Citation: 2010 TCC 647
Date: 20101220
Dockets: 2007-1428(IT)I
2007-2500(IT)I
BETWEEN:
JOSEPH HESTER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
AND BETWEEN:
MILDRED BONDY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1]
The appellants, Joseph Hester and
Mildred Bondy, are status Indians who during the relevant periods worked at
Anishnawbe Health Toronto (AHT), a community health centre located in Toronto. The
appellants were not employees of AHT, but were employed by Roger Obonsawin, who
carries on a placement business under the name Native Leasing Services (NLS). The
principal office of NLS was located on the Six Nations reserve near Brantford,
Ontario. The issue is whether the employment income received by the appellants from
NLS is exempt from federal income tax as being personal property situated on a
reserve.
[2]
The central legislative provision
is paragraph 87(1)(b) of the Indian Act, which at the relevant
time read:
87(1) Notwithstanding any other Act of
Parliament or any Act of the legislature of a province, but subject to section
83, the following property is exempt from taxation, namely,
(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.
(Emphasis added.)
[3]
In respect of Mr. Hester’s appeal,
the relevant taxation years are 1995, 1998, 1999, 2000, 2001, 2002 and 2003. As for Ms.
Bondy’s appeal, the relevant taxation years are 1999 and 2000. The appeals were heard together on partial common
evidence.
Background
[4]
A useful background to these
appeals is found in a decision of Lax J. of the Ontario Superior Court of
Justice in an action commenced by Mr. Hester against the respondent and several
government officials: Hester v. The Queen et al, [2008] 3 CTC 44. Parts
of this decision are reproduced below:
Response of CRA and NLS to s.87 Jurisprudence
[6] The exemption from income tax for aboriginal
persons that is available under section 87 of the Indian Act has been
the subject of evolving jurisprudence. Between 1983 and 1993, CRA interpreted
section 87 as exempting from tax the income of employees working for on-reserve
employers, even where such work was performed off the reserve in accordance
with the law set out in Nowegijick v. The Queen, [1983] 1 S.C.R. 29. All
of NLS’s employees were exempt under this application of the law.
[7] Hester asserts that CRA changed
this policy in 1993. The defendants say that this was in response to the
decision of the Supreme Court of Canada in Williams v. Canada, [1992] 1
S.C.R. 877, which formulated a “connecting factors” test to determine the situs
of intangible personal property for the purposes of section 87. This
represented a significant change from Nowegijick and required an
analysis of the purpose of the exemption under s. 87, the type of property and
the nature of the taxation of that property, with reference to the individual
personal circumstances of each Indian person.
[8] In 1993, CRA announced that it
intended to change the manner in which it administered s. 87 in order to
correspond to the test enunciated by the Supreme Court. To that end, on
December 15, 1993, it released draft administrative guidelines for comment.
Obonsawin and a number of other NLS workers made submissions to CRA, but these
submissions were not adopted as in the opinion of CRA, they were not responsive
to the newly formulated ‘connecting factors’ test.
[9] In June 1994, CRA issued the Indian
Act Exemption for Employment Income Guidelines (the “administrative
guidelines”) effective for the 1995 taxation year. This provoked protest by
members of the aboriginal community, including employees of NLS, and in
December, they occupied CRA’s Tax Services Office in Toronto demanding further consultations and changes to the administrative
guidelines. This eventually resulted in an agreement in or about January 1995
whereby the protestors agreed to vacate CRA’s premises; CRA agreed to hear
further representations from Obonsawin on the application of the administrative
guidelines to NLS workers; and both would take all available steps to expedite
consideration by the courts of challenges to the guidelines (the “Test Case
Agreement”).
Test Cases
[10] The purpose of the test cases was to
establish an orderly determination of the application of aboriginal tax
immunity rights and present a range of factual situations applicable to NLS
workers in order for the court to adjudicate the application of section 87 to
NLS and similar organizations. Eventually, four test cases (“Shilling”, “Horn”,
“Clark” and “Williams”) made their way to the Federal
Court.
