Lewin v. The Queen, docket 1999-504-IT-G

Date: 20010417

Docket: 1999-504-IT-G

BETWEEN:

STEVEN LEWIN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Tardif, J.T.C.C.

[1]            The purpose of the appeal is to determine whether $4,097.60 in property income (interest on investments) should be included in computing the appellant's income for the 1996 taxation year. The appellant is an "Indian" within the meaning of the Indian Act (R.S.C. 1985, c. I-5), and he submits that the property income in question was not taxable.

[2]            The Notice of Appeal and the Reply to the Notice of Appeal ("the Reply") provide a good summary of the facts, and it is appropriate to reproduce the main parts of both pleadings.

[3]            I will begin with paragraphs 1 to 8 of the Notice of Appeal:

[TRANSLATION]

1.              During the 1996 taxation year, the appellant was an Indian within the meaning of the Indian Act (R.S.C. 1985, c. I-5) and, as an Indian, was a member of the Huron-Wendat Nation;

2.              During that taxation year, the appellant was domiciled at 1615 Joseph-Blais, Mont-Laurier, Quebec;

3.              During that taxation year, the appellant received interest income paid to him by the Caisse populaire Desjardins du Village Huron, a financial institution whose head office and chief place of business are on the Huron-Wendat reserve;

4.              Under a notice of reassessment dated November 10, 1997, a total of $4,097.60 in property income was unlawfully added to the appellant's income for the 1996 taxation year;

5.              On December 1, 1997, the appellant filed a notice of objection to the notice of reassessment referred to above;

6.              The Department of National Revenue confirmed the reassessment through a notice of confirmation dated September 15, 1998;

7.              Since the additional income was earned by an Indian on an Indian reserve, it is not taxable, as can be seen from section 87 of the Indian Act (R.S.C. 1985, c. I-5) and section 81(1)(a) of the Income Tax Act (R.S.C. 1985, c. 1 (5th Supp.));

8.              The notice of reassessment dated November 10, 1997, and the notice of confirmation dated September 15, 1998, are therefore unfounded and invalid.

[4]            In replying to the Notice of Appeal, the respondent stated the following:

[TRANSLATION]

1.              He has no knowledge of paragraph 1 of the Notice of Appeal as written and therefore denies it.

2.              With regard to paragraph 2, the address is the one given in the appellant's 1996 tax return, and he takes note of the appellant's admission that he was not domiciled on an Indian reserve.

3.              He has no knowledge of and therefore denies paragraph 3 of the Notice of Appeal.

4.              With regard to paragraph 4 of the Notice of Appeal, he admits that the Minister of National Revenue added $4,097.60 in property income to the appellant's income but otherwise denies the paragraph.

5.              With regard to paragraph 5 of the Notice of Appeal, he admits that the appellant filed a notice of objection but specifies that it was filed on December 2, 1995; he also admits paragraph 6.

6.              He denies paragraphs 7 and 8 of the appellant's Notice of Appeal.

7.              In reassessing the appellant as he did, the Minister of National Revenue assumed, inter alia, the following facts.

8.              During the 1996 taxation year, the appellant was not a resident of an Indian reserve.

9.              For the 1996 taxation year, the Caisse populaire Desjardins du Village Huron issued a T5 slip showing that $4,097.60 in interest from Canadian sources had been recorded under the appellant's name and social insurance number.

10.            In computing his 1996 income, the appellant did not include that $4,097.60 as interest income.

11.            The $4,097.60 is not personal property of an Indian situated on a reserve.

[5]            The issue is whether the $4,097.60 must be included in computing the appellant's income as interest from Canadian sources.

[6]            In support of the appeal, the appellant testified and also called two witnesses, Max Gros-Louis in his capacity as the former grand chief of the Huron-Wendat Nation and Yvan Bastien in his capacity as the general manager of the Caisse populaire Desjardins ("the credit union") doing business on the reserve. The respondent called Céline Laverdière as a witness.

