22]
And in paragraph 28
stated:
[28] .
. ., a purposive interpretation of the exemption does not require that the
evolution of that way of life should be impeded. Rather, the comments in both Mitchell
and Williams in relation to the protection of property which Indians
hold qua Indians should be read in relation to the need to establish a
connection between the property and the reserve such that it may be said that
the property is situated there for the purposes of the Indian Act. While
the relationship between property and life on the reserve may in some cases be
a factor tending to strengthen or weaken the connection between the property
and the reserve, the availability of the exemption does not depend on whether
the property is integral to the life of the reserve or to the preservation of
the traditional Indian way of life. . . .
[23]
Likewise Cromwell J.
cautioned against elevating considerations of whether the economic activity was
in the “commercial mainstream” as a factor of determinative weight in
determining the situs of investment income, which he felt was done in Recalma
v. Canada, 98 DTC 6238 (F.C.A.) and other decisions of the lower courts, as
“problematic” as he stated in paragraph 56 :
[56] .
. . because it might be taken as setting up a false opposition between
“commercial mainstream” activities and activities on a reserve. Linden J.A. in Folster
was alive to this danger when he observed that the use of the term “commercial
mainstream” might “… imply, incorrectly, that trade and commerce is somehow
foreign to First Nations” (para. 14, note 27). He was also careful to observe
in Recalma that the “commercial mainstream” consideration was not a
separate test for the determination of the situs of investment property,
but an “aid” to be taken into consideration in the analysis of the question (para.
9). Notwithstanding this wise counsel, the “commercial mainstream”
consideration has sometimes become a determinative test. . . .
[24]
Cromwell J. reiterated
in paragraph 54 that La Forest J. in Mitchell, while noting
[54] .
. . that the purpose of the legislation is not to permit Indians to “acquire,
hold and deal with property in the commercial mainstream on different terms than
their fellow citizens”: . . . was clear that, even if an Indian acquired an
asset through a purely commercial business agreement with a private concern,
the exemption would nonetheless apply if the asset were situated on the
reserve. . . . it must be remembered that the protections of ss. 87 and 89 will
always apply to property situated on a reserve”: p. 139.
[25]
What is abundantly
clear from the Supreme Court of Canada decision in Bastien Estate is
that the mere fact a status Indian engages in business that would normally be
considered in the “commercial mainstream” does not per se preclude the ensuing
business income from being situated on a Reserve. The question to be answered
is not whether the business activity is normally considered in the commercial
mainstream nor whether it is traditionally Indian, but whether it is property
situated on a reserve. I do not read such decision to say however that the type
or nature of the business is not relevant to the discussion nor, depending on
the type of income involved, consideration of the “commercial mainstream” will
never be a relevant consideration, only that the approach cannot be to make
such consideration itself the determinative test as such approach would in fact
result in the substituting itself for the issue that must be determined; namely,
the situs of the property.
Type of Property and Nature of Taxation
[26]
There is no dispute
between the parties that it is the business income of the Appellant that is the
type of property in question and that such property is taxed on the basis of
“profits” as contemplated by subsection 9(1) of the ITA which reads:
9(1) Subject
to this Part, a taxpayer’s income for a taxation year from a business or
property is the taxpayer’s profit from that business or property for the year.
[27]
It is trite to state
that various elements factor into the determination of “profit”; namely, revenue
as well as all the component expenses a taxpayer is entitled to deduct that
were incurred for the purposes of gaining or producing income as contemplated
by paragraph 18(1)(a) of the ITA. I mention this now because, as
will become obvious later, the parties have couched some of their arguments
based on the relative weighing of the Appellant’s revenues and expenses
relative to each other.
Step One - Factors to Consider
[28]
In identifying what
relevant factors are to be considered that may connect or not connect the
business income to the Reserve, there appears to have been three decisions
dealing with business income rendered by the Courts since the decision in Bastien
Estate; all dealing with business income from fishing activities; namely
two decisions of the Federal Court of Appeal in Canada v. Robertson,
2012 FCA 94, [2012] F.C.J. No. 358 (QL) and Ballantyne v. Canada, 2012
FCA 95, [2012] F.C.J. No. 359 (QL) heard at the same time and for which
leave to appeal to the Supreme Court of Canada has been filed, and the Tax
Court of Canada decision in McDonald v. Canada, 2011 TCC 437, 2011 DTC
1314, which have all discussed relevant factors often under different headings.
The decision of the Tax Court in McDonald was released two months
after the Supreme Court of Canada’s decisions in Bastien Estate and Dubé,
while the Federal Court of Appeal decisions were released six months after McDonald.
