Citation: 2007TCC393
Date: 20071206
Docket: 2003-4665(IT)G
BETWEEN:
ALEXANDRE DUBÉ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1] The appellant is
appealing assessments and reassessments for the 1997 to 2002 taxation years.
For 1997 to 1999, the appellant did not include in his taxable income
investment income received from the Caisse populaire Desjardins de Pointe‑Bleue
(the "Caisse"). The Minister of National Revenue (the "Minister")
therefore added this income to the appellant's taxable income. According to the
appellant, however, this income is non‑taxable. For 2000, 2001 and 2002,
the appellant included his investment income from the Caisse in his returns but
claimed a deduction for the same amounts. The Minister refused the deduction
claimed by the appellant for his investment income from the Caisse.
[2] The Minister also
imposed a penalty for late filing for the 1997, 1998, 2000 and 2001 taxation
years. The appellant sent the Canada Revenue Agency (the "Agency")
his income tax return for the 1997 taxation year in July 1998, for the
1998 taxation year in August 1999, for 2000 in December 2001 and for
the 2001 taxation year in July 2002. The penalty for late filing is
respectively 7%, 8%, 10% and 6% of the tax payable for each of those taxation
years.
[3] The appellant's
investment income for each of the taxation years in question is $19,956 for
1997, $12,115 for 1998, $73,210 for 1999, $82,303 for 2000, $80,116 for 2001
and $49,530 for 2002.
[4] The appellant is an
Indian and maintains that, under section 87 of the Indian Act
(R.S.C. 1985, c. I‑5) (the "IA") and paragraph 81(1)(a)
of the Income Tax Act (the "Act"), his investment income is
not taxable. The issue is therefore whether this investment income from the
Caisse is taxable or not and whether the Minister was justified in imposing a
late-filing penalty on the appellant for the 1997, 1998, 2000 and 2001 taxation
years.
[5] It is admitted that
the appellant is an Indian. His income tax returns show as his address 1 Wapol
Street on the Obedjiwan Indian reserve. There is no financial institution on this
reserve. The appellant uses the services of a credit union for the purposes of
his business and for personal purposes. This credit union is located on the
Mashteuiatsh reserve, also known by the name of Pointe‑Bleue, from which
the name of the Caisse is derived.
[6] The Obedjiwan
reserve is located approximately 300 kilometres from the Pointe‑Bleue
reserve and the Pointe‑Bleue reserve is 6 kilometres from Roberval.
According to the 2003 Quebec Indian and Inuit Communities Guide, the
Obedjiwan reserve has 2,107 members, of whom 1,798 live on the reserve and 309
off‑reserve. Its members are Attikamek Indians. The Pointe‑Bleue
reserve has 4,622 members according to the same guide, including 1,983 who live
on the reserve and 2,635 who live off‑reserve. Its members are Montagnais
Indians. The same guide, for 1999, indicates that the Pointe‑Bleue
reserve had 4,365 members, of whom 2,557 lived off‑reserve, and that the
Obedjiwan reserve had 1,879 members, of whom 319 lived off‑reserve. These
figures correspond to data from the year prior to the publication of the Guide.
[7] The appellant has
been a member of the Obedjiwan reserve since birth. He is married and the
father of 4 children, the youngest being 16 years old and the eldest
30 years old. He claims to be a resident of the reserve even though, for a
few years, he owned a residence in St-Félicien and then in Roberval. He
acquired these homes to enable his children to attend schools in St-Félicien.
His spouse and two of his children lived in these homes during the school year,
which is ten months of the year. The appellant acknowledges having also
lived in them, but says that he returned to Obedjiwan almost every weekend.
[8] In the early 1980s,
the appellant decided to go into business on the recommendation of his band
council. Answering a call for tenders, the appellant offered his services for
the transport of residents in need of medical care from the Obedjiwan reserve
to Roberval. The successful bidder had to obtain the approval of the band
council. He was offered a one‑year contract with a year-to‑year
renewal clause, subject to certain conditions, including agreement on the rate.