[7]            The appellant's registered Indian status was not disputed. Former grand chief Max Gros-Louis began by tracing the history of the credit union's arrival and creation on the Huron reserve of which he was then grand chief.

[8]            He explained in great detail that he had personal knowledge of the fact that the Indians living on the reserve faced serious problems every day in obtaining loans, even when the purpose of the loans was to meet a basic need. He also said that financial institutions generally saw them as having very little financial credibility.

[9]            In this regard, he provided a number of examples showing that the Indians had no credit possibilities; more often than not, they had to pay for their purchases in cash or provide security of exceptional quality, since their on-reserve property, being immune from seizure, was of no interest to banks.

[10]          Since this was a serious problem affecting the day-to-day lives of the Indians on the reserve, the band council, under his leadership, took the initiative of doing what was necessary to set up and establish a real credit union on the reserve, one that would be able to better understand and more easily assess and evaluate the Indians' needs and concerns.

[11]          Since the plan addressed a major concern, the grand chief and those collaborating with him succeeded in establishing a real credit union whose activities were initially intended to be confined to the reserve itself.

[12]          The former grand chief explained that the new credit union proved to be a considerable and very appreciable asset; close co-operation was quickly established between it and the band council, especially as regards housing loans.

[13]          Since it was run solely by Indians, the credit union was very much attuned to the expectations of its Indian members; since it was concerned about their financial needs, it co-operated fully in this regard to ensure the well-being and development of the Huron community. With its much better understanding of Indian aspirations, habits and customs, the reserve's credit union quickly came to be greatly appreciated and patronized by a large number of people.

[14]          The credit union's management subsequently decided to broaden the area it served, which until then had basically been the reserve; the credit union therefore took the necessary steps to extend its operations to the entire greater Québec area.

[15]          Mr. Gros-Louis explained that each year the band council made 10 or so grants of about $50,000 for home construction; since such grants were not enough to pay all the construction costs, the recipients had to obtain financing from another source.

[16]          In actual practice, those who received a grant from the band council obtained a loan for the same amount from the credit union at the same time. The loan was guaranteed by the band council. The relationship between the credit union and the band council was always harmonious, and their excellent co-operation facilitated development on the reserve.

[17]          Yvan Bastien next explained that the credit union did indeed co-operate with the band council so that new homes could be built. He also explained that the grant from the band council, supplemented by a loan for the same amount, could at times be accompanied by an additional loan given the fact that construction costs sometimes exceeded the amount of the grant and the housing loan. He explained that the credit union had therefore devised a type of special loan called a "balloon loan". It was basically a personal loan for which the payment dates were based on the schedule of mortgage payments. In actual practice, this personal loan was renewable every five years.

[18]          Mr. Bastien explained that, although the credit union was concerned about and attuned to the Indians' needs, this did not mean that its role and activities were any different from those of any other credit union off the reserve.

[19]          The general manager said that the credit union was staffed mostly by Indians; it was an institution similar and comparable to all the other credit unions in the network. He also said that the credit union on the reserve was subject to the same obligations and constraints and had the same rights and duties. In other words, any other credit union off the reserve could have offered exactly the same services to the Indians living on the reserve.

[20]          The location did not have the effect of broadening the range of services offered to the Indians, since the site did not confer any special prerogative or right that an outside credit union could not have offered.

[21]          Describing how the credit union operated, he explained that the Indians no doubt had a better understanding than the customers of other credit unions of the importance of not having as part of their assets deposits that yielded nothing. In other words, he explained that the Indians were very vigilant about ensuring that the amounts deposited in their accounts earned interest.

[22]          He thus explained that his credit union accumulated substantial surpluses that he had to send off the reserve because the residents' financial needs did not make it possible to use all of the credit union's cash assets. To put this clearly, the money that the credit union had for lending purposes greatly exceeded the borrowing needs of the Indians living on the reserve, which was why it had to send that excess money to the traditional capital markets off the reserve.