[29]
In short, the cases
generally described and analysed the factors described in the Federal Court of
Appeal’s decision in Southwind v. Canada, [1998] 1 C.T.C 265 (FCA). In
paragraph 36 of McDonald, V. Miller J. described the factors indentified
in Southwind as being appropriate:
36 Some
of the relevant factors which connect business income to a location were
identified in Southwind v. Canada. I will discuss these same factors in
the present case while, at the same time, addressing the concerns noted by the
SCC in the Estate of Rolland Bastien with respect to the term
‘commercial mainstream’. Those factors are (1) the type of business and the
location of the business activities; (2) the location of the customers (debtors)
of the business and where payment was made; (3) the residence of the business
owners; (4) where decisions affecting the business are made; (5) place where
the books for the business are kept; (6) nature of the work and the commercial
mainstream.
[30]
Although the factors
set out in Southwind were used to structure the analyses in McDonald,
the judgments in Robertson and Ballantyne were not structured as
such but did address each of the potentially relevant factors from Southwind.
In Robertson and Ballantyne, the first two factors in Southwind
were analysed under the heading “location of business activities” but were
nonetheless addressed. Likewise, in argument, the parties have identified
factors which in some instances divide the elements of the factors in Southwind
into more numerous factors. Accordingly, I propose to analyse the Southwind
factors identified in McDonald in the same order as a good starting
point, cognizant of course that there may be other relevant factors to consider
which will be discussed under the category of “other factors” and as required
by the two-step process identified in Bastien Estate above, give weight
to them having regard to the appropriate considerations.
Step Two - Analyses of Relevant Factors and Weight
1. Type of Business and Location of Business
Activities
[31]
While the parties have
identified this category as two different factors, I propose to discuss
them under the same heading as I consider them too interrelated in the case at
hand to separate them.
[32]
The business has been
previously described as that of clear-cutting trees and brush for predominantly
the oil and gas industry to facilitate seismic testing and pipelines. The
nature of the business is in my view analogous to that of a construction
contractor or demolition contractor in that the business involves undertaking
projects located outside its offices or headquarters on which it must generally
bid on a competitive basis with its competitors located off reserve. It is in a
sense a nomadic business where the business is expected to provide its services
to different sites on a project-by-project basis. Its head office and
administrative centre is located on Reserve but it predominantly engages the
services of its operational employees off Reserve without having any physical
or permanent type base at any of those sites. The administrative employees of
the business are on the other hand located almost exclusively on the Reserve
and these include the services of the Appellant himself as owner and manager as
well as his “right-hand man”, his spouse, who is the bookkeeper, safety
coordinator and financial and administrative manager in almost every sense of
the word.
[33]
At this point, it is useful
to note that the Appellant takes the position that the business activities of
the Appellant should be seen from the perspective of the Appellant’s duties,
who, without doubt, based on the evidence, provides his managerial duties
almost exclusively on Reserve. The Respondent, on the other hand, takes the
position that the business activities of the Appellant are not the provision of
workers or human resources per se but the provision of clear-cutting services
which occurs very predominantly off Reserve under contracts for which it is
liable to indemnify the party for whom it performs work for damages if it fails
to perform its clear-cutting obligations properly. The Respondent argues that
99% of the Appellant’s $3.4 million revenue is obtained from projects conducted
off Reserve within a 20,000-kilometre area which it obtained in an open bidding
process in competition with mainstream competitors. The Respondent states that
the Appellant deployed almost all its labour and equipment on such off-reserve
projects on which its employees, both Indian and non-Indian, provided services to
off‑reserve oil and gas companies using equipment, the majority of which,
based on measure of value, was rented from off-reserve equipment providers.
[34]
In essence, the
Appellant asks the Court to focus on the situs of the management of the
business while the Respondent asks the Court to focus on the situs of
the labour activities of the business. In my view, both parties are too narrow
in their outlook. All the relevant components of the business must be evaluated
in the quest to determine the location of its business activities having regard
to the nature of the business. This approach is consistent with both the nature
of the nomadic business I have described above as well as the manner of
taxation of the property which is by taxing the profits as described above.
The Supreme Court of Canada recognized the multiplicity of components
which make up a business in Stewart v. Canada, 2002 SCC 46, [2002] 2
S.C.R. 645, at paragraph 38, referring to a quote from the case of Erichsen
v. Last (1881), 4 T.C. 422, at page 423:
I
do not think there is any principle of law which lays down what carrying on a
trade is. There are a multiple of incidents which together make the carrying on
[of]a trade, but know of no one distinguishing incident which makes a practice
a carrying on of trade, and another practice not a carrying on of trade. If I
may use the expression, it is a compound fact made up of a variety of
incidents.
