Starr v. The Queen, docket 2001-2003-IT-I (Informal Procedure)

Date: 20011227

Docket: 2001-2003-IT-I

BETWEEN:

VINA STARR,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Beaubier, J.T.C.C.

[1]            This appeal pursuant to the Informal Procedure was heard at Vancouver, British Columbia, on December 6, 2001. The Appellant testified. The Respondent called Alexander Abernethy who was a trust officer of National Trust Company and its successor at the relevant times.

[2]            The facts and issues in dispute are summarized in the Reply to the Notice of Appeal, paragraphs 2 to 14 of which read:

2.              He admits, as alleged in the preamble to the Notice of Appeal (Amended), that the Appellant's address is 306 - 1075 Comox Street, Vancouver, British Columbia and that she is appealing assessments of tax for her 1997 and 1998 taxation years.

3.              He admits, as alleged in Part A, paragraph 1 of the Notice of Appeal (Amended), that the Appellant is an Indian person within the meaning of s. 2 of the Indian Act.

4.              In her income tax returns, the Appellant reported income from investments held in the Vina A Starr Trust (the "trust") but claimed deductions for this income on the basis that it was exempt from tax because it was earned on a reserve.

5.              By Notices of Assessment dated July 13, 1998 and September 20, 1999 respectively, the Minister of National Revenue denied the Appellant's claim for these deductions and included this income in calculating her income for those years.

6.              The Appellant filed Notices of Objection dated April 25, 2000 and April 30, 2000 for the 1997 and 1998 years respectively.

7.              He admits, as alleged in Part A, paragraph 2 of the Notice of Appeal (Amended), that the Minister confirmed the assessments by Notification of Confirmation dated March 5, 2001.

8.              In so assessing the Appellant, the Minister relied on the following assumptions:

a)              The facts as stated and admitted hereinbefore;

b)             The Appellant was a Canadian resident at all relevant times;

c)              On June 29, 1995, the Appellant, as settlor, established the trust and contributed funds in the amount of $150,000 to it;

d)             These funds were earned off-reserve by the Appellant through her law firm, V Starr and Associates, which was located at 103 Davie Street in Vancouver, B.C., not on a reserve;

e)              The funds were flowed through to the Appellant's personal law corporation, V Starr Personal Law Corporation, and then to the Appellant who contributed the funds to the trust;

f)              The trustee of the trust was National Trust Company;

g)             The Appellant established the trust at a branch of the trustee which was located in the Park Royal South shopping center in West Vancouver, British Columbia on leased land which located on the Squamish Indian Reserve;

h)             The trust agreement provided that the annual net income of the trust was to be paid to the settlor;

i)               The trust was to last for a term of five years or until the death of the settlor whichever came first;

j)               At that point, the trustee was either to distribute to the settlor the entire trust property including all income and additions of capital, or else to divide the trust property according to the settlor's will;

k)              The trust agreement provided that the settlor could revoke the trust or change the trustee at any time;

l)               The head office of the trustee was not located on a reserve;

m)             The funds contributed to the trust were used to purchase investments, mainly four common trust funds of National Trust Company (Canadian Equity Common Trust Fund, Bond Common Trust Fund, Foreign Equity Common Trust Fund and Money Market Common Trust Fund);

n)             The investments in the trust were held in the commercial mainstream of the Canadian and international economy, and it was in the commercial mainstream that the issuers of the investments earned the investment income that was allocated to the Appellant;

o)             In 1997 and 1998, capital gains, dividends, foreign non-business income and "other income" from these investments as well as interest income from cash held in the trust were allocated to the Appellant;

p)             Such income totaled $15,699.40 and $24,977.23 in those years respectively as follows:

	1997	1998
Taxable capital gains	10,302.83	15,874.94
Taxable amount of dividends	2,526.72	1,566.82
Foreign non-business income	572.41	1,179.20
Other income	2,293.06	6,353.28
Interest from cash	4.38	2.99
Total	15,699.40	24,977.23

q)             The income from the investments was not property "situated on a reserve" within the meaning of s. 87 of the Indian Act.

9.              He says that the common trust funds of National Trust Company held in the Appellant's trust were managed and administered by Cassels Blaikie Investment Counsel Limited, that Cassels Blaikie chose the broadly diversified investments and securities held in each of the common trust funds, and that Cassels Blaikie is a wholly owned subsidiary of National Trust Company and is not located on a reserve.

B.             ISSUES TO BE DECIDED

10.            The issue is whether the Appellant's income from the investments and from cash held in the trust was "situated on a reserve" and therefore exempt from tax pursuant to s. 87 of the Indian Act and s. 81(1)(a) of the Income Tax Act.