[23]          Finally, the appellant testified that he had expressed an interest in possibly becoming a resident of the reserve but that, for all practical purposes, he had no chance because there were about 400 names before his on the waiting list.

[24]          He explained that, aside from a short period of time, he had generally worked for businesses that had nothing to do with his or any other Indian community. The savings that gave rise to the certificates of deposit that generated the interest income at issue in this appeal basically resulted from work done for various businesses operating off Indian reserves.

[25]          The evidence was not very explicit as to why the appellant put his savings in the credit union on the reserve. Like many other Indians, he probably believed that this made his interest income non-taxable given that the credit union was situated on a reserve.

[26]          It has been shown that the credit union on the Huron reserve had a high percentage of customers who entrusted their savings to it in the form of investment certificates. According to Mr. Bastien, the percentage was no doubt higher than at most other credit unions.

[27]          The general manager testified that the Indians were very shrewd, since they obtained the maximum income from their savings by never leaving them in an account that did not earn interest.

[28]          Organizationally and legally, the credit union on the Huron reserve had and still has the same rights and duties as all the other credit unions doing business throughout Quebec.

[29]          Over the years, management — as was the case at the other credit unions — adhered to a business plan guided by and directed towards the ultimate goal of serving their members while remaining viable and profitable.

[30]          As at any other credit union, the ultimate objective was to make a profit, although members' expectations were taken into account; as at all credit unions, services tailored to the members' special needs and concerns were offered.

[31]          The evidence did not show that the credit union on the reserve had its own specific business plan, customs, policies or characteristics; rather, the evidence showed that it was a credit union like any other credit union working in a specific area with a specific or even hermetic clientele, such as a mining, fishing or logging community. Credit unions in such communities have the same concerns and objectives and deal with specific problems that may be due to isolation, distinctive economic characteristics and special needs, such as financing a fishing boat or timber cutting or transportation machinery.

[32]          The evidence did not show that the Huron credit union's social and cultural role detracted from its financial role; there is no doubt that the credit union, whose location ("situs") was on the reserve, always pursued goals of optimum profitability so as to obtain surpluses enabling it to pay good returns on the money entrusted to it by the Indians and, at the same time, offer services meeting their expectations; this did not make that credit union a special or distinct institution.

[33]          To achieve its financial and its cultural and social goals, the reserve's credit union observed the same practices and used the same investment vehicles as all the other credit unions. The evidence showed that much more money was deposited by Indians living on the reserve or elsewhere than was needed to meet the reserve's local financial needs in terms of both personal loans and loans described as housing loans. In other words, the credit union on the reserve received and had at its disposal amounts significantly higher than what it needed to deal with the various requirements and all the financial needs of the Indians on the reserve.

[34]          The substantial surpluses were sent off the reserve to the ordinary capital market, in a manner consistent with the duties governing all credit unions.

[35]          Thus, the income of the reserve's credit union was derived mainly from off-reserve economic activities, including mortgage loans, personal loans, investments with the Fédération des caisses populaires and purchases of municipal bonds.

[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.

[37]          In the case at bar, although the appellant had expressed an interest in living on the reserve by putting his name on the long waiting list, he was actually living off the reserve. The evidence also showed that, over the years, the appellant had lived and worked like every other resident of Canada.

[38]          A registered Indian either is or is not a resident of a reserve.

[39]          Believing that his status as an Indian made his interest income tax-exempt provided that his money was entrusted or loaned to a credit union situated on the Huron reserve, he purchased investment certificates, which earned the interest at issue in this appeal.

[40]          In essence, the evidence showed that the appellant owned investment certificates issued by the credit union located on the reserve; a very small portion of the money used to buy the investment certificates came from work done on an Indian reserve, which is why there is no need to look at that aspect.

[41]          The evidence showed that the capital had been put together very largely through work done off-reserve as part of ordinary activities like those in which most Canadian taxpayers are involved.