[35]
Likewise, in Robertson,
the Federal Court of Appeal acknowledged that a proper analysis of the location
of the business income requires considering all components of the business. In
that case, the Court looked to both the physical activities of the Appellant’s
business (catching fish which occurred mainly off reserve as well as the
business activities (selling fish which was to an on-reserve Co-op)) and found
as a whole that the location of the business activities favoured an on-reserve
result, particularly since that Appellant sold his catch to an entity located
on reserve while his physical activities of catching fish were at best a weak
connection to the reserve since they were predominantly caught off reserve
notwithstanding that the boats departed from an on-reserve location.
[36]
In the case at hand,
there is no question that the employees other than the administrative or
managerial staff, conducted most of their activities off Reserve on the
different projects the business contracted to do. The evidence is that 99% of
the $3.4 million business revenue was earned in relation to such off-reserve
projects and that the vast majority of his $2.8 million in expenses were
incurred off Reserve; namely approximately $1.22 million in wages, $575,000 in
subcontract fees and $350,000 in equipment rental fees and other expenses
outlined in the Appellant’s financial statements. On this basis, the Respondent
suggests that the management activities of the Appellant are but ancillary to
the main thrust of its labour intensive business and could be done either off
Reserve or on Reserve.
[37]
With respect to the
Respondent, it seems to me that to simply focus on the above sales and expense
items is to ignore both the nature of the business and the other components of
the business. Firstly, the nature of the business is nomadic in the sense already
explained. The Appellant performs its contractual obligations from a labour
perspective, as the Respondent has suggested, off Reserve because that is where
the work is. This is the case for both Indian and non-Indian owned businesses
competing for this work and accordingly by its very nature, the location of the
activities cannot by itself be determinative of the situs of the
business income. This was acknowledged in McDonald at paragraph 43 by V.
Miller J.:
43 The
only fishing activity that occurred on the Reserve was the mending of gear and
the loading of the Vessels for fishing. The location of most of the fishing
activities was not on the Reserve nor was it in the inshore area close to the
Reserve. However, this factor alone cannot be determinative of the issue. As Bowie
J. remarked in Walkus v. R.,15 ‘the work could only be done
away from the Reserve, because that is where the fish are.’
[38]
To accept the position
of the Respondent on this factor would be inconsistent with the Supreme Court
of Canada’s decision in Bastien Estate where Cromwell J. made it clear
that the state of jurisprudence supports the fact that aboriginals are not
limited to activities considered traditionally Indian nor prohibited from
operating in the commercial mainstream in order to qualify for the section 87 Indian
Act exemption.
[39]
Secondly, on the facts
of this case, there is strong evidence that the managerial activities of the
business are much more than merely incidental to the business. The Appellant
negotiated his contracts from the Reserve office, completed pre-qualifying
questionnaires for the potential customers in order to qualify for the bidding
process with them, undertook marketing activities such as meeting with
prospective clients at band-arranged “meet and greets” and prepared and kept
updated a business portfolio for such potential customers there, received
employee inquiries and the qualifying material from prospective employees at
the Reserve and kept lists as well as arranged to assemble and hire employees
for each project from the Reserve. When the nature of the business is
performing contracts obtained on a competitive bid process, it must be
acknowledged that a great deal of effort is expended in bringing in the work or
“sales” through this process and I am satisfied most if not all of such efforts
occurred on the Reserve. This, of course, is in addition to the general administrative
duties of paying employees from the Reserve, bookkeeping, filing payroll, workers’
compensation and other returns and the myriad of administrative duties
otherwise performed on Reserve. The nature of this business is such that the
management services and duties of the Appellant’s business are far more than
merely incidental to the labour component and are in fact an essential and
significant part of its business operations.
[40]
Moreover, from the
perspective of the labour activities themselves, the evidence is that the
hiring and firing of employees occurred on the Reserve, the employees
assembled at the Reserve offices before being transported on site and received
training and orientation for each project there. The Business provided foremen
who followed the workers to job sites and provided liaison between the Reserve
office and the workers on site as well as some supervision. The needs of over
140 employees off site were satisfied by the office on Reserve via the supply
of personal provisions or commissaries which were requested by the employees
and arranged through the office and transported to the site and the employees
were paid by cheques or payments issued from the Reserve office. These factors
connect the employees while situated off site to the on-Reserve office and its
sphere of influence. This is not the case of a single independent contractor or
small operation working exclusively off site as was the case in Southwind
where a single proprietor himself worked as a logger off site exclusively for
one off-reserve company to earn $42,000. The Appellant’s operation employed
over 140 employees with a cumulative wage base in excess of $1.2 million which
helped the Appellant earn over $3.4 million in gross revenues from multiple
customers and profits of approximately $600,000 in one year; all the more
remarkable when one considers the remote location in which the business
operates.