[9] According to the
transportation permit issued to the appellant by the Commission des transports
du Québec for the period from March 27, 1997, to March 26, 2002,
the authorized route was a forestry road connecting the Obedjiwan reserve and
Roberval and crossing the territory of La Tuque. The appellant was also
authorized to make pick‑ups in Roberval for various communities, including
Alma and Chicoutimi, provided that the
travel was for medical purposes and that there was a contract in force between
the appellant and the band council.
[10] The appellant had
also held since March 11, 1998, a permit from the Commission des transports du
Québec allowing him to provide a transportation service to the general public
from the Obedjiwan reserve to St-Félicien, using a pre‑established route.
[11] To provide this
transportation service, the appellant operated from four to six vehicles,
including 15‑passenger minibuses, and employed three full‑time and
two part‑time drivers. He had to go off the reserve for banking services
since no such service was offered on the Obedjiwan reserve. This is why he did his
banking with the Caisse on the Pointe‑Bleue reserve near Roberval.
According to the appellant, he uses that credit union because it is on a
reserve and he knows someone who works at the Caisse.
[12] The appellant used
the services of Ms. Dominique Boily, a principal with Samson Bélair Deloitte
& Touche, to prepare his tax returns. According to the appellant,
Ms. Boily, or her firm, has prepared his tax returns since 1997. However, only
since 2000 has Samson Bélair Deloitte & Touche been identified on the
appellant's tax returns as the firm paid to prepare his tax returns. Another firm
prepared the returns in previous years. However, Ms. Boily's services have
been used by the appellant since 1996 to review his file and provide him with
an opinion on whether his income was taxable or not. To that end,
Ms. Boily contacted Revenue Canada to obtain instructions on the tax treatment of the appellant's
employment income. Moreover, Ms. Boily again asked for an interpretation
in March 1999 when the appellant's situation with regard to the operation
of his business and with regard to his personal life changed, more specifically
on his acquiring a secondary residence in St-Félicien for his own needs and
those of his family. In both cases, the Canada Customs and Revenue Agency (as
it was then called) offered the opinion that, in light of the information
provided, the appellant's income would not be taxable. The Agency also emphasized
that it was not bound by its comments and that a final determination for any
given year could only be made following an audit.
[13] According to
Ms. Boily, the income reported on the appellant's tax returns is net
income. No financial statement is included with the returns since the income
was not taxable. Ms. Boily's firm relied solely on the information
provided by the appellant, which consisted of the financial statements he had
prepared himself.
[14] The house in St-Félicien
was purchased around 1996. The appellant kept it for about five years before
purchasing another in Roberval. The Roberval home has been on the market for
about a year. These houses were occupied by his spouse and two of his children
to enable the latter to attend the local schools and participate in sports
activities, such as hockey for his sons. He acknowledges that he also lived in them.
[15] The appellant uses
the Caisse's services for the purposes of his business and his personal purposes
and has a separate account for each. He also uses credit cards issued by the
Caisse and obtained hypothecary loans for the purchase of the houses in
St-Félicien and Roberval.
[16] The interest income
generated by the appellant's investments is substantial and is the result of
substantial investments made in 1998 in particular. A detailed table of the appellant's
investments since 1997 was filed (Exhibit I‑11). It discloses that
substantial amounts were deposited in 1997 and 1998; thus his interest income
in the years in question came from the deposits made in those two years. Asked
about the source of the funds, the appellant initially stated that it was
business income and then said that he did not know where the money came from
and that he would have to, as he put it, look into his affairs.
[17] The Caisse, where
the appellant did business, was founded in 1965. Between 1996 and 2002, it had
about 3,000 members. In 2006, it had 4,600 members, of whom about 4,200 were Aboriginals
who lived on the reserve and about 400 were neither Aboriginals nor residents
of the reserve. There are no restrictions on who can become a member of the
Caisse. Although the majority of the Caisse's members are Aboriginals, its
staff does not ask clients who wish to open an account if they are Aboriginals.
Nor do they ask them to disclose their Certificate of Indian Status number. The
membership list does not indicate whether the members are Aboriginals or not.
