Citation: 2007TCC625
Date: 20071206
Docket: 2003-4582(IT)G
BETWEEN:
THE ESTATE OF ROLLAND BASTIEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers J.
[1] This is an appeal
from an assessment made by the Minister of National Revenue (the Minister) and
dated March 6, 2003, in which the Minister added investment income of
$73,511 in the computation of the appellant's income for the 2001 taxation
year. The assessment was confirmed by the Minister on
September 29, 2003. The above investment income was from term
deposits with two credit unions situated on Indian reserves, specifically, the
Caisse populaire Desjardins du Village Huron on the Wendake Huron reserve and
the Caisse populaire Desjardins de Pointe‑Bleue on the Mashteuiatsh (Pointe‑Bleue)
reserve near Roberval. The issue is whether the investment income of the late
Rolland Bastien is property situated on a reserve and therefore exempt from
taxation.
[2] The parties agreed
on certain facts concerning the late Rolland Bastien. I am therefore reproducing
below the partial agreement on the facts filed at the hearing:
[translation]
1.
Rolland Bastien was
born in 1919 on the Reserve and always lived there until his death in 2003.
2.
Rolland Bastien was
an Indian within the meaning of the Indian Act; he belonged to the
Huron/Wendat nation.
3.
His heirs are his
spouse and his children, all Hurons living and having always lived on the
Wendake reserve (hereafter “the Reserve”).
4.
Throughout his life,
Rolland Bastien lived on the Reserve and throughout his working life he worked
there manufacturing moccasins.
5.
From 1970 to 1997,
Rolland Bastien personally operated a moccasin manufacturing business: Les
Industries Bastien enr.
6.
Prior to 1970, he
worked in the family business, Bastien Brothers Inc., also a moccasin
manufacturer, which was founded by his great‑grandfather and was located
on the Reserve.
7.
Mr. Bastien
operated his business under the name of Les Industries Bastien enr., which
he registered in 1970, as appears from the business name filed as
Exhibit A‑6 in support of this agreement.
8.
In 1997, Rolland
Bastien disposed of the business in favour of his children, Denis Bastien and
Ginette Bastien, both residing then, as they do now, on the Reserve.
9.
Denis Bastien is the
chief of the Huron Band Council and as part of his responsibilities handles
matters relating to hunting, fishing and the hunting and fishing rights resulting
from the Huron Treaty of 1760.
10.
The sale price was
payable over a five‑ to eight‑year period.
11.
At all times relevant
to the dispute, the main commercial activity of Les Industries Bastien enr. was
the manufacture and sale of moccasins (95%), and to a lesser degree, the
manufacture of snowshoe harnesses (5%). The moccasins were manufactured at the
facilities of Les Industries Bastien enr., located on the Reserve.
12.
The business employed
about 12 people, all Hurons and all residing on the Reserve.
13.
In addition to its
employees, the business also used subcontractors for related tasks of beading
and lacing the moccasins.
14.
The subcontract work
was assigned on average to five or six people working from their homes. Half of
these workers lived off the Reserve.
15.
Approximately 15% of
the moccasins manufactured by Les Industries Bastien enr. are sold on the
Reserve; the rest are sold across Canada, mainly on
other Indian reserves.
16.
The moccasins are
made mainly from moose skin and deerskin, but also from cowhide.
17.
The materials used in
the manufacture of the moccasins come from outside the Reserve, mainly from
Kamouraska, and to a lesser degree, Ontario.
18.
The sale of moccasins
and crafts is the main source of revenue, accounting for about 95% of the sales
of Les Industries Bastien enr.
19.
Moreover, about 5% of
the activities of Les Industries Bastien enr. involves the sale of
snowshoes, which are not manufactured by Rolland Bastien's business, although
it does make the harnesses.
20.
The snowshoes,
without harnesses, are supplied to Les Industries
Bastien enr. by another registered Huron business, which
makes the snowshoes on the Reserve.
21.
The situation
described above is representative of Rolland Bastien's business between 1970
and 1997.
22.
The manufacture of
moccasins is considered by the Huron community to be a traditional activity.
23.
The business operated
by Rolland Bastien created jobs in traditional areas of activity for the
benefit of members of the Huron community living on the Reserve.
24.
When he was still
alive, Rolland Bastien held account number 1270 at the Caisse.