[42]          Moreover, the interest paid to the appellant was paid pursuant to a loan agreement whose situs is clearly on the reserve, since the debtor credit union is situated there.

[43]          As for the interest income generated by the loans to or investments at the credit union on the reserve, once again, that income was used or invested in or spent on ordinary off-reserve activities or to acquire property not situated on the reserve.

[44]          Finally, the financial activities and economic operations that enabled the credit union to pay the appellant such interest were carried on or conducted predominantly off the reserve.

[45]          Can the mere fact that a non-resident Indian has put capital through a financial institution whose place of business is on a reserve mean that the interest generated by the capital is excluded from his or her income and is therefore non-taxable?

[46]          To determine whether the interest paid to the appellant was taxable, I believe that an overview of the relevant case law is necessary.

[47]          That case law has established a number of tests while making it clear that they are not all of the same importance; in other words, some tests are more relevant than others.

[48]          Since this exercise or analysis involves a subjective assessment, it is appropriate to go back to the legislative basis for the tax exemption.

Relevant statutory provisions

[49]          Section 87 of the Indian Act provides 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.

This provision is recognized by paragraph 81(1)(a) of the Income Tax Act, which reads 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;

[50]          To better understand the reasons for and especially the origin of the tax exemption granted to Indians, it is helpful to consider certain important decisions.

[51]          The limits of the tax exemption granted to Indians were clearly defined by the Honourable Mr. Justice Dickson, as he then was, Justice of 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.

[52]          Mitchell v. Peguis Indian Band, [1990] 2 S.C.R. 85, provides some very relevant information on the historical dimension of the applicable statutory provisions. The Honourable Mr. Justice La Forest stated the following at page 131:

                In summary, the historical record makes it clear that ss. 87 and 89 of the Indian Act, the sections to which the deeming provision of s. 90 applies, constitute part of a legislative "package" which bears the impress of an obligation to native peoples which the Crown has recognized at least since the signing of the Royal Proclamation of 1763. From that time on, the Crown has always acknowledged that it is honour-bound to shield Indians from any efforts by non-natives to dispossess Indians of the property which they hold qua Indians, i.e., their land base and the chattels on that land base.

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.

He continued as follows at pages 132-33:

The approach I have taken is fully supported by the cases. In Francis v. The Queen, [1956] S.C.R. 618, this Court made it clear that Indians were liable to pay custom duties in respect of goods brought directly over the international border onto a reserve. The tax exemption conferred by the then s. 86 (now s. 87) was held to have no application because of the fact that the excise tax attached at the international border, and hence before the property in question could become situated on a reserve.

                Reference should also be made to the decision of the British Columbia Court of Appeal in Leonard v. R. in Right of British Columbia (1984), 52 B.C.L.R. 389, leave to appeal to this Court refused, [1984] 2 S.C.R. viii. There it was held that Indians could be assessed provincial sales tax in respect of purchases made on portions of their lands that they had conditionally surrendered to Her Majesty in right of Canada for the purpose of attracting commercial leases. I find myself in respectful agreement with the following observation of Macfarlane J.A. as to the limits of s. 87(b), at p. 395:

It is a reasonable interpretation of the section to say that a tax exemption on the personal property of an Indian will be confined to the place where the holder of such property is expected to have it, namely on the lands which an Indian occupies as an Indian, the reserve. Indians who surrender their lands to non-Indians on lease give up the right to occupation, and when they own or possess personal property on those surrendered lands I think that they are in no different position than any other citizen.                             [Emphasis in original.]

In another recent decision, Leighton v. B.C. (Gov't), [1989] 3 C.N.L.R. 136, the British Columbia Court of Appeal again had occasion to consider the significance of the phrase "situated on a reserve" in s. 87(b) of the Indian Act. In what I take to be a sound approach, Lambert J.A. held that when considering whether tangible personal property owned by Indians can benefit from the exemption from taxation provided for in s. 87, it will be appropriate to examine the pattern of use and safekeeping of the property in order to determine if the paramount location of the property is indeed situated on the reserve. I have no doubt that it will normally be appropriate to take a fair and liberal approach to the problem whether the paramount location of tangible property or a chose-in-action is situated on the reserve; see Metlakatla Ferry Service Ltd. v. B.C. (Gov't.) (1987), 12 B.C.L.R. (2d) 308 (C.A.) 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."