Indeed, the percentage of Aboriginal members is based on an estimate by the
Caisse's management. Of its members, 30% are residents of the Obedjiwan
reserve. The Caisse's primary territory is Pointe‑Bleue, but there is
nothing preventing a non‑resident from becoming a member.
[18] The Caisse has two
membership categories: regular members and associate members. Regular members
reside within the Caisse's territory and are entitled to vote at the Caisse's meetings.
Associate members do not reside within the Caisse's territory and while they
can attend meetings, they may not vote. There is no other restriction. Despite
this difference, the appellant was apparently a regular member, even though he
does not reside on the Pointe‑Bleue reserve. It would appear that the
Caisse's territory is larger than that of the Pointe‑Bleue reserve.
[19] The Caisse's board
of directors is composed of seven members who were, at the time of the hearing,
all Aboriginals and residents of Pointe‑Bleue. The evidence did not show
if the Caisse's bylaws require that the board of directors be composed of Aboriginal
members. As for the position of director, there is no requirement that an Aboriginal
hold this position, or that the Caisse's employees be Aboriginals. If
individuals have the same qualifications, an Aboriginal would be given
preference.
[20] The Caisse has three
main sources of revenue: revenue from deposits and investments it makes with
the Fédération des caisses populaires Desjardins (the "Federation"),
with which it is affiliated, certain investments being mandatory for all the
credit unions, namely, the investment fund and the liquidity fund; revenue
generated from loans made to its members; and accessory products, such as
administration fees, the sale of travellers cheques and brokerage fees.
[21] The Caisse's balance
sheet produced as evidence reveals that it has the same level of funds invested
with the Federation as it has paid out in loans to its members. The Caisse had
liquid assets and investments in the amount of $34.9 million and
$39 million in 2004 and 2005 respectively.
[22] Term deposits with
the Federation are managed solely by the Federation and represent the surplus
savings that the Caisse is unable to lend to its members. In this instance, the
Caisse has had surpluses for several years.
[23] As for the
investments and deposits with the Federation, these are participation deposits,
mandatory deposits, liquidity deposits, etc. In terms of the loans to members,
they consist of on‑reserve housing loans and off‑reserve
hypothecary loans, and consumer loans, investment loans such as lines of
credit, and business loans, both on and off the reserve.
[24] The Caisse received
deposits from its members in the order of $51 million and $55 million
in 2002 and 2003 and made loans in the order of $39 million and
$40 million in these same years. Thus it loans about 75% of the deposits
it receives from its members or 75% of what it takes in. The excess liquidities
are invested with the Federation, which explains the asset shown on the balance
sheet and to which I referred earlier.
[25] The Caisse does not
have status as an Aboriginal business and pays deposit insurance premiums for
all its members. Each year since 2003, it has given $75,000 in donations and
sponsorships to the Pointe‑Bleue and Obedjiwan communities or reserves.
The proportion of loans to its Aboriginal members is 77%.
Analysis
[26] The issue is
therefore whether the investment income of an Indian is property situated on an
Indian reserve and whether it should be excluded from the Indian's income
pursuant to paragraph 81(1)(a) of the Act, which provides as
follows:
81(1)
Amounts not included in income — There shall not be included in computing the
income of a taxpayer for a taxation year,
(a) Statutory Exemptions — 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.
[27] Section 87 of the IA
also provides a tax exemption. That section 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,
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.
(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.
[28] For paragraph 87(1)(b)
of the IA to apply, three elements must therefore be present: being an Indian
within the meaning of the IA, having possession of personal property, and that
property being situated on a reserve. In the present case, it is admitted that
the appellant is an Indian and that the investment income is personal property.
The dispute relates to the question of whether the property is in fact situated
on a reserve. This question has been the subject of many decisions of the Tax
Court of Canada and the Federal Court, and numerous legal principles have been
developed in the case law.