[41]
The Appellant owned and
supplied bobcat machinery and equipment to the sites as well as rented equipment
from off-reserve equipment renters. In fact, the financial statements of the
Appellant for 2003 show that its capital assets cost approximately $0.5 million
of which $200,000 was for brush cutter equipment in addition to over $100,000
in vehicle investments. In addition, the equipment was stored on the Reserve
site and the Appellant’s work shop to effect repairs was located on the Reserve
site, both of which form part of the Appellant’s capital investment in land and
buildings identified in its financial statements. In this context, the fact the
Appellant rents other needed equipment from off-site equipment renters seems
inconsequential, particularly when no evidence was tendered suggesting what
industry norms would be for comparison purposes.
[42]
Accordingly, having
regard to the above analysis of the labour, management and capital components
of the business, I am of the view that the labour activities and capital
components are undeterminative of the issue having regard to the nature of the
business while the management component is highly indicative of setting the situs
of the business activities on Reserve.
[43]
At this point, I should
also like to address the arguments of the Appellant that the proximity of the
work sites to the Reserve and the preference of the customers in awarding
contracts to aboriginals suggest a connection to siting the business on the
Reserve. In my opinion, the evidence shows that the Appellant operated his
business within an 80-kilometre radius of the Reserve which comprises an area
consisting of approximately 20,000 square kilometres. The Appellant
indicated that his family and other members of his Reserve enjoy rights to hunt
and trap on property outside the Reserve as a Treaty No. 8 Band. Treaty No.8, a
copy of which was submitted into evidence, clearly granted rights to the
signatory Indian Bands “. . .to pursue their usual vocations of hunting,
trapping and fishing throughout the tract surrendered . . . saving and
excepting such tracts as may be required or taken up from time to time for
settlement, mining, lumbering, trading or other purposes.” In fact, the
Appellant’s family retains the rights to operate trap lines within a 120-square
kilometre area of land outside the Reserve within such tract of land initially
surrendered by Treaty No. 8.
[44]
While the Appellant has
testified he originally got into the business due to inquiries made of his
father that were relayed to him from an oil and gas company that concerned
clearing work over the trap line area, there is no evidence that in 2003 or
even beforehand that the Appellant’s business entered into any contract to
clear land over the trap line area. The evidence is that the Appellant and his
competitors bid for contracts to clear trees and brush over the 20,000-square
kilometre area, including over areas in which other members of his band or
other bands have trapping rights. As indicated, under the provisions of Treaty
No. 8, the existence of trapping rights is subject to the use of those lands
for “settlement, mining, lumbering, trading or other purposes” so do not
prohibit the business activities of the Appellant’s customers. In any
event, the evidence is that those trapping lines became uneconomical and were
not used in 2003 hence would have been for practical purposes unaffected by any
mining or oil and gas activities, regardless of any obligation that may have
existed by agreement with the Province of British Columbia or any other party
to require consultation with the Band before undertaking any activity thereon.
[45]
The only evidence of
any services provided by the Appellant to the Reserve itself was that of one
contract awarded to him from the Band valued at $30,000 in the 2003 year.
[46]
Based on this evidence,
I cannot find that the large area of 20,000 square kilometres in which the Appellant
undertook contract work can be said to be in close proximity or contiguous to
the Reserve such that it can be considered “on reserve”. The facts here
only remotely connect the Reserve to the wider non‑reserve area, unlike
those in the case of Amos v. Canada, 99 DTC 5333 (F.C.A.), where the
Reserve surrendered part of its lands by way of lease to a pulp mill that
employed the Appellants in that case and that located the mill partly on the
leased Reserve lands and partly on lands the mill owned contiguous to the
leased lands.