25.
At the end of the
2001 taxation year, Rolland Bastien held term deposits totalling at least
$655,000, as shown by the deposit certificates and the history of account number
1270 filed as Exhibit A‑7 in support of this agreement.
26.
In the 2001 taxation
year, Mr. Bastien received interest on his investments at the Caisse
populaire du Village Huron totalling $64,416.79, as appears from his tax return
filed as Exhibit A‑8 in support of this agreement.
27.
This interest was
deposited in the transaction savings account in account number 1270 during
the 2001 taxation year, as appears from the transactions record, Exhibit A‑7.
28.
Mr. Bastien also
received in the 2001 taxation year interest totalling $9,095.02 on investments
with the Caisse populaire Desjardins de Pointe‑Bleue, as appears from his
tax return, Exhibit A‑8.
29.
Rolland Bastien has
no connection with the Pointe‑Bleue reserve, other than the fact that he
has an account at the Caisse populaire de Pointe‑Bleue.
30.
Rolland Bastien never
lived on the Pointe‑Bleue reserve, never operated a business on that
reserve, and never held any property on that reserve, except for the savings
account at the Caisse populaire de Pointe‑Bleue.
31.
The income used for
his investments with the Caisse populaire du Village Huron and the Caisse
populaire de Pointe‑Bleue came exclusively from the operation of his
business, Les Industries Bastien enr., and from any proceeds from the
sale of the business paid by his children since 1997.
32.
Rolland Bastien
considered the income from the operation of his business Les Industries Bastien
enr. to be property exempt from taxation; this income was not audited by
the Canada Revenue Agency and was not taxed.
33.
The investment income
generated by the deposit certificates with the Caisse populaire du Village
Huron and the Caisse populaire de Pointe‑Bleue was not used to purchase capital
property outside the Reserve; it was reinvested in the business or used for the
everyday needs of Mr. Bastien and his spouse or to make other term
investments with those credit unions.
34.
In the Lewin case,
Mr. Lewin never lived on the reserve.
[3] I reproduce below a
second partial agreement on the facts that the parties agreed to adduce as
evidence. This agreement represents a series of facts about the Caisse
populaire du Village Huron.
[translation]
1.
During the period
relevant to this case, the Caisse populaire Desjardins du Village Huron (the
Caisse) was governed in particular by the Savings and Credit Unions Act,
R.S.Q. c. C-4.1, and the Act respecting financial services cooperatives,
R.S.Q. c. C-67.3 (the Act).
2.
The Caisse was founded in 1965 and since then,
its head office, which is its only place of business and only capital asset, has
been located on the Village Huron reserve, a reserve within the meaning of
section 2 of the Indian Act (S.C., c. I-5); copies of the articles of
incorporation are produced by consent as Exhibit A-1.
3.
The Caisse is located on the Reserve pursuant to
the terms and conditions set out on the permit issued by the Minister of Indian
Affairs and Northern Development, upon approval of the Band Council, all in
accordance with section 28 of the Indian Act; copies of the permits in
force at all times relevant to the dispute are produced by consent as Exhibit
A-2.
4.
All the founders of the Caisse were members of
the Huron community and lived on the Reserve.
5.
Between 1997 and 2003, the board of directors
and the audit and ethics committee were composed entirely of Huron residents of
the Reserve.
6.
According to the articles of incorporation of
the Caisse, at the beginning, its recruitment territory was the Wendake Indian reserve
(the Reserve).
7.
In 1992, the Caisse changed the territory in
which it could recruit members, expanding it to include the Reserve and the Quebec
City Urban Community.
8.
The Caisse, in accordance with the Act, chose to
consider two types of members: regular members, composed of members in the
territory established by the Caisse in its articles of incorporation, and associate
members, from outside its territory.
9.
The late Rolland Bastien was a regular member.
10.
Steven Lewin, in Lewin v. Canada,
1999-504 (IT)G was an associate member.
11.
The regular and associate members had access to
the same products and services. The main distinction was that associate members
did not have the right to vote at the Caisse's meetings.
12.
From 1996 to 2003, 60% of the Caisse's members
were Indians. Of this percentage, the majority lived off the Reserve; at least
95% of the Hurons living on the Village Huron reserve are members of the
Caisse.
13.