C.             STATUTORY PROVISIONS RELIED ON

11.            He relies on ss. 3, 12(1)(m), 75(2), 81(1)(a) and 104(13) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended, ss. 2, 14, 242 through 244 and 409 of the Trust and Loan Companies Act R.S.C. 1991, c. 45 and ss. 2 and 87 of the Indian Act, R.S.C. 1985, c. I-5.

D.             GROUNDS RELIED ON AND RELIEF SOUGHT

12.            The Deputy Attorney General submits that the income from the investments and cash held in the trust was not "situated on a reserve" within the meaning of s. 87 of the Indian Act because the most relevant "connecting factors" for this income point to off-reserve locations. Such connecting factors include the following:

a)              The funds contributed to the trust were earned off-reserve by the Appellant through her law practice,

b)             The trustee, National Trust Company, was not located on a reserve,

c)              The income earning operations of National Trust Company were not carried on at reserve locations except for a very minor percentage;

d)             The manager and administrator of the common trust funds, Cassels Blaikie, was not located on a reserve;

e)              The investments in the trust, both the common trust funds and the investments held within them, were held in the commercial mainstream and not on a reserve,

f)              The investment income that was allocated to the Appellant was earned in the commercial mainstream by the issuers of the investments.

13.            He further submits that, in any case, s. 75(2) of the Income Tax Act deems the income and capital gains from the investments to be income and capital gains of the Appellant directly, and not income or capital gains of the trust at all, because:

a)              the contributed funds and the investments were held in the trust on condition that such property would either revert to the Appellant or pass to persons to be determined by the Appellant in her will;

and, further, because:

b)             during the lifetime of the Appellant, such property was not to be disposed of except with the Appellant's consent or in accordance with her direction.

14.            He therefore respectfully submits that the Minister properly assessed the Appellant on the basis that the capital gains, dividends, foreign non-business income and "other income" from the investments as well as the interest income from cash held in the trust, totaling $15,699.40 and $24,977.23 in the 1997 and 1998 taxation years respectively, was not exempt from tax and was to be included in computing the Appellant's income for those years.

[3]            Assumptions 8 b) and c) were admitted by the Appellant. Assumptions d) and e) are correct, however, all of the Appellant's legal income was earned working for Indians or Indian bands and was filed and assessed as exempt from tax. It is this income which formed the capital of $150,000 that was settled or placed in the trust. Assumptions 8 f), g), h) and i) were admitted by the Appellant in her Answer. Assumptions 8 j), k) and l) were established by the evidence to be correct.

[4]            Assumption 8 n) is correct as is assumption 8 o). Assumption 8 p) was admitted to be correct by the Appellant.

[5]            Assumption 8 q) is in dispute.

[6]            The evidence established paragraph 9 of the Reply to be correct. However, during the entire time in dispute, the Appellant never knew this to be the case, and the Trust deed itself (Exhibit A-1) did not provide for such delegation to Cassels Blaikie Investment Counsel Limited ("Cassels").

[7]            Paragraph 81(1)(a) of the Income Tax Act (the "Act") reads:

81.            (1) 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;

Section 87 of the Indian Act reads:

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.

(3) No succession duty, inheritance tax or estate duty is payable on the death of any Indian in respect of any property mentioned in paragraphs (1)(a) or (b) or the succession thereto if the property passes to an Indian, nor shall any such property be taken into account in determining the duty payable under the Dominion Succession Duty Act, chapter 89 of the Revised Statutes of Canada, 1952, or the tax payable under the Estate Tax Act, chapter E-9 of the Revised Statutes of Canada, 1970, on or in respect of other property passing to an Indian.

[8]            The Court agrees with the submission of the Respondent contained in paragraph 13 of the Reply. Subsection 75(2) of the Act clearly applies to the Appellant respecting the trust in this case.

[9]            The Appellant disputed the Respondent's assumption 8 q) that the income in question was "income from the investments". Rather, she stated, the income in question was income from the trust. In this she is aided by subsection 108(5) of the Act which reads:

108(5)      Except as otherwise provided in this Part,

(a)            an amount included in computing the income for a taxation year of a beneficiary of a trust under subsection 104(13) or (14) or section 105 shall be deemed to be income of the beneficiary for the year from a property that is an interest in the trust and not from any other source, and

(b)            an amount deductible in computing the amount that would, but for subsections 104(6) and (12), be the income of a trust for a taxation year shall not be deducted by a beneficiary of the trust in computing the beneficiary's income for a taxation year,

but, for greater certainty, nothing in this subsection shall affect the application of subsection 56(4.1) and sections 74.1 to 75 of this Act and section 74 of the Income Tax Act, chapter 148 of the Revised Statutes of Canada, 1952.

[10]          Thereupon subsections 104(19), (20), (21) and (22) act to retain the character of the trust's income. Subsection 104(19), dividends from taxable Canadian corporations; and (20), dividends other than taxable dividends, require a designation by the trust in respect of the particular beneficiary to be characterized. The "allocation" described in assumption 8 o) describes the designation which applies to these dividends, excepting only "capital dividends" concerning which paragraph [12] hereof would apply.