[29] Therefore, it is
possible today to determine the state of the law on this issue, which has to do
primarily with the taxation of the investment income of Indians. The Federal
Court of Appeal decision in Recalma v. The Queen, 98 DTC 6238, is
the leading case on the issue of whether or not investment income is excluded
from taxable income. This decision restates the principles enunciated in Williams
v. The Queen, [1992] 1 S.C.R. 877 (QL). These principles are known as the
connecting factors for determining the situs of property. Recalma
has been applied and followed in Tax Court of Canada and Federal Court
decisions (see Lewin v. The Queen, [2001] T.C.J. 242 and [2002] F.C.J.
1625, Sero and Frazer, [2001] T.C.J. 345 and 2004 FCA 6, and Large v.
The Queen, [2006] TCC 509).
[30] It is important to be
mindful of how the tax exemption granted to Indians in the two above-quoted statutory
provisions has been interpreted in a number of important judgments, and in
particular, to bear in mind the limits placed on the tax exemption by the
Supreme Court of Canada in Nowegijick v. The Queen, [1983] 1 S.C.R.
29, at page 36.
Indians are citizens and, in affairs of life not governed by
treaties or the Indian Act, they are subject to all of the
responsibilities, including payment of taxes, of other Canadian citizens.
[31] This being said, in Mitchell
v. Peguis Indian Band, [1990] 2 S.C.R. 85 (QL), La Forest J.
commented on the Crown's obligation to Aboriginal peoples that arises from the
signing of the Royal Proclamation of 1763. He describes that obligation as an
obligation to not dispossess Indians of their property. However, in his
analysis of the interpretation of the IA, he stated the following, at
paragraphs 88, 91, 92 and 112:
Paragraph 88:
It is also important to underscore the corollary
to the conclusion I have just drawn. The fact that the modern-day legislation,
like its historical counterparts, is so careful to underline that exemptions
from taxation and distraint apply only in respect of personal property situated
on reserves demonstrates that the purpose of the legislation is not to remedy
the economically disadvantaged position of Indians by ensuring that Indians may
acquire, hold, and deal with property in the commercial mainstream on different
terms than their fellow citizens. An examination of the decisions bearing on
these sections confirms that Indians who acquire and deal in property outside
lands reserved for their use, deal with it on the same basis as all other
Canadians.
Paragraphs 91 and
92:
. . . But I would reiterate that in
the absence of a discernible nexus between the property concerned and the
occupancy of reserve lands by the owner of that property, the protections and
privileges of ss. 87 and 89 have no application.
92. I draw attention to these decisions by way
of emphasizing once again that one must guard against ascribing an overly broad
purpose to ss. 87 and 89. These provisions are not intended to confer
privileges on Indians in respect of any property they may acquire and possess,
wherever situated. Rather, their purpose is simply to insulate the property
interests of Indians in their reserve lands from the intrusions and
interference of the larger society so as to ensure that Indians are not
dispossessed of their entitlements. The Alberta Court of Appeal in Bank of
Nova Scotia v. Blood, [1990] 1 C.N.L.R. 16, captures the essence of the
matter when it states, at p. 18, in reference to s. 87, that: "In
its terms the section is intended to prevent interference with Indian property
on a reserve."
Paragraph 112:
A reading of the Indian Act shows
that this provision is but one of a number of sections which seek to protect
property to which Indians may be said to have an entitlement by virtue of their
right to occupy the lands reserved for their use. In addition to the
protections relating to Indian lands to which I have already drawn attention,
the range of property protected runs from crops raised on reserve lands to
deposits of minerals; see ss. 32, 91, 92, 93. These sections restrict the
ability of non‑natives to acquire the particular property concerned by
requiring that the Minister approve all transactions in respect of it. As is
the case with the restrictions on alienability to which I drew attention
earlier, the intent of these sections is to guard against the possibility
that Indians will be victimized by "sharp dealing" on the part of
non-natives and dispossessed of their entitlements.
[Emphasis added.]