The Caisse has an agreement with the Huron
Nation Band Council under which it grants housing loans to Indians living on
the Reserve who want to purchase or build a home on the Reserve.
14.
Under the agreement, the Band Council guarantees
the housing loan up to a certain amount, which it does by way of a suretyship
in favour of the Caisse.
15.
In 2001, the maximum amount of the Council's
sureties was $105,000 for purchases of existing housing. That amount was increased
to $150,000 in 2003.
16.
For new housing construction, the Band Council
would grant Huron members assistance or a contribution not exceeding $58,000
and was prepared to guarantee any loan by the Caisse up to $47,000. This amount
may also have been increased in 2003, but the figures are not known.
17.
This method, by which the Caisse loans
money to Hurons on the Reserve on the strength of the Band Council's guarantee
of the performance of their obligations, resulted from the difficulty
experienced by Indians living on a reserve in getting loans because, under
section 89 of the Indian Act, their property cannot be seized.
18.
The Caisse cannot seize property or buildings on
the Reserve. It does not lend unless surety is provided.
19.
If the acquisition cost of the housing or the
construction costs are higher than the amount guaranteed by the Band Council,
the Caisse may, after reviewing the borrowing member's credit, grant a personal
loan, not guaranteed by the Band Council. It would not require additional
guarantees unless the borrowing member is able to provide some, in which case
the Caisse will so require.
20.
The Caisse is willing, on the basis of the
guarantees provided by the Minister of Indian Affairs and Northern Development,
to grant housing loans to Indians other than those on the Reserve for
properties located on other reserves.
21.
From 1996 to 2003, loan activities on the
Reserve were not enough to make the Caisse's operations profitable.
22.
From 1996 to this day, the Caisse has been
seeking borrowers from off the Reserve and beyond its territory because its own
market is insufficient.
23.
From 1996 to this day, the Caisse has been carrying
on an offensive aimed at gaining new hypothecary loan clients off the Reserve
by consulting the land register and inviting borrowers with competitors to
renew their hypothecs, but with the Caisse.
24.
The Caisse also solicits businesses off the
Reserve with a view to having them take out commercial loans.
25.
Commercial activities on the Reserve are not
sufficient to make the Caisse's operations profitable.
26.
From 1996 to 2003, the Caisse had the following
income-generating assets:
·
Investments in the form of cash deposits and
investments with the Fédération des Caisses Desjardins or elsewhere, and
·
Loans to regular and associate members,
as seen from the financial statements for the Caisse's fiscal years
ending from 1996 to 2003 and filed as Exhibit A-3 in support of this agreement and
from the trial balance filed as Exhibit A-4 in support of this agreement.
27.
Of the Caisse's funds used for loan activities,
at most a third of them are lent to Indians on reserves.
28.
In 2001, the Band Council provided surety to the
Caisse for loans to Hurons totalling $824,488.76; a copy of a letter from the
Band Council confirming this is filed as Exhibit A-5.
[4] The parties also
agreed to enter on the record herein the testimonies of Gaston Boyer, Anne
Gill, Guylaine Simard and Hubert Robichaud given at the hearing in Alexandre
Dubé v. The Queen, 2003-4665(IT)G.
[5] In addition to the facts
concerning the Caisse populaire du village Huron, there is the testimony of its
general manager, Yvon Bastien, who explained that while the Caisse has adopted
the general credit organization standard of the Fédération des Caisses populaires
Desjardins du Québec (the Federation) and the financing practice established by
the Federation in the manual on credit for individuals, it also takes into
account the adaptations and exceptions set out in other policies adopted by the
board of directors. The manager made specific reference to a benchmark debt
ratio for clients whose salary is net of tax; this is a ratio that was adopted
by the Caisse's board of directors and that makes it possible to fully
finance a house on the Reserve. Where necessary, the Caisse grants personal
loans amortized like hypothecs and confers authority on the manager to grant a
loan under circumstances where the benchmark debt ratio is exceeded, if, in his
judgment, it is appropriate to do so.
[6] However, the Caisse
does have to justify this practice to the Federation because it contravenes the
standards, and the Federation does not appreciate any deviation from its
standards. The benchmark debt ratio and the granting of loans without a
guarantee or with a guarantee provided by the band council only apply to
Indians who live and work on the Reserve or, more particularly, to Indians
whose income is non-taxable.