Shilling Test Case
[11] Following a series of procedural
motions, on November 23, 1998, Justice Reed of the Federal Court (Trial
Division), stated a question of law for determination by the court in the
Shilling action, namely whether Shilling was entitled by operation of section
87 of the Indian Act to exemption from income tax with respect to the
salary paid to her by NLS during specified years. The matter proceeded on an
agreed statement of facts and, in the first instance, the court determined the
question in favour of Shilling. On June 4, 2001, the Federal Court of Appeal
reversed the decision of Justice Sharlow of the Trial Division. Leave to appeal
to the Supreme Court of Canada was refused on March 14, 2002.
[12] Shilling sought to continue on to trial
in the Federal Court. On November 18, 2003, Justice Simpson granted the Crown’s
motion for summary judgment and dismissed the Shilling action. The Federal
Court of Appeal dismissed Shilling’s appeal from this decision and Shilling’s
subsequent application for leave to extend the time for seeking leave to appeal
was dismissed by the Supreme Court of Canada on October 6, 2005.
Horn, Clarke and Williams Test Cases
[13] Although it was originally contemplated
that the outcome of the Shilling test case would resolve most of the claims of
NLS workers, NLS decided that the remaining three test cases needed to be
litigated. To that end, the Crown sought and obtained timetables from the
Federal Court (Trial Division) in order to bring these cases to completion. The
Clarke test case was eventually settled on the consent of the parties. The Horn
and Williams cases proceeded to trial on October 16, 2006. On October 16, 2007,
Justice Phelan released his decision in the remaining test cases concluding
that neither Horn nor Williams was entitled to exemption from tax pursuant to
section 87 of the Indian Act. He dismissed the plaintiffs’ claims for
discrimination under section 15 of the Charter. Consequently, all three
of the test cases have resulted in the tax exemption claims being denied,
subject to appeals by Horn and Williams.
[…]
Income Tax Appeals of Hester and other NLS
Workers
[23] Beginning in February 2006 and on the
understanding that NLS workers intended to be governed by the outcome of the
test cases, CRA sent letters to NLS workers asking that they advise which of
the four test cases was reflective of their individual situations. The NLS
workers returned a form letter declining to identify which of the four factual
situations applied to them. Believing that NLS workers no longer wished to be
bound by the outcome of the test cases but instead wished to exercise their
individual rights under the Income Tax Act, CRA then issued Notices of
Confirmation confirming the income tax assessments. Hester and approximately
1200 other NLS workers served Notices of Appeal from their assessments. The
scope of some of the appeals is broad asserting rights under section 81(1)(a)
of the Income Tax Act, section 87 of the Indian Act, sections 25
and 35 of the Charter as well as an exemption from income tax on the
basis of aboriginal or treaty rights. Subsequently, other NLS workers filed
Amended Notices of Appeal and are only proceeding on the basis of section 87 of
the Indian Act. The Chief Justice of the Tax Court is case managing all
of these appeals, which are moving forward.
[5]
The current status described by
Justice Lax remains the status quo except that the Horn and Williams
appeals have been exhausted and several other appeals by NLS workers have been
heard by this Court. To my knowledge, none of the appeals that have been
decided by this Court to date have been successful.
Issues
[6]
The appellants raise two issues.
[7]
First, they submit that the legal
principle that the courts have been applying in these types of cases is
incorrect. They submit that the correct test for the situs of employment income
is the location of the employer. Based on this test, it is submitted, the
appellants’ employment income qualifies for exemption because the employer,
NLS, is located on a reserve.
[8]
Second, the appellants submit that
the exemption applies even if the legal principle that has been adopted by the
courts, the connecting factors analysis, is applied to their circumstances.
Is location of the
employer the proper approach?
[9]
The appellants submit that in
interpreting the phrase “situated on a reserve” in subsection 87(1) of the Indian
Act, employment income is situate where the employer is located. Since NLS is
principally located on the Six Nations reserve, the appellants’ employment
income qualifies for the exemption, it is suggested.
[10]
This approach is at odds with a
significant body of jurisprudence in this Court and the Federal Court of Appeal
which has consistently applied a connecting factors analysis in considering
whether employment income is situated on a reserve.