[32] At paragraph 123, La
Forest J. goes into greater detail regarding the concept of situs:
The conclusion I draw is that it is entirely
reasonable to expect that Indians, when acquiring personal property pursuant to
an agreement with that "indivisible entity" constituted by the Crown,
will recognize that the question whether the exemptions of ss. 87 and 89
should apply in respect of that property, regardless of situs, must turn
on the nature of the property concerned. If the property in question simply
represents property which Indians acquired in the same manner any other
Canadian might have done, I am at a loss to see why Indians should expect that
the statutory notional situs of s. 90(1)(b) should apply in
respect of it. In other words, even if the Indians perceive the Crown to be "indivisible",
it is unclear to me how it could be that Indians could perceive that
s. 90(1)(b) is meant to extend the protections of ss. 87 and
89 in an "indivisible" manner to all property acquired by them
pursuant to agreements with that entity, regardless of where that property is
held. What if the property concerned is property held off the reserve, and was
acquired by the Indian band concerned simply with a view to further business
dealings in the commercial mainstream?
[33] In Williams, supra,
Gonthier J. made the exemption provided in section 87 subject to the
manner in which Indian taxpayers choose to organize their affairs, particularly
as regards the choice to situate their property on or off a reserve. At
paragraphs 18 and 19, he comments as follows:
Therefore, under the Indian Act, an
Indian has a choice with regard to his personal property. The Indian may
situate this property on the reserve, in which case it is within the protected
area and free from seizure and taxation, or the Indian may situate this
property off the reserve, in which case it is outside the protected area, and
more fully available for ordinary commercial purposes in society. Whether the
Indian wishes to remain within the protected reserve system or integrate more
fully into the larger commercial world is a choice left to the Indian.
The purpose of the situs test in
s. 87 is to determine whether the Indian holds the property in question as
part of the entitlement of an Indian qua Indian on the reserve. . . .
[34] In his judgment,
Gonthier J. describes the legal analysis that must be applied to determine
whether taxation violates section 87 of the IA. He addresses the issue
of the weighting of the connecting factors at paragraph 37:
. . . 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.]
[35] Lastly, at
paragraph 61, Gonthier J. explains how the situs of the
property in question is to be determined:
Determining the situs of intangible
personal property requires a court to evaluate various connecting factors which
tie the property to one location or another. In the context of the exemption
from taxation in the Indian Act, there are three important
considerations: the purpose of the exemption; the character of the property in
question; and the incidence of taxation upon that property. Given the purpose
of the exemption, the ultimate question is to what extent each factor is
relevant in determining whether to tax the particular kind of property in a
particular manner would erode the entitlement of an Indian qua Indian to
personal property on the reserve.
[36] These are the
connecting factors reiterated in Recalma, Lewin and Sero
and Frazer, and which have been used to decide whether investment income
should be excluded from taxable income on the ground that it is situated on a reserve. In Recalma,
supra, at page 6240, the Federal Court of Appeal affirmed the judgment of
Judge Hamlyn of this Court and recognized four factors to be considered in
determining the situs of investment income.
So too, where investment income is at issue, it
must be viewed in relation to its connection to the Reserve, its benefit to the
traditional Native way of life, the potential danger to [sic] the
erosion of Native property and the extent to which it may be considered as
being derived from economic mainstream activity. In our view, the Tax Court
judge correctly placed considerable weight on the way the investment income was
generated, just as the Courts have done in cases involving employment, U.I.
benefits and business income. Investment income, being passive income, is
not generated by the individual work of the taxpayer. In a way, the work is
done by the money which is invested across the land. The Tax Court judge
rightly placed great weight on factors such as the residence of the issuer of
the security, the location of the issuer's income generating operations, and
the location of the security issuer's property. While the dealer in these
securities, the local branch of the Bank of Montreal, was on a Reserve, the
issuers of the securities were not; the corporations which offered the Bankers'
Acceptances and the managers of the Mutual Funds in question were not connected
in any way to a Reserve. They were in the head offices of the corporations in
cities far removed from any reserve. Similarly, the main income generating
activity of the issuers was situated in towns and cities across Canada and
around the world, not on Reserves. In addition, the assets of the issuers of
the securities in question were predominantly off Reserves, which in case of
default would be most significant.