[47]
Likewise, I cannot
agree with the Appellant that many of his clients through their written policy
statements, grant preference to aboriginal businesses and thus lead to a
conclusion the Appellant obtains his work as a result of his Indian status or
residence on the Reserve or rights to a trapping area, thus creating a
connection between the Reserve and the business activities of the Appellant. In
the Aboriginal Guideline statement issued by EnCana, the Appellant’s largest
customer, it is clear that although it “encourage(s) aboriginal communities to
develop business opportunities” with EnCana, that EnCana awards contracts to “both
qualified Aboriginal and non-Aboriginal businesses . . . on a competitive
basis. . .” Similar sentiments were expressed in the policy statements of other
customers submitted into evidence. Notwithstanding as well that the Fort Nelson
First Nation has a written policy that commits the Band Council to “. . . insist
that oil and gas companies give initial full consideration to our member
contractors” and to “Advocacy” on their behalf, the said Band Policy
acknowledges that “Companies have the sole discretion to grant contracts to any
contractor that meets its requirements.” While the Band Policy clearly suggests
a preference for its own member contractors, it is clear that such preference
can only lead to a member receiving a contract on the Reserve, as in any other
case the decision is that of the customer.
[48]
Accordingly, I can find
only a very weak argument for connecting the Business to the Reserve on basis
of proximity or policy of any party save to contracts on the Reserve itself,
especially having regard to the nature of the business.
2. Location of Customers and Where Payment Made
[49]
There is no doubt in my
mind that all but one of the Appellant’s customers in 2003 was based off
Reserve, such customers being made up of oil and gas exploration companies
predominantly based in the Calgary, Alberta vicinity where their head office
was. The Appellant takes the position that such a factor, coupled with the
place where the work was done as earlier discussed are the predominant factors
in applying the connecting factors test to business income, relying on the
decisions in Southwind and Pelletier v. Canada, 2010 FCA 300,
2010 DTC 5193 (F.C.A.) and the Tax Court decision in Pelletier v. The Queen,
2009 TCC 358, [2009] 4 C.N.L.R. 243 (T.C.C.). Southwind involved a single
independent contractor logger working off reserve exclusively for one off-reserve
based corporation. Pelletier involved the Appellant therein who took
over the logging business of his Indian Band and conducted all his contracts
off reserve for non‑reserve customers, spending time working the logging
sites as well as residing on the reserve.
[50]
While the two above particular
factors were discussed in both cases, I see no indication in those cases to
suggest a presumption of weightiness in their favour over any other factors. In
Pelletier, Bowie J. discussed the connecting factors outlined in Southwind
and concluded in paragraph 15 that “Considering all of these factors, . . . I
am of the view that the appellant’s income derived from the 4 K Logging
business does not qualify as property situated on a reserve. . .” The Federal
Court of Appeal did not reverse Bowie J.’s decision, finding that the judge “was
fully alive to the totality of the evidence, and the ‘surrounding circumstances’
connecting the business to and benefiting the reserve, . . .” In the appeal to
the Federal Court of Appeal, the Appellant took the position that “. . . the Judge
erred in his application to the facts of the multi-factor test for determining
the situs of employment or business income. . .”, in effect suggesting
the judge should have given more weight to the other facts and the Court found
he considered the totality of the evidence and refused to reweigh the evidence
that was before the judge. In essence, in those cases, the judges considered
what the relevant factors were and analysed them to give the respective factors
the weight they thought it deserved. There was no statement that any connecting
factor should per se receive more weight, but rather a determination by the
judge of the weight he chose to give in the specific facts of that case.
[51]
The Appellant here on
the other hand suggests that the location of the customers is less relevant
than the location of the place where the customers had their business dealings
with the Appellant, which he suggests is the Reserve. Frankly, while there was
some evidence to suggest certain of the customers representatives would attend
the meet and greet sessions held by the Band or contact the Appellant by email,
this hardly constitutes concluding that the “dealings” with the Appellant
occurred on Reserve. All but one of the customers was clearly located off
Reserve. However, I am not sure this factor should be given much weight in
light of the fact the parties corresponded mainly by electronic means with each
other and having regard to the fact the nature of the business was that of performing
work at different sites, none of which were the customer’s head offices in
Calgary. This factor has more significance in my view where it is investment
income that is the type of property in issue such as in Bastien Estate
and Dubé, where such factor is more important in establishing where the
obligation to pay the investment income occurs.
[52]
In fact, the other side
of the coin, whether one considers it the other component of this factor or a
separate factor, is where payment is made and it is clear from the evidence
that most payments from the customers were by cheques mailed to the Appellant’s
Reserve office.
[53]
In my view, the fact
most customers are located off Reserve but payment is received on Reserve are
factors which tend to neutralize the weight to be given to them. Moreover, as I
mentioned above, in the modern world, where parties conduct their transactions
in the electronic world, as appears to be the case in this business, such factors
are of little assistance in aiding the Court to determine the situs of
the business income for a business of this nature. The fact that the customers
were located off Reserve appears to be more a fact related to the discussion of
the “commercial mainstream”, a factor in my view heavily relied on in both Southwind
and Pelletier which were decided before Bastien Estate.
