Citation: 2007TCC722
Date: 20071206
Docket: 2003-4468(IT)I
BETWEEN:
JEAN-YVES BOIVIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1] The Appellant is
appealing assessments made by the Minister of National Revenue (the Minister)
on September 15, 2003, for the 2000 and 2001 taxation years. The Minister added
investment income of $2,705.51 and $1,979.47 in calculating the Appellant’s
income for the two years in question on the ground that the investments were
not the personal property of an Indian situated on an Indian reserve. In
addition, for 2001, the Minister imposed a penalty equivalent to 10% of
$1,979.40 under subsection 163(1) of the Income Tax Act (the Act) on the
ground that the Appellant had not reported interest income for one of the three
years preceding 2001. However, the Minister informed the Court that he was
abandoning the last item and that he therefore consented to a judgment amending
the assessment to eliminate the penalty imposed under subsection 163(1) of the
Act.
[2] The Appellant is a
Status Indian who has lived on the Pointe-Bleue Reserve since he retired from
the public service in 1993. He received investment income from the Caisse
populaire de Pointe-Bleue in the amounts stated above during the two taxation
years in question. The Caisse is located within the Pointe-Bleue Reserve. The
Appellant acknowledged that the Caisse earns its income from two main sources,
from which it is able to pay interest income to its members. Those sources are
investment income it earns from its own deposits and investments with the
Fédération des Caisses Populaires Desjardins and interest income it earns from
the loans it grants to its members, whether or not they are residents of the
reserve, and whether or not they are Aboriginal people.
[3] At the hearing of
this matter, it was agreed that part of the evidence in Dubé v. Her Majesty
the Queen would be entered in the record of this case. The evidence in
question consists of the testimony of Anne Gill, Guylaine Simard,
Gaston Boyer and Hubert Robichaud and the exhibits entered in evidence by
them.
[4] 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 which about 4,200 were
Indians who lived on the reserve and about 400 were neither Indians 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 Indians, the
Caisse’s staff does not ask clients interested in opening an account if they
are Indian. Nor do they ask them to disclose their status certification number.
The membership list does not indicate whether the members are Indians or not.
Indeed, the percentage of Indian members is based on an estimate by the
Caisse’s management. Of these members, 30% are residents of the Obedjiwan
reserve. The Caisse’s primary area is Pointe‑Bleue, but there is nothing
preventing a non‑resident from becoming a member.
[5] The Caisse has two
membership categories: regular members and auxiliary members. A regular member
resides within the Caisse’s territory and is entitled to vote at meetings of
the Caisse. Auxiliary members do not reside within the 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.
[6] The Caisse’s board
of directors is composed of seven members who were, at the time of the hearing,
all Indians and residents of Pointe‑Bleue. The evidence did not show if
the Caisse’s by-laws require that the board of directors be composed of Indian
members. As for the position of director, there is no requirement that an
Indian hold this position, or that the Caisse’s employees be Indian. If individuals
hold the same qualifications, an Indian would be given preference.
[7] The Caisse has
three main sources of income: income 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 credit
unions, such as the investment fund and the liquidity fund; income generated
from loans made to its members; and accessory products, such as administration
fees, the sale of travellers cheques and brokerage fees.
[8] The Caisse’s
balance sheet, as adduced, reveals that it has the same level of funds invested
with the Federation as it has in loans made to its members. In 2004 and in
2005, the Caisse had liquid assets and investments in the amount of
$34.9 million and $39 million in each of these years.
[9] Term deposits
invested with the Federation are managed solely by the Federation and represent
the surplus savings that the Caisse is unable to loan to its members. In this
instance, the Caisse has had surpluses for several years.
[10] As for the
investments and deposits with the Federation, these are qualifying shares,
mandatory deposits, liquidity deposits and others. In terms of the loans to
members, they consist of on‑reserve housing loans and off‑reserve
hypothecary loans, consumer loans, investment loans, such as lines of credit,
and business loans, all both on and off the reserve.
[11] 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. These figures show that it loans about
75% of the deposits it receives from its members or 75% of its revenue. The
excess liquidity is invested with the Federation, which explains the asset
shown on the balance sheet and to which I referred earlier.
[12] The Caisse does not
have status as an Indian business and pays deposit insurance premiums for all
its members. Each year since 2003, it has remitted $75,000 in gifts and
sponsorships to the Pointe‑Bleue and Obedjiwan communities or reserves.
The proportion of loans granted to its Indian members is 77%.
Analysis
[13] The issue is
therefore whether the investment income of an Indian is personal 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) 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.
[14] Section 87 of the IA
also provides for 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:
(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.
[15] For paragraph 87(1)(b)
of the IA to apply, three elements must be present: being an Indian within the
meaning of the IA, owning personal property and the property being situated on
a reserve. In the present case, it was admitted that the Appellant is an Indian
and 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 several legal principles have been developed through the
case law.
[16] Therefore, it is now
possible to establish the legal status of this issue which deals primarily with
taxation of investment income of Indians. The Federal Court of Appeal ruling in
Recalma v. The Queen, (1998) 98 D.T.C. 6238 is the leading case on the
issue of whether or not investment income is to be included in taxable income.
This decision relies on the principles stated in Williams v. The Queen,
[1992] 1 S.C.R. 877. 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] F.C.J. 6, and Large v. The Queen, [2006]
TCC 509).