[7] In 2001, 60% of the
members of the Caisse du Village Huron were Indians. The Caisse had between
4,000 and 5,000 members from 1996 to 2003. Its territory, as indicated in
paragraph 7 of the agreement on the facts, corresponds to that of the Reserve
and the Quebec City Urban Community. The services to Aboriginal and non‑Aboriginal
members are identical and there is no difference in the interest rates on
investments for Aboriginal and non-Aboriginal persons. However, interest rates
on unsecured loans, or loans guaranteed by the band council, are higher.
Off-reserve hypothecary loans are offered at better rates.
[8] It should be noted
that, according to paragraphs 22 to 25 of the agreement on the facts, since
1996 the Caisse has expanded its activities beyond its territory in order to
make its operations profitable. In 1992 it expanded its territory to include the
Quebec City Urban Community.
[9] The financial
statements for the Caisse populaire du Village Huron for 1996 to 2003 and the
trial balance for 1993 to 2003 were submitted as evidence. As with
the Caisse populaire de Pointe-Bleue, the assets of the Caisse du
Village Huron are composed mainly of cash deposits and investments with the
Federation, which accounted for, on average, 25% of its assets in the
years 1996 to 2003. The balance of the assets is composed in particular of
housing loans on and off the Reserve, consumer loans and business loans.
[10] All of the Caisse du
Village Huron's investments are made off the Reserve and all are managed by the
Federation. These are term deposits with the Federation and mandatory participation
deposits. Until 2000, the Caisse du Village Huron also purchased municipal
bonds from the Federation. They were sold in 2001. As for loans to individuals
and businesses, which were the most common at 75% of the Caisse's assets,
around 30% of these loans were granted to Indians living on a reserve,
including a reserve other than Wendake. This means that around two thirds of
the Caisse's assets were invested outside the Reserve. This was true from 1996
to 2003. During that period, the Caisse did not grant any housing loans guaranteed
by the band council.
[11] The Caisse populaire
Desjardins de Pointe-Bleue 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 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 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.
[12] 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 can attend meetings but may not vote, and they do not reside
within the Caisse's territory. There is no other restriction. Despite this
difference, the late Rolland Bastien was, prior to his death, a regular member
even though he did not reside within the Caisse's territory. It would appear
that the Caisse considered that its territory could be larger if it so directed.
[13] 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.
[14] The Caisse populaire
de Pointe-Bleue has three main sources of revenue: revenue from deposits and
investments it makes with 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 revenue from accessory products, such as administration fees, the sale of
travellers cheques and brokerage fees.
[15] 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 in 2005 respectively.
[16] 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.
[17] 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.
[18] The Caisse populaire
de Pointe-Bleue 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 those 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.
[19] The Caisse populaire
de Pointe-Bleue 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
[20] 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 Income Tax Act (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.
[21] The exemption by
another enactment of Parliament is that set out in section 87 of the Indian
Act (the IA), which 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.
[22] 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 late Rolland Bastien was 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.
[23] 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. No. 242 and [2002]
F.C.J. No. 1625, Sero and Frazer, [2001] T.C.J. No. 345 and 2004 FCA 6,
and Large v. The Queen, 2006 TCC 509).
[24] 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.
[25] 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 not to 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.
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.]
[26] 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?
[27] 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.
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. . . .
[28] 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.]
[29] 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.
[30] 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.]
[31] 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.]
[32] 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.
[33] 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.
[34] Counsel for the appellant
argues that the present case must be distinguished from Recalma v. Canada, [1996] T.C.J. No. 675,
because here the appellant's income was derived from term deposits and not from
securities purchased through a bank with income generated from the sale of
traditional Aboriginal products made on the Reserve. Counsel for the appellant
also prepared a comparative table of the key facts in the analysis of the
connecting factors that were used to determine the situs of the
investment income in Recalma, supra, Lewin, supra,
and Sero and Frazer, supra. He maintains that the facts in the
present case meet all of the key criteria and argues that income flow is a
legal fiction, referring in this regard to the contractual nature of deposit
certificates, the status of the parties and the nature of the contract under
the Civil Code of Quebec (the “Code”), and arguing that this legal fiction
may not be used to subject the investment income of an Aboriginal to taxation
because of the manner in which the Caisse's assets are structured or the manner
in which they are managed. He argues that the contract that the Caisse entered
into with the Federation has nothing to do with an Aboriginal who purchases a
term deposit. Any ambiguity in section 87 of the Indian Act should
be resolved in the Aboriginals' favour. He submits as well that what sets this
case apart from others is the fact that the Caisse populaire du Village Huron
was authorized by the Minister and the Band Council to locate on the reserve
and that the Caisse's policy is different in that it offers unsecured
commercial loans in accordance with a resolution adopted by the Caisse's board
of directors on September 24, 1996. Counsel concluded his arguments
by asserting that interest cannot be taxed until it is paid and that the fact
that the interest is derived from the economic mainstream is of no concern to
Indians.