Less weight was properly accorded by the Tax Court judge, in this case of
investment income, to factors such as the residence of the taxpayer, the source
of the capital with which the security was bought, the place where the security
was purchased and the income received, the place where the security document
was held and where the income was spent. We can find no fault with the
reasoning of the Tax Court judge in the way he balanced the various connecting
factors involved in this case in the light of the purpose of the legislation.
Thus, in our view, taking a purposive approach, the
investment income earned by these taxpayers cannot be said to be personal
property "situated on a reserve" and, hence, is not exempt from
income taxation.
[Emphasis added.]
[37] This approach was
followed by this Court in Lewin, supra, and by the Federal Court
of Appeal in Sero and Frazer, supra. In Sero and Frazer,
Sharlow J.A. also considered certain criticisms regarding Recalma,
but saw in these none that could change her finding that the investment income
was not situated on a reserve. In fact, only Linden J.A., in Recalma,
and Judge Tardif, in Lewin, recognized the possibility that investment
income might be generated on a reserve. In Recalma, Linden J.A. stated
the following at page 6240:
. . . The result may, of course, be
otherwise in factual circumstances where funds invested directly or through
banks on reserves are used exclusively or mainly for loans to Natives on
reserves. When Natives, however worthy and committed to their traditions,
choose to invest their funds in the general mainstream of the economy, they
cannot shield themselves from tax merely by using a financial institution
situated on a reserve to do so.
[Emphasis added.]
[38] In Lewin, at
first instance, Judge Tardif stated the following at paragraph 36:
If it had been a financial institution created solely
for the purposes, concerns and needs of the Indians living on the reserve and
if the bulk of its income had primarily been reinvested on the reserve to
strengthen, develop and improve the social, cultural and economic well-being of
the Indians living there, the situation could have been different.
[39] Coming back, then,
to the four criteria enunciated by Linden J.A. in Recalma for determining
the situs of investment income, the first three must certainly be met,
but the fourth is the most important, and it is the extent to which the income
is derived from economic mainstream activity or solely or mainly from Aboriginal
economic activity. The four criteria are:
1. the
investment income's connection to the reserve (residence, source of income,
etc.);
2. the
benefit of the investment income to the traditional Native way of life;
3. the
potential danger of the erosion of Native property;
4. the
extent to which the investment income may be considered as being derived from economic
mainstream activity.
[40] In the present case,
counsel for the appellant addressed all of the factors considered by Judge Hamlyn at
first instance in Recalma. He argued that the factor of the Indian's
residence carries more weight here than it did in Sero and Frazer where
the two appellants did not live on a reserve. He also argued that, in this
case, the appellant's source of income is the reserve and that this fact is
important because it sets this case apart from other cases. He further argued
that the investment vehicle, namely, the Caisse populaire de Pointe‑Bleue,
is a connecting factor that distinguishes this case from Recalma because
neither a bank nor speculative investments are involved here. Even though in Lewin
a credit union was also involved, counsel for the appellant identified several
elements on the basis of which Lewin can be distinguished from the
present case. He raised the fact that, in Lewin, the credit union was
controlled by members outside the reserve, not to mention the other facts, cited
earlier, which that case has in common with Recalma and which set those
cases apart from this one. Counsel for the appellant laid great emphasis on the
fact that 75% of the Caisse's funds are loaned to its members and that this percentage
should be considered when determining the proportion of the appellant's
investment income that should be subject to tax.
[41] For her part,
counsel for the respondent points out that it is a matter of determining the situs
not of the certificates of deposit but rather of the investment income or
interest income earned from them. It is necessary to show the existence of a
sufficiently strong connection with the reserve. She argues that the income-generating
activities must be clearly connected to a reserve in order for the investment
income to constitute property situated on a reserve. She goes on to say that an
overly broad scope should not be given to sections 87 and 89 because these
provisions are simply intended to protect the property rights of Indians from
interference and hindrance by society at large. She reminds the Court that the
connecting factors analyzed in Recalma were important but that the Court
did not grant the exemption sought. She reiterates that the Court must
attribute considerable weight to the residence of the issuer of the securities,
the location of the issuer's income-generating activities, and the location of
the issuer's property, and less weight to factors such as the taxpayer's place
of residence, the source of the capital, and where the securities were bought
and the income received. Counsel for the respondent addressed each of the
factors in the light of the evidence adduced and argues that in the case at bar
there are not enough factors connecting the appellant's investment income to a
reserve.