3. Residence of the Owners
[54]
The Appellant was a
status Indian who was born, grew up on and lived on the Fort Nelson First
Nation Reserve, having lived there most of his life and certainly at all times
since the commencement of his Business. Even though the Business was a
proprietorship, it was described in evidence as the family business and in this
light it is worthy to note that the other part of the management team, the
spouse of the Appellant, even though a member of a different Indian Band, also
lived on this Reserve with her husband, where both of them clearly provided
most if not all of their services to the Business. The fact that the owner or
owners in a looser sense not only lived on the Reserve but had a strong
connection to the community on the Reserve, and started and grew their Business
on the Reserve are factors which weigh in favour of suggesting the Business
income was on Reserve.
4. Where Decisions Affecting the Business are made
[55]
The evidence is
overwhelming that the vast majority of decisions affecting the Business are
made on Reserve. Both the Appellant and his spouse, representing the management
of the Business, worked from the Reserve office and it was there they decided what
business to pursue and tenders to bid on, which workers to hire, assemble and
how to assign them to specific job sites, which workers to retain on their
worker list and which workers to fire. It is on the Reserve they ensured they
satisfied which requirements were necessary to bid on work, such as to obtain
insurance, join the relevant associations, and keep the relevant industry and
safety certifications. All the administrative and financial decisions were
clearly made on Reserve, including decisions on their financing requirements, qualifying
potential workers to ensure they had driver’s licences and safety certificates,
what equipment to buy or rent and so forth.
[56]
The Respondent suggests
that the employees were supervised by both the Appellant’s foremen and the customers’
representatives on off-reserve sites, and accordingly, suggests business
decisions were also made off site hence this factor is not conclusive. I do not
agree with the Respondent on this issue. Firstly, all other managerial and administrative
decisions above described or described in the factual summary at the beginning
of this decision were clearly made on the Reserve. As for any supervision
provided off Reserve, the evidence was that the foremen acted as liaisons with
the Reserve office and made only minor decisions regarding the employees and
clearly within parameters established by the Appellant. The decision as to
what employee worked on what site, whether to hire and fire an employee and how
to deal with problems was clearly left to the Appellant.
[57]
As for the role of the
customers’ consultants on site in the supervision of the employees, the
evidence does not establish such consultants had the main right of supervision.
The consultants determined what was to be cleared or done in the overall sense,
much in the sense of an architect or civil engineer supervising a building site
or road improvement, but it was the Appellant who, as the Respondent pointed
out, was responsible for completing the clear cutting and was contractually liable
to indemnify its customers if the work was not done satisfactorily. Any supervisory
role by the customers’ representative was minor compared to the number of
decisions affecting the Business, both from a managerial and administrative
perspective, as well as from a labour perspective, that were performed on
Reserve. Accordingly, this factor also suggests the income is situate on Reserve.
5. Place where Books and Records kept
[58]
There is no dispute the
books and records were kept on Reserve. Moreover, it is clear having regard to
the duties of the Appellant’s spouse as bookkeeper as well as financial manager
of the Business that all initial bookkeeping entries and ledgers were created
on the Reserve, all employee lists, qualifying documents and records were put
together and kept on Reserve, all invoices for supplies and assets were
received and paid from the Reserve, all employee payments were issued or
electronically entered on Reserve and all payroll remittances, workers’ compensation
and safety and other administrative reports were prepared on Reserve. In
general, the Reserve was the place of not only storing but of creating such
required books and records. Having regard to the size of the Business operation
in 2003, earning $3.4 million in revenue, employing over 140 different
employees and paying out more than $2.8 million in expenses, it is quite clear
the creation, maintenance and storage of the books and records were quite
substantial.
6. Nature of Work and the “Commercial Mainstream”
[59]
Having regard to the
Supreme Court of Canada’s decision in Bastien Estate and Dubé
above discussed, it is clear that the commercial mainstream factor is not a
determinative one. As counsel for the Respondent pointed out, the Bastien Estate
decision did (in paragraphs 56 and 60) acknowledge that this factor could be
taken into consideration as an aid in the analysis of the situs of
income. Whether one wishes to give the “commercial mainstream” the moniker of
“aid” or “factor” is in my view irrelevant as long as the cautions of Cromwell
J. in Bastien Estate are kept in mind; that the Court should not substitute
the question as to what is the situs of the property with the question
as to whether the work is in the “commercial mainstream”, nor fail to
understand that the availability of the exemption does not depend on whether
the property is integral to the life of the Reserve or to the preservation of
the traditional Indian way of life.