[11]          These same rights of the trustee to "allocate" or designate income will apply to "foreign non-business income", "other income" and interest "from cash" as described in assumption 8 p).

[12]          However respecting subsection 104(21), the designation of net taxable capital gains, the trust deed itself (Exhibit A-1) does not define "income" to include capital gains. Nor does it authorize the encroachment on capital in favour of the Appellant as sole beneficiary. In these circumstances, even though it appears from assumption 8 o) that capital gains were "allocated" or designated to the Appellant, there was no authorization to the trustee to do so. This would also apply to any "capital dividends" which were "allocated".

[13]          The result of the foregoing analysis is that the income (but not the capital) designated or "allocated" by the trustee to the beneficiary is "deemed" under the designation subsections:

... to be the particular beneficiary's income for the particular year from that source.

[Example - Subsection 104(22)]

The reasons for this are:

1.              The particular provisions sections 104 override the more general provisions of the Income Tax Act.

2.              The actions of the trustee in so designating income were voluntary acts of the trustee, which, in this case, were authorized by the beneficiary herself in the trust deed, which she drew, and then were accepted by her.

The result is that the designated or "allocated" income is, for tax purposes, not income from the trust. Rather, it is income from the investments.

[14]          The "allocation" or designation of capital is not authorized by the text of the trust deed. However, it was in fact done by the trustee and the Appellant. Designations such as this are commonly done for the tax advantage of the parties to the designation. That designation was accepted by the Respondent, as described in assumption 8 o). In these circumstances, the Appellant is estopped from denying the designation of capital for the years in question. As a result, the designated capital is capital from investments and not from the trust for the purposes of this appeal.

[15]          Thus, the Appellant is an Indian as defined in the Indian Act. The income at issue is personal property of the taxpayer. At issue here is the situs of the income. In Williams v. The Queen, 92 DTC 6320 (S.C.C.) the Supreme Court opted for a purposive approach in determining the situs of the property. The approach is referred to as the "connecting factors" test. Gonthier, J. elaborated at page 6326 as follows:

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 consideration:

(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.

The analytical framework to be adopted is that described by Hamlyn, J. in Recalma v. The Queen, 96 DTC 1520 (T.C.C.). In that case the taxpayers were Indians and lived full time on a reserve. They invested money derived from their fishing business in banker's acceptances and mutual funds. Hamlyn, J. dismissed the appeal and held that the connecting factors respecting the investments placed them primarily off reserve and in the general mainstream of the economy. He applied the following criteria at page 1523:

... the following connecting elements are considered for determining the situs of the investment income:

(a)            the residence of the Appellants;

(b)            the origin or location of the capital used to buy the securities;

(c)            the location of the bank branch where the securities were bought;

(d)            the location where the investment income is used;

(e)            the location of the investment instruments;

(f)             the location where the investment income payment is made; and

(g)            the nature of the securities and in particular;

(i)             the residence of the issuer,

(ii)            the location of the insurer's income generating activity from which the investment is made, and

(iii)           the location of the issuer's property in the event of a default that could be subject to potential seizure.

In affirming the Tax Court decision, Linden, J.A. for the Federal Court of Appeal, 98 DTC 6238 (Fed. C.A.), stated at page 6239:

In evaluating the various factors the Court must decide where it "makes the most sense" to locate the personal property in issue in order to avoid the "erosion of property held by Indians qua Indians" so as to protect the traditional Native way of life. It is also important in assessing the different factors to consider whether the activity generating the income was "intimately connected to' the Reserve, that is, an ‘integral part' of Reserve life, or whether it was more appropriate to consider it a part of ‘commercial mainstream" activity. (See Folster v. The Queen (1997), 97 D.T.C. 5315 (F.C.A.)). We should indicate that the concept of "commercial mainstream" is not a test for determining whether property is situated on a reserve; it is merely an aid to be used in evaluating the various factors being considered. It is by no means determinative. The primary reasoning exercise is to decide, by looking at all the connecting factors and keeping in mind the purpose of the section, where the property is situated, that is, whether the income earned was "integral to the life of the Reserve", whether it was "intimately connected" to that life, and whether it should be protected to prevent the erosion of the property held by Natives qua Natives.

It is plain that different factors may be given different weights in each case. Extremely important, particularly in this case, is the type of income being considered as attracting taxation. Where the income is employment or salary income, the residence of the taxpayer, the type of work being performed, the place where the work was done and the nature of the benefit to the Reserve are given great weight. (See Folster, supra) Where the income is unemployment insurance benefits, the most weighty factor is where the qualifying work is performed. (See Williams, supra) Where business income is involved, greater emphasis was placed on where

the work was done and where the source of the income was situated. (See Southwind v. The Queen, January 14, 1998, Docket No. A-760-95 (F.C.A.)).