[35] For her part,
counsel for the respondent argues that there is not a close connection with the
Reserve solely because the Caisse carries on activities that benefit some of
its members. The fact that the Caisse is situated on the Reserve is not a
conclusive factor. The services that the Caisse provides to Aboriginals are the
same ones that it provides to its non‑Aboriginal members. According to
the respondent, even if there is a contract between the Caisse and an Aboriginal,
that is not a sufficient basis for saying that there is in that case a close
connection between the Caisse and the Reserve. The respondent reiterated certain
arguments that she had presented in Dubé and maintains that there is
nothing in this case to justify a decision different from that rendered in Recalma,
Lewin, and Sero and Frazer. Counsel for the respondent argues
that little weight should be given to personal factors. Since the income‑generating
activities of the credit unions are the same, the Court must determine how that
income was earned. Accordingly, it is necessary to examine the income‑generating
activities and decide if they are closely connected to the reserve.
[36] Having heard Dubé,
supra, and the other related cases, in which part of the evidence from Dubé
was entered on the record, I do not want to repeat my entire analysis from
those cases. I will therefore limit myself to repeating a few passages from my
judgment in Dubé, namely, paragraphs 45, 46, 47, 48, 49 and 50.
[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.
[37] In the case at bar,
it is true that the Reserve was the late Rolland Bastien's place of residence,
the source of the capital, the location of the Caisse populaire, the place where
the investment income, or a good part of it was used, the location of the
investment vehicle, and the place where the investment income was paid.
However, these are factors of lesser importance in determining the situs of
investment income, as for that purpose the emphasis is mainly on the connection
between the investment income and the reserve and the extent to which that
income can be considered as being derived from an economic mainstream activity.
We must also take into account the beneficial effect of the income on the
traditional Native way of life and the potential danger of the erosion of
Native property. It is thus in this context that the analysis must be carried
out, as Linden J.A. held in Recalma, supra. Obviously, that
analysis must also be carried out bearing in mind the purpose of the exemption
set out in the Indian Act, the type of property involved and the nature
of the taxation of this property (Mitchell, supra, and
Williams, supra).
[38] The exercise that
must be engaged in is to determine how the income was earned. It must be
determined what the Caisse did with the money, that is to say, what the income
generating activities were, and then whether these activities were, at the
time, closely connected to the reserve. In my opinion, the legal entities in
question and the contractual nature of the investment certificates under the Civil
Code do not help us carry out the analysis required under the case law. We
must focus on the intended purpose of section 87 of the Indian Act.
[39] I cannot accept counsel
for the appellant's arguments concerning the Caisse's policies regarding
unsecured commercial loans to Aboriginals and the debt ratio, or the argument
that interest income is only taxable when paid. None of this creates a close
connection with the reserve. As for the first two arguments, what are actually
involved are benefits for the Aboriginal members of the Caisse populaire. Regarding
the interest income, it is taxable even if the taxpayer did not receive it
(paragraph 12(1)(c) of the Income Tax Act). Lastly, I also cannot
accept the argument that there is ambiguity in the interpretation of the Act.
The Federal Court of Appeal has precisely formulated the analysis that is
required in order to rule on the point at issue.
[40] In this case, the
credit unions, their income-generating activities and the connecting factors
are the same as in Lewin. As a result, I must conclude that the appellant's
investment income is not situated on a reserve and is therefore not tax-exempt.
[41] The appeal is
dismissed and the respondent is entitled to her costs.
Signed at Ottawa, this 6th day
of December 2007.
"François Angers"
Translation
certified true
on this 19th day of March 2008.
Erich Klein, Revisor
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