[42] It will be
remembered that, in Recalma, Judge Hamlyn gave considerable weight to
the appellants' place of residence, but that the Federal Court of Appeal
considered the situs of the investment income and its connection to the
reserve to have more weight. In the present case, the appellant's place of
residence was the subject of a number of observations given the fact that the appellant
owned a residence in St-Félicien and then in Roberval during the years in
question. The appellant's spouse and children occupied the off‑reserve
residences for ten months of the year, that is, during the school year. The appellant
also occupied these residences from time to time on weekends on account of the
travel required by his work. In the summer, the family lived on the Obedjiwan
reserve. The appellant's position that his St-Félicien and Roberval residences
were secondary residences is difficult to accept when one considers that a
principle residence is the place where one normally lives and that, in this
case, the family spent ten months of the year in their off‑reserve
residence. We note that the appellant did not report any capital gain on the
disposition of the St-Félicien residence.
[43] In addition, the
nature of the appellant's income is a factor that may create a connection with
the reserve. In the present case, the income generated by the business is
connected to a reserve because it comes from the activities of his business,
which consists in the provision of a service to Aboriginals by Aboriginals,
with the exception of a few off‑reserve services. Where there is some
difficulty in terms of a connection with the reserve is the fact that the Court
is not able to conclude that the appellant's business is the source of the
income deposited, which, in turn, generated investment income. The appellant
was unable to establish the source of a quite considerable sum of money used to
generate the investment income, and consequently I am unable to establish a
connection with a reserve for this part of his investments.
[44] The place where the
investment income is used raises certain questions when we consider the facts
in this case. The appellant used a joint account, which he held with his spouse,
for the family's needs on and off the reserve. Since the appellant's family
lived off the reserve for most of the year, it is possible to infer that a
large portion of the investment income was used off‑reserve. Although the
evidence shows that most of the income was reinvested, it does not allow us to
conclude that the investment income was used on the reserve.
[45] Lastly, we must
determine if the Caisse's activities have a connection to the reserve. It is
clear from the evidence adduced that the Caisse populaire de Pointe‑Bleue
is situated on the reserve, that it serves Aboriginal clients, that it hires Aboriginal
staff and that Aboriginals sit on its board of directors. However, it must also
be acknowledged that the Caisse is not exclusively Aboriginal as regards its
structure and mission. It has the same objectives as any other credit union, and
these are explicitly stated in the statute governing credit unions. It is a co-operative
that anyone may join and it offers its services to all its members, whether
they are Aboriginal or not. The Caisse is subject to federal and Quebec
legislation. The only distinctive characteristic of this credit union is that
it is situated on a reserve and, in my view, that factor carries little weight
in the present case.
[46] In the case at bar,
it seems obvious to me that the investment income, in the form of the interest
paid to the appellant, was beneficial to the traditional way of life of the
Aboriginals living on the Obedjiwan or Pointe‑Bleue reserves. However, as
Judge Tardif pointed out in Lewin, the operations of the credit union that
paid the appellant the interest did not serve only the interests of the reserve,
and any banking institution situated off the reserve could have provided the
same services. Judge Tardif went on to say that the services provided and
offered by the credit union on the reserve were basically ordinary services
related to the economic aspects of life; they had nothing to do with the Aboriginals'
culture and traditional way of life.
[47] I do not believe
that there is any potential risk here of erosion of Native property. The
investment income is the product of capital invested with the Caisse and that
capital is not threatened. It is the growth of that capital and the means used
to accomplish that growth that are the object of the last factor, namely, whether
the income‑generating activity is tied to the economic mainstream and to
what extent.