[emphasis added]

[16]          Applying the connecting factors test:

1.              Although the Appellant's present residence appears to be in Vancouver, she was residing on a reserve during the 1997 and 1998 taxation years;

2.              The funds initially contributed to the trust were earned by the Appellant through her law firm, V Starr and Associates. The income of the law firm was derived from legal services provided to Indians residing on a reserve and was, thus, exempt from taxation.

3.              The funds flowed to the Appellant through her personal law corporation, V Starr Personal Law Corporation, which was at all relevant times located on a reserve.

4.              The head office of the trustee was located in Toronto, Ontario. The investment instruments were "funds". There is no evidence as to where they were located. The Appellant established the trust at a branch of the trustee, which was on leased property located on the Squamish Indian Reserve.

5.              The funds contributed to the trust were used to purchase investments, mainly four common trust funds of the trustee. The money held in those trust funds was in the commercial mainstream of the Canadian and international economy and not on a reserve. It was in the commercial mainstream and not on a reserve that the issuers of the investments earned the investment income that was allocated to the Appellant.

6.              The income and capital gained in the fund was reinvested except for the income draw that the Appellant took in 1998 while she was resident on a reserve.

7.              The trust funds of the trustee were managed and administered by a wholly owned subsidiary of the trustee which was not located on a reserve.

[17]          The different factors are to be given different weights in each case. The money in question was passive investment income. In that respect, Linden, J.A. observed at page 6240 in Recalma as follows:

... 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... 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.

In Recalma the taxpayers were Indians and lived full time on a reserve. They invested money derived from their business, which was located on a reserve, in banker's acceptances and mutual funds. Hamlyn, J. and Linden, J.A. gave little weight to the situs of the taxpayers' residence and the location of the business which generated the money they invested. The Federal Court of Appeal considered at page 6240 that:

[w]hile 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.

In the present case, as in Recalma, it is of relatively little importance that the Appellant resided on a reserve during the 1997 and 1998 taxation years. The fact that the capital contributed to the trust was exempt income, and that the Appellant's personal law corporation was located on a reserve have little weight. Considerable weight must be put on the way the income was generated. The Appellant disputes the Court's ability to look through the trust and base its analysis on the situs of the investments held by the trust and the location of the investments' income generating activity. Instead, she suggests that the major consideration the Court should take into account is the fact that the trust was established at a branch of the trustee, which was located on a reserve.

[18]          Although a trust is deemed by subsection 104(2) to be an individual for the purposes of the Act, this Court bases its analysis on the situs of the source of the income. That is, where it "makes the most sense" to locate the personal property in issue. That location was where the instruments were located and where their capital was invested to earn the income and capital in question. It was not on a reserve. Nor was that investment or the income therefrom integral to the life of a reserve.

[19]          The analysis in Sero v. Canada, 2001 DTC 575 (T.C.C.), Lewin v. Canada 2001 DTC 479 (T.C.C.), Hill v. Canada, [1999] 3 C.T.C. 2073 and Recalma is directly applicable to the case at bar. The connecting factors respecting the income and capital derived by the Appellant place it off reserve and in the general mainstream of the economy.

[20]          The assessments are confirmed and the appeals are dismissed.

Signed at Saskatoon, Saskatchewan, this 27th day of December, 2001.

"D. W. Beaubier"

J.T.C.C.

COURT FILE NO.:                                                 2001-2003(IT)I

STYLE OF CAUSE:                                               Vina Starr v. The Queen

PLACE OF HEARING:                                         Vancouver, British Columbia

DATE OF HEARING:                                           December 6, 2001

REASONS FOR JUDGMENT BY:                      The Honourable Judge D. W. Beaubier

DATE OF JUDGMENT:                                       December 27, 2001

APPEARANCES:

For the Appellant:                                                 The Appellant herself

Counsel for the Respondent:              Wendy M.Yoshida

COUNSEL OF RECORD:

For the Appellant:                

Name:                               

Firm:                 

For the Respondent:                             Morris Rosenberg

                                                                Deputy Attorney General of Canada

                                                                                Ottawa, Canada

2001-2003(IT)I

BETWEEN:

VINA STARR,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on December 6, 2001 at Vancouver, British Columbia by

the Honourable Judge D. W. Beaubier

Appearances

For the Appellant:                                The Appellant herself

Counsel for the Respondent:                Wendy M. Yoshida

JUDGMENT

          The appeals from the assessments made under the Income Tax Act for the 1997 and 1998 taxation years are dismissed in accordance with the attached Reasons for Judgment.

          Signed at Saskatoon, Saskatchewan, this 27th day of December, 2001.

"D. W. Beaubier"

J.T.C.C.