[11]
The appellants acknowledge that
their argument goes against the grain of many judicial decisions, but they
submit that the courts have erred in applying the connecting factors analysis
to employment income.
[12]
The appropriate test, it is
submitted, is the one acknowledged by the Supreme Court of Canada in Nowegijick
v. The Queen, [1983] 1 S.C.R. 29, 83 DTC 5041. That test essentially looks to
the location of the employer. As for the connecting factors analysis which was
later adopted by the Supreme Court of Canada in Williams v. The Queen, [1992]
1 SCR 877, 92 DTC 6320, the appellants submit this test was intended to have
limited application and does not apply to employment income.
[13]
These submissions have no merit,
in my respectful view.
[14]
I would first comment that the
approval of the location of the employer test in Nowegijick was obiter
and was only given a passing comment in the decision. The reasons of Dickson J.
make it clear that this was not the issue in the case:
[…] The Crown conceded in argument, correctly in my view, that the
situs of the salary which Mr. Nowegijick received was sited on the reserve because
it was there that the residence or place of the debtor, the Gull Bay
Development corporation, was to be found and it was there the wages were
payable.
[…]
[…] In R. v. The National Indian Brotherhood (1978), 78 DTC 6488 the
question was as to situs, an issue which does not arise in the present case.
(pp. 5043, 5044)
[15]
In any event, it is clear from the
subsequent Williams decision that the connecting factors test should be
applied to employment income. I would refer in particular to the comments of Gonthier
J. below:
37 The approach which best reflects
these concerns is one which analyzes the matter in terms of categories of
property and types of taxation. For instance, connecting factors may have
different relevance with regard to unemployment insurance benefits than in
respect of employment income, or pension benefits. The first step is to
identify the various connecting factors which are potentially relevant. These
factors should then be analyzed to determine what weight they should be given in
identifying the location of the property, in light of three considerations: (1)
the purpose of the exemption under the Indian Act; (2) the type of
property in question; and (3) the nature of the taxation of that property. The
question with regard to each connecting factor is therefore what weight should
be given that factor in answering the question whether to tax that form of property
in that manner would amount to the erosion of the entitlement of the Indian qua
Indian on a reserve. (Emphasis
added.)
[16]
Third, in my respectful view, the argument
that the appellants put forward has effectively been dealt with in Horn et
al v. The Queen, 2008 FCA 352, 2008 DTC 6743. The comments of Evans J.A.
below are relevant:
[4] However, the Court expressly stated
(at para. 18) that the “contextual form of analysis” was appropriate for, inter
alia, cases involving a taxation transaction “where the location is
objectively difficult to determine”. It quoted (at para. 17) the observation of
the court below that God’s Lake was “not concerned with where a
transaction is located for the purposes of taxation.” The Court also referred
with approval to the adoption of the connecting factors approach in Williams
v. Canada, [1992] 1 S.C.R. 877, the origin of this Court’s jurisprudence on
the location of employment income as personal property for the purpose of section
87, even though Williams concerned employment insurance payments.
[5] In our view, the words quoted above
from God’s Lake make it clear that the Supreme Court has not issued an
invitation to this Court to revisit its well settled law. The Supreme Court has
so far refused leave to appeal from the section 87 cases decided by this Court
applying the connecting factors analysis to determine the location of
employment income for tax purposes. Short of Parliamentary intervention, only
the Supreme Court of Canada may review the soundness of the analytical
framework developed and consistently applied on the issue by this Court.
[17]
For these reasons, I do not agree
that courts have inappropriately applied the connecting factors analysis to
determine whether employment income is situated on a reserve for purposes of
the tax exemption.
Application of connecting
factors analysis
[18]
The appellants’ second argument is
that their employment income qualifies for exemption even if a connecting
factors analysis is applied.
[19]
This approach requires a
consideration of the relevant facts and circumstances.