[17] It is important to
remember the interpretation of the tax exemption granted to Indians within the
meaning of the two above-mentioned legislative provisions in many important
judgments, in particular the limits of the tax exemption established by the
Supreme Court of Canada in Nowegijick v. The Queen, [1983] 1 S.C.R.
29, at paragraph 21.
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.
[18] This being said, in Mitchell
v. Peguis Indian Band, [1990] 2 S.C.R. 85, 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 this obligation as the 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.]
[19] At paragraph 123, La
Forest J. provides more details regarding the concept of situs:
123. 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?
[20] At paragraph 123, La
Forest J. provides more details regarding the concept of situs:
123. 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?
[21] In Williams, supra,
Gonthier J. made the exemption provided in section 87 subject to the
manner in which Indian taxpayers chose 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:
18. 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.
19. 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…
[22] In his judgment,
Gonthier J. describes the legal analysis that must be applied to determine
whether taxation violates section 87 if 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.]
[23] 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.
[24] These are the
connecting factors that were reiterated in Recalma, Lewin
and Sero and Frazer, and that were used to determine whether investment
income should be excluded from taxable income on the ground that it is situated
on a reserve. In Recalma, the Federal Court of Appeal confirmed the
judgment by Hamlyn J. of this Court and recognized four factors to consider in
determining the situs of investment income.
11. 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 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.
12. 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.
13. 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.]
[25] This approach was
followed in Lewin of this Court and in Sero and Frazer of the
Federal Court of Appeal, supra. In Sero and Frazer, Sharlow J.A.
also took into consideration some criticisms about Recalma, but it did
not retain any that would change her finding that the investment income was not
situated on a reserve. In fact, only Linden J.A., in Recalma, and Tardif
J., in Lewin, recognized the possibility that investment income might be
generated on a reserve. In Recalma, Linden J.A. stated the following at
paragraph 14:
…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.]
[26] In Lewin, at
first instance, Tardif J. 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.
[27] If we return to the
four criteria established by Linden J.A. in Recalma to determine the situs
of investment income, the first three criteria must certainly be met, but the
fourth is the most important: the extent to which the income is derived from
mainstream economic activity or solely or mainly Aboriginal activity. These
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 to the erosion of Native property;
4. the
extent to which the investment income may be considered as being derived from
mainstream economic activity.
[28] It should be noted
that, in Recalma, Hamlyn J. accorded considerable weight to the
Appellants’ location 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.
[29] The important
question is therefore whether the Caisse’s activities have a connection to the
reserve. It is clear from the evidence adduced that the Caisse populaire of the
Pointe‑Bleue Reserve is situated on the reserve, that it serves Indian
clients, that it hires Indian staff and that Indians sit on its board of
directors. However, it must also be acknowledged that the Caisse’s structure
and vocation is not exclusively Indian. It has the same objectives as all other
credit unions, which are explicitly defined in the legislation governing credit
unions. It is a cooperative that anyone may join and it offers its services to
all its members, whether they are Indian 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 this matter.
[30] In the case at bar,
it is obvious to me that the investment income, in the form of the interest
paid to the Appellant, had a benefit to the traditional way of life of Indians
living on the Obedjiwan or Pointe‑Bleue reserves. However, as
Tardif J. 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. He 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
Indians’ culture and traditional way of life.
[31] I do not believe
that there is any potential risk here of erosion of Indian property. The
investment income is the product of capital invested in 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, specifically
whether the income‑generating activity is tied to the economic mainstream
and to what extent.
[32] The question at
issue relates to this last factor, determining 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
tried to show that the Caisse has some autonomy in how it carries out its general
operations beyond its obligations to the Federation. He stressed the fact that
most of the Caisse’s members are Indians and that it is their capital that the
Caisse invests. In my view, the Appellant is trying 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 it adequately address
the question of how the Caisse generates its investment income?
[33] It is true that the
Caisse loans money to its members and that many of its members are Indians.
However, the Caisse has three main sources of income, the first being deposits
and investments made with the Federation. Under the legislation, the Federation
has an 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.
Ministerial guarantees covering housing loans for Indians 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, based
on its financial statements, the Caisse has as many assets invested with the
Federation as it has in loans to its members. Lastly, there is the income
generated from accessory products, such as administration fees, brokerage fees
and others.
[34] It is true that, in
the case at bar, a majority of the members of the Caisse populaire de Pointe‑Bleue
appear to be Indians. I say “appear” because customers are not asked when they
open an account if they are Indians and the status certificate number is not
required. The percentage of Indian members is based on an unofficial evaluation
made by the Caisse’s management. Regardless, even if the majority of the
Caisse’s clients are Indians, these Indian 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
Indians since the legislation governing the Caisse stipulates 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.
[35] In order for the
Appellant’s investment income to be exempt, there would have to be connecting
factors and a primary connection to a reserve. That is not the case here.
Accordingly, the investment income is not exempt from income tax.
[36] The appeal is
therefore dismissed, except with respect to the penalty imposed under
subsection 163(1) of the Act. On that point, the appeal is allowed and the
assessments are referred back to the Minister of National Revenue for
reconsideration and reassessment
Signed at Ottawa,
Canada, this 6th day of December 2007.
"François Angers"
Translation certified
true
on this 8th day of February 2008.
Monica F.
Chamberlain, Reviser
Email this Content