At pages 140-41, the Honourable Mr. Justice La Forest went on as follows:

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.

Finally, he added the following at pages 144-45:

                . . . I have no doubt that Indians are very much aware that ordinary commercial dealings constitute "affairs of life" that do not fall to be governed by their treaties or the Indian Act. Thus I take it that Indians, when engaging in the cut and thrust of business dealings in the commercial mainstream are under no illusions that they can expect to compete from a position of privilege with respect to their fellow Canadians. This distinction, it is fair to say, will be driven home every time Indians do business off their reserve lands. Professor Slattery puts the matter plainly when he notes, op. cit, at p. 776, that the purchases made by Indians in a normal drugstore are governed by laws of general application.

                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?

[53]          Another case involving section 87 of the Indian Act that came before the Supreme Court of Canada was Williams v. Canada, [1992] 1 S.C.R. 877.

[54]          In that case, the Honourable Mr. Justice Gonthier held that the exemption provided for in section 87 is subject to the Indian taxpayer's choice as to how to organize his or her affairs.

He stated the following at page 887:

Therefore, under the Indian Act, an Indian has a choice with regard to his personal property. The Indian may situate this property on the reserve, in which case it is within the protected area and free from seizure and taxation, or the Indian may situate this property off the reserve, in which case it is outside the protected area, and more fully available for ordinary commercial purposes in society. Whether the Indian wishes to remain within the protected reserve system or integrate more fully into the larger commercial world is a choice left to the Indian.

The purpose of the situs test in s. 87 is to determine whether the Indian holds the property in question as part of the entitlement of an Indian qua Indian on the reserve...

He added the following at pages 890-91:

In resolving this question, it is readily apparent that to simply adopt general conflicts principles in the present context would be entirely out of keeping with the scheme and purposes of the Indian Act and Income Tax Act. . . . The test for situs under the Indian Act must be constructed according to its purposes, not the purposes of the conflict of laws. Therefore, the position that the residence of the debtor exclusively determines the situs of benefits such as those paid in this case must be closely reexamined in light of the purposes of the Indian Act. It may be that the residence of the debtor remains an important factor, or even the exclusive one. However, this conclusion cannot be directly drawn from an analysis of how the conflict of laws deals with such an issue.

He further stated at pages 892-93:

. . . 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.

And finally, Gonthier J. concluded as follows at pages 899-900:

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.

[55]          The principles laid down in Williams (supra) were taken up again by the Honourable Judge Hamlyn of this Court in Recalma v. The Queen, 96 DTC 1520.

[56]          In that case, the Honourable Judge Hamlyn found that investment income was taxable personal property after considering the various connecting factors for determining the situs of that income.

[57]          He thus considered the following aspects: the residence of the appellants; the origin or location of the capital used to buy the securities; the location of the bank branch where the securities were bought; the location where the investment income was used; the location of the investment instruments; the location where the investment income payment was made; and the nature of the securities, and in particular the residence of the issuer, the location of the issuer's income generating activity from which the investment was made and the location of the issuer's property in the event of a default that could be subject to potential seizure.

[58]          In keeping with the case law, Judge Hamlyn did not attach the same importance to each of these factors; however, he accepted and recognized that the Indian's place of residence was crucial. He also stressed the situs of the income generating activity. Judge Hamlyn stated the following on this point in Recalma, supra, at page 1524:

                All the transactions involved with the investment instruments including location of the instruments, the residence of the issuers, the acceptance of the orders and the interest generating activity of the investment instruments were all located or conducted off the reserve.