[48] The question at
issue relates to this last factor, that is, the source of the investment
income. In the context of this case, the appellant must show that the investment
income was generated on the reserve. To that end, the appellant attempted to
show that the Caisse has some autonomy in how it carries on its general
operations beyond its obligations to the Federation. He stressed the fact that
most of the Caisse's members are Aboriginals and that it is their capital that
the Caisse invests. In my view, the appellant is seeking to show through these
arguments the connection between the Caisse and the reserve and, possibly, to
identify the source of the appellant's income, but does that adequately address
the question of how the Caisse generates its investment income?
[49] It is true that the
Caisse loans money to its members and that many of these are Aboriginals.
However, the Caisse has three main sources of income, the first being deposits
and investments with the Federation. The Federation has a statutory obligation
to put these funds in investment funds and liquidity funds that, in turn, are
invested in the economic mainstream off the reserve. These investments with the
Federation are managed solely by the Federation and the evidence shows that the
Caisse populaire de Pointe‑Bleue has had surpluses for several years. The
evidence also reveals that approximately 25% of its members' deposits are
invested with the Federation. The remaining 75% constitutes the Caisse's second
source of income and is loaned to its members residing on the reserve and off
the reserve, notably in the form of lines of credit and consumer loans. This
type of loan by the Caisse is offered to all members, both Native and non‑Native,
living on a reserve or off‑reserve. The departmental guarantees covering
housing loans for Aboriginals are offered to all financial institutions located
on or off a reserve and the Caisse populaire de Pointe‑Bleue therefore
does not hold a monopoly on housing loans on the Pointe‑Bleue or
Obedjiwan reserves. It should also be noted that, according to its financial
statements, the Caisse has invested with the Federation funds equal to the
amount of its loans to its members. Lastly, there is the income generated from
accessory products such as administration fees and brokerage fees.
[50] It is true that, in
the case at bar, a majority of the members of the Caisse populaire de Pointe‑Bleue
appear to be Aboriginals. I say "appear" because customers are not
asked, when they open an account, if they are Aboriginals, and the Certificate
of Indian Status number is not required. The percentage of Aboriginal members
is based on an unofficial evaluation by the Caisse's management. Regardless,
even if the majority of the Caisse's clients are Aboriginals, it must be
acknowledged that these Aboriginal investors do not control the surpluses
invested with the Federation and the Caisse cannot avoid its obligation to make
these investments in the economic mainstream. The Caisse's bylaws cannot
prescribe that its board of directors be composed solely of Aboriginals since
the statute governing the Caisse provides that members of the board of
directors must be elected by the Caisse's regular members. Accordingly, it is
virtually impossible to distinguish this case from Lewin on this point.
[51] Counsel for the appellant
suggests that, in the case at bar, it would be possible to break down the
interest income into that generated by "Aboriginal" investments and
that generated in the economic mainstream. We must remember that it is the
income that must be connected to a reserve and not the benefit that it brings
to Aboriginals. Even though the Caisse brings a benefit to Aboriginals, that does
not necessarily mean that that benefit creates a factor connecting this
property to the reserve, as is required by the case law. The idea of dividing
income in order to create exempt portions was not accepted by the Federal Court
of Appeal in Akiwenzie v. Canada, 2003 FCA 469, and Monias,
2001 FCA 239. Further, if we were to undertake that exercise, we would, among
other things, have to determine whether the Aboriginals to whom the Caisse
loans money live on or off the reserve in order to ascertain whether there is a
connection with the reserve. Would it be possible, through the application of
this formula, to find that there are sufficient activities on a reserve to allow
one to conclude that the investment income is derived predominantly from the
reserve? In my opinion, the exercise that would have to be engaged in to
determine the exempt income involves too many imponderables and complexities to
be practicable.
[52] For the appellant's
investment income to be exempt, there would have to be connecting factors
creating a primary connection with a reserve. No such factors exist in this
case. Accordingly, the investment income is not tax‑exempt. The appellant's
tax returns for the 1997, 1998, 2000 and 2001 taxation years were indeed filed
late and the Minister was justified in imposing a late filing penalty. The
appeal is dismissed with costs.
Signed at Ottawa, Canada, this 6th day of December 2007.
"François Angers"
Translation
certified true
on this 19th day
of March 2008.
Erich Klein, Revisor