[20]
As for Mr. Hester, he is a status
Indian and a member of The Crees of the Waskaganish First Nation, located in Quebec. He has
never lived on a reserve but maintains cultural ties to reserves. Mr. Hester has
held a number of senior positions at AHT. He became the Acting Executive
Director in 1997 and the Executive Director in 1998, a position which he
continues to hold.
[21]
Mr. Hester is responsible for all
aspects of AHT, which is a community health centre based in Toronto whose
mandate is to serve mainly aboriginal persons residing in the Greater Toronto
Area.
[22]
Mr. Hester’s duties are performed
principally in Toronto. AHT has mutually beneficial relationships with several
reserves and Mr. Hester sometimes visits these reserves as part of his mandate.
I am not satisfied from the evidence that such visits were a frequent part of
his duties at AHT.
[23]
In addition to duties performed
for AHT, Mr. Hester was designated by NLS as their liaison at AHT. In this
capacity, he reviewed evaluation forms for NLS employees at AHT. There is insufficient
evidence to establish that any portion of Mr. Hester’s employment income is
properly allocable to these services.
[24]
As for Ms. Bondy, she is also a
status Indian who has lived in Toronto for many years. She is a member of the Wikwemikong
First Nation on Manitoulin Island and maintains familial and cultural ties there.
[25]
Ms. Bondy was placed by NLS at AHT
as a secretary/assistant in 1997 and she carried out general administrative
work there until early in 2000 when she left for other employment. Her AHT duties
were carried out in Toronto.
[26]
As for facts concerning NLS and
Mr. Obonsawin, the parties submitted an agreed statement of facts. Most of the
relevant facts have been reviewed in other cases, notably in Horn, and
it is not necessary for me to review them again here.
[27]
Based on the evidence before me,
the facts in these appeals do not warrant a different outcome than that reached
in Shilling and Horn.
[28]
The appellants worked at the same
community health centre that Ms. Shilling worked. Like the appellants, her
duties were primarily performed in Toronto although she did visit reserves as part of her
duties.
[29]
I would note in particular the
following comments of the Federal Court of Appeal in Shilling:
[62] In this case, only the location
of the employer’s head office connects the respondent’s employment income to a
reserve, and there is no evidence to justify giving this factor the significant
weight that the learned Trial Judge attached to it. On the other hand, the
location and nature of the employment, which have been held to be generally the
most important factors in a connecting factors analysis in employment income
cases, as well as the respondent’s place of residence, indicate that Ms.
Shilling’s employment income was situated off-reserve.
[63] The factors connecting the
employment income with an off-reserve location outweigh those connecting it
with a reserve. Therefore, Ms. Shilling’s employment income for 1995 and 1996
is not situated on a reserve and is not exempt from taxation under paragraph
87(1)(b) of the Indian Act.
[30]
The Horn decision is also
relevant because it filled in some evidentiary gaps regarding NLS that were
missing in Shilling. Based on the larger evidentiary record concerning
NLS, Horn concludes that the relationship with NLS is not a strong
connecting factor. Reproduced below is a brief excerpt from the trial court decision
in Horn by Phelan J. (2007 FC 1052, 2007 DTC 5589).
[96] The benefits of NLS to the Six Nations Reserve are not overwhelming but
are real. The majority of the administrative staff were members of the Six
Nations, some of whom lived on the reserve. NLS paid rent to the reserve as
well. However, these expenditures for rent and salary/benefit were modest
amounts globally (approximately $240,000) and only a small percentage of NLS’s
gross income (approximately 2%).
[97] Therefore, while NLS’s location is on the Six Nations Reserve, these
other circumstances indicate that this factor is not particularly weighty. It
is of almost little weight to Horn as she is not a member of the Six Nations
nor does her band at Kahnawake receive any direct benefits from NLS’s location
on the Six Nations Reserve.
[31]
In light of the background to
these appeals, it is important that the Courts provide certainty on this issue.
In order to deviate from the conclusions reached in Shilling and Horn,
there should be material facts that warrant a new look. Such facts do not
present themselves in these two appeals.
[32]
The appeals will be dismissed.
Each party shall bear their own costs.
Signed at Toronto,
Ontario this 20th day of December 2010.
“J. M. Woods”
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