                The income realized from a banker's acceptance is taxed as interest income. The income from the managed funds is also taxed as interest income. The income stream for these financial instruments starts with the companies who originally issued the banker's acceptances or the managed funds then passes through the Bank of Montreal before being paid to the Appellants. The act of buying the investment instruments in question is the act of making a choice to enter into an investment transaction with all its parameters. Thus, to earn an income stream from the economic mainstream from economic activities located, generated and structured off the reserve is the choice the Appellants made. The Appellants, by making the choice, chose to enter the main economic mainstream of normal business conducted off the reserve.

                As a result, the personal property of the Appellants (the investment income) is not situated on a reserve.

[59]          The Federal Court of Appeal affirmed Judge Hamlyn's decision. The reasons for judgment of the Honourable Mr. Justice Linden of that court are reported at 98 DTC 6238. He stated the following:

                . . . 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 . . . .

                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.

Linden J.A. continued as follows 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.

[60]          In the case at bar, the appellant lived off the reserve; his way of life and habits were similar and comparable to those of all Canadians. In the context of his everyday activities, he saved money. He decided to deposit his savings to the credit union, a financial institution with operating rules as all those other similar institutions known as credit unions.

[61]          In fact, there was just one distinctive characteristic: the credit union was situated on a reserve. It was not owned by an Indian or the Indian community, although the vast majority of its members were Indians; however, any non-Indian could have been a member and, in theory, it would have been possible for non-Indians to control and run it, although its situs did not lend itself to this.

[62]          The interest paid to the appellant by the credit union was paid pursuant to a loan agreement under which the appellant was the lender and the credit union the debtor; the situs of the agreement that generated the interest was, physically, the location of the credit union's place of business, namely the reserve, and there is no doubt about this in the instant case.

[63]          Can this fact alone make the interest that was paid tax-exempt in the hands of the appellant, an Indian who was not a resident of the reserve? My answer is no, mainly for the following reasons:

The capital used for the appellant's investment at the credit union was put together mainly through off-reserve work and economic activities.

The vast majority of the economic and financial activities that enabled interest to be paid to the appellant were carried on off the reserve.

The interest paid to the appellant did not contribute in any way to the protection or safeguarding of the interests, culture and development of the traditional way of life of the Indians living on the reserve.

The operations and activities of the credit union that paid the appellant the interest were not exclusively directed at the development of the Huron Nation.

Any financial or banking institution could have provided the same services to the Indians living on the reserve even if it was situated off the reserve.

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.

The evidence established no connection between the situs of the credit union and the protection or safeguarding of the interests, culture and development of the traditional way of life of the Indians living on the reserve.

The evidence basically showed that there was a closer, tighter bond between the credit union and its Indian members; the situs of the credit union no doubt contributed to that positive, harmonious and sustained relationship. However, the same could very well have been true of another institution situated off the reserve.

The credit union had the same rights and duties as any other credit union, and its only distinctive characteristic was that it was favourably disposed towards its mainly Indian customers. This was appropriate behaviour for any organization the very essence of which was to do business with Indians.

The interest paid to the appellant was neither spent nor invested on the reserve or for the benefit of the Indians living there. Like the capital that generated it, the interest resulted from economic activities that are common to all Canadians and was used for expenditures that are also usual, ordinary and common to all Canadians.

[64]          Interests being property income, it is difficult if not impossible to determine where the income was generated, since the property is itself very volatile; in the instant case, the credit union's manager explained that most of the capital entrusted to it (contractual situs on the reserve) was sent to the traditional capital markets off the reserve. Where the only thing Indian about a credit union is the location of part of its operations, the fact that property income has gone through the credit union does not make it non-taxable. I do not think that the exemption provided for in the Act justifies or allows for an interpretation as broad and inclusive as that argued for by the appellant.

[65]          For these reasons, the appeal is dismissed with costs.

Signed at Ottawa, Canada, this 17th day of April 2001.

"Alain Tardif"

J.T.C.C.