[60]
The nature of the work
of the Appellant’s business is, in its simplest sense, the clearing of paths by
the felling of trees and cutting of brush to facilitate oil and gas or mineral
extraction exploration or distribution via pipelines. The nature of his
particular business involves both a large managerial and administrative
component as well as a labour component, the latter mainly working on site,
usually off Reserve, utilizing chain saws, bobcats and other modern equipment,
all for profit.
[61]
The Respondent, in paragraph
17 its Reply, assumes both:
o) the Appellant conducts the Business in the commercial
mainstream, competing with non-aboriginal businesses; . . .
q) the
Business is not integral to the life on an Indian reserve; . . .
[62]
The Appellant argues
that these assumptions on are not valid and I would agree with him in the sense
that the Appellant need not be concerned about rebutting these specific
assumptions in light of the dicta of the Supreme Court of Canada in Bastien Estate
above. However, whether as aids or factors, the Court recognized that they may
be of assistance in determining the situs of the property and the
Respondent has acknowledged in argument that while the Court may conclude this
factor has little weight, whatever weight it does have supports an off‑reserve
location for the income in issue.
[63]
The difficulty I have
with the Respondent’s position is that it appears to be made of bold
assertions; - “the Appellant conducts the Business in the commercial
mainstream” without specific explanation. In the Respondent’s defence, it
cannot be blamed for taking this approach as many Court decisions have taken
the same approach. In both Southwind and Pelletier mention is
made of the term “commercial mainstream” as if it was clear what is meant by
it. Is it in the commercial mainstream because it provides the services to customers
who are not on the reserve, in which case it is a factor already contemplated
in the Southwind list of factors and so is duplicative. Is it because
the clearing of trees and brush are not considered traditionally an Indian
activity or are not integral to life on the Reserve in this case? Was the
logging activity in Southwind and Pelletier in the same category?
I dare say, I believe aboriginal communities and non-aboriginal alike were
clearing trees and brush for paths, patches to farm on and build accommodation
or keep livestock on long before the discovery of the new world and that these
activities may have led to or facilitated trade. Is it because the manner in
which the clearing of trees and brush today, using modern equipment and tools,
is dissimilar to the more crude technologies utilized before the Crown treaties
with the Indians were made? If so, was it not the same for non-aboriginals in
that era who have evolved to utilizing the new technologies over time?
[64]
It appears to me that in
the above contexts the treatment of this factor has involved, as a corollary, a
consideration of whether the activity is “Indian enough” in the historical
perspective, which the Supreme Court of Canada clearly disavowed in Bastien Estate
thus demonstrating the dangers with utilizing this factor. Moreover, the
Supreme Court of Canada clearly warned that the purpose of the legislation
could not be read so as to treat the aboriginal community as frozen in time and
not permitted to evolve as alluded to by Cromwell J. in paragraph 28 of Bastien
Estate quoted earlier.
[65]
Based on the
Respondent’s argument, it seems that its main justification for considering it
in the commercial mainstream is because the Appellant’s Business competes with
non-aboriginal businesses, which wording is specifically found in the
assumption of paragraph 17(o) in the Respondent’s Reply. In paragraphs 75 and 76
of the Respondent’s written argument, the Respondent stated:
75.
Recalling the purpose of section 87 of the Indian Act, which is to
“shield Indians from any efforts by non-natives to dispossess Indians of the
property which they hold qua Indians”, but “not to remedy the
economically disadvantaged position of Indians by ensuring that Indians may
acquire, hold and deal with property in the commercial mainstream on different
terms than their fellow citizens”, the tax exemption contained therein should
not be applied in this case.
76. If
the Appellant is exempted from tax on his business profit, he will have an
economic advantage over his non-Indian competitors, which is totally contrary
to section 87.
[66]
Having regard to the
above, it is my view that the term “commercial mainstream” is now a misnomer.
Competition with non-aboriginals is the more accurate category that describes
the real reason for the existence of the factor. Clearly, categorizing it as suggesting
it must describe the “non-Indianness” of the activity, as demonstrated by the earlier
examples, are clearly inappropriate. However, as counsel for the Appellant
pointed out, the Supreme Court of Canada also recognized, in the continuation
of the quote utilized by the Respondent’s counsel in its argument above from Cromwell
J. in Bastien Estate, that while La Forest J. in Mitchell
noted that the purpose of the legislation is not to permit Indians to “acquire,
hold and deal with property in the commercial mainstream on different terms
than their fellow citizens,” it was clear that, “even if an Indian acquired an
asset through a purely commercial business agreement with a private concern,
the exemption would nonetheless apply if the asset were situated on the
reserve. … it must be remembered that the protections of ss.87 and 89 will
always apply to property situated on a reserve.”
[67]
It is thus clear to me
that, whether the aboriginal competes with non‑aboriginals or not, the
question of competition per se, or the “commercial mainstream” which I feel are
one and the same, is irrelevant. The question is whether the property is
situated on the Reserve and this had nothing to do with whether the same
property can be owned by non-aboriginals and exist off reserve. In my view, any
consideration of this “commercial mainstream” or “competition with
non-aboriginals” factor is irrelevant to the determination of whether the
Appellant’s business income is situated on the Reserve and I assign no weight
to it. It may be an aid in defining the nature of a business and the location
of its business activities above, but no presumptive weight can be given to it
in the manner it has been utilized in the past.
[68]
Moreover, it must be
emphasized that just because a finding that a property is situated on a Reserve
may lead to a competitive advantage given an Indian over a non-Indian does not give
reason to negate the finding it is situated on a Reserve. Any advantage such
finding may render is in my view the exact advantage that was contemplated by
section 87 of the Act.
Other Factors
[69]
The other factor
discussed and argued by the parties not discussed above is whether the purported
benefit of the Appellant’s Business to the Reserve weighs in connecting the Business
to the Reserve or not. Simply put, I cannot find any real weight should be
given to this “benefits to reserve” factor. Firstly, the nature of business
income is that it is the property of the person earning it, which in this case
is the Appellant. It cannot be said to directly accrue to or benefit the
Reserve itself. Secondly, the Appellant argues that due to the fact he hires
mainly aboriginal workers, 16 of over 140 from his own Reserve, that the
benefits of their income on Reserve benefits the overall economy of the Reserve
and is instrumental to the social and economic health of the Reserve by
assisting members to stay, live and contribute to their own communities. With
such a small portion of the Appellant’s workers living on the Appellant’s Reserve,
it is difficult to accept that where the vast majority of wages are paid to
workers hailing from other parts of British Columbia, Alberta, Saskatchewan
and as far away as Newfoundland and Labrador, who may be aboriginal and non–aboriginal
alike, that the Reserve is a large beneficiary of the Business or that it is intended
to be or that those 105 aboriginals of the over 140 working for the Appellant
are assisted in remaining in their own communities when it is clear the vast
majority do not hail from the Reserve. There was in fact no evidence given as
to where they might in fact live. Moreover, there was no evidence tendered that
the competitors of the Business do not operate in the same way so as to make
any valuable comparison as to the relative benefits accruing to the Reserve
that might tend to show a closer connection.
[70]
The Appellant also
argues that his Business provided direct benefit to the Reserve through his
contributions to advertising and promotion on Reserve of which the evidence is
he spent $2,900, as well his donation of $1,000 to sponsor sports teams on
Reserve and his contribution of $1,000 to help a youth attend hockey camp off
Reserve. While laudable, such contributions, relative to the $3.4 million
revenue of the Business cannot be said to be a significant benefit.
[71]
In all, the most that
can be said is that a small benefit of the business income from the Business
benefits the Reserve, itself constituting only a weak factor connecting the
business income to the Reserve.
Conclusion
[72]
Having regard to my
analyses of the above relevant factors and the weight I have assigned to
them, I must conclude that the Appellant’s Business income as his personal
property has a strong connection to the Reserve and thus is property situated
on a Reserve for the purposes of paragraph 87(1)(b) of the Indian Act
and hence exempt from taxation pursuant to section 81 of the Income Tax Act.
[73]
Having come to this
conclusion, it is not necessary to determine the second issue as to whether the
Appellant can deduct a management fee paid to his spouse of $161,000. For the
record, I would have found that such a deduction would have been permitted
having regard to the vast myriad of duties undertaken by the Appellant’s spouse
over and above her bookkeeping duties in acting essentially in a capacity akin
to being the Chief Financial Officer as well as Safety Officer, having regard
to her onerous efforts, responsibilities and the principled manner in which her
remuneration was determined; especially in light of the fact no contradictory
evidence was before the Court to suggest otherwise. Moreover, although the
Respondent had conceded at the beginning of the trial that the Appellant would
also have been permitted a capital cost allowance such as to reduce his taxable
income by $23,107, such fact, together with the issue of the management fee, is
now at best only a bookkeeping adjustment to ensure proper reporting for
accounting purposes.
[74]
The appeal is allowed
with costs to the Appellant; however, the parties are invited to file written
submissions within 30 days as to costs if any of them feel a standard cost
award should not stand.
Signed at
Ottawa, Canada, this 10th day of July 2012.
“F.J. Pizzitelli”
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