Jacob Pete v. Minister of National Revenue, [1991] 1 CTC 2001, 91 DTC 204

Couture, C.T.C.J.:—These appeals refer to the appellant's 1978, 1979, 1980 and 1981 taxation years. The appellant acted on his own behalf and adduced the following uncontradicted evidence.

He is an Indian as this word is defined in subsection 2(1) of the Indian Act, R.S.C. 1970, c. 1-6 and is a Treaty Indian of the Treaty 6 Area. He is a member in good standing registered with the Little Pine Band and has full access to funding programs of the Government of Canada. He was a member of the Royal Canadian Mounted Police in the early sixties. In fact he was the first Indian to join the force.

He is a consultant specializing in assisting individual Indians, Indian bands, Indian groups and Indian-controlled corporations in obtaining government funding in connection with their activities and their businesses. His work also consists of advising Indian bands on a number of administrative problems of a social and cultural nature.

He resides in Saskatoon where he may be reached by clients who require his services. He maintains a small office in the basement of his residence. His consulting practice started around 1971. While attending Indian band meetings and functions, he began advising Indians living on the reserve on an informal basis and from this practice his activities as a consultant developed into a professional career.

While he has an office in his home, he never sees or receives clients there. When clients need his services he always meets with them at their place of business. He has no business telephone at his office and before 1986 he did not advertise. Since then there is a listing in the telephone directory under the designation Pete, MCS Associates with his home telephone number. He has business stationery showing his home address as his place of business.

For his 1978 and 1979 taxation years, the appellant took the position that the source of all his income was personal property situated on a reserve and did not report any professional income for those years in filing his income tax returns. For 1980 and 1981 he reported only his professional income earned from activities unrelated to Indian bands.

In his notice of appeal the appellant submitted that the income which is the subject of the appeal was not taxable because it was exempt from taxation under the Indian Act as personal property situated on a reserve and under the provisions of paragraph 81(1)(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act").

The respondent says that the income in question was derived from his consulting business and was not situated on a reserve within the meaning of paragraph 87(1)(b) of the Indian Act and therefore is subject to tax under the provisions of the Act.

From the reply to the notice of appeal and hearing what was said at trial, it was impossible for the Court to ascertain the rationale in support of the assessments. It was only upon reading the written argument subsequently filed at the request of the Court on behalf of the respondent that his reasoning in attempting to bring the appellant within the ambit of the provisions of the Act could be understood.

To ensure that the thrust of that argument is faithfully reported I reproduce the paragraphs that I consider relevant:

2. The question for determination, therefore, is whether the business income of the appellant constitutes personal property situated on a reserve.

3. It is submitted that the business income of the appellant constitutes property within the meaning of both section 248 of the Income Tax Act and paragraph 87(b) of the Indian Act.

4. In that regard Dickson, J in Nowegijick v. The Queen, (SCC) 83 DTC 5041 at 5045 concluded that" (A) tax on income is in reality, a tax on property itself” [s/c] [1] and so doing adopted the following language of the Supreme Court of Illinois in Bachrach v. Nelson (1932), 182 N.E. 909:

The overwhelming weight part of quotation of judicial authority [s/c] [2] holds that (income is property) . . .

(Such judicial authority) define what is personal property and in substance hold that money or any other thing of value acquired as gain or profit from capital or labour is property and that, in the aggregate, these acquisitions constitute income, and, in accordance with the axiom that the whole includes all of its parts, income includes property and nothing but property, and therefore is itself property.

Quoted in Nowegijick v. The Queen, supra, at p. 5044.

5. In Nowegijick v. The Queen, supra, the Supreme Court of Canada was concerned with determining the situs of the appellant's employment income.

6. Upon concluding that,

(a) a tax on income is in reality a tax on property, and,

(b) wages constitute personal property,

Dickson, J. resolved the question of situs by holding that the situs of a debt is determinable by reference to the residence of the debtor.

P. 5043 citing Cheshire, Private International Law (10th ed.) p. 536 et seq. as well as the judgment of Thurlow, A.C.J. in R. v. National Indian Brotherhood (F.C.T.D.) 78 D.T.C. 6488 at 6491 et seq.

17. As a general principle it is possible for property to be sited at different locations for different purposes. That is, the situs of property can vary depending on whether it is sought to be determined for purposes of administration, succession duty or taxation.

Castel, Canadian Conflict of Laws, Second Edition, paragraph 288.

18. Situs can, therefore, be said to constitute a legal fiction whose location will depend on the purpose for which it is being ascertained.

Castel, Canadian Conflict of Laws (1977), Volume 2, page 334.

19. For example, in the case of shares, the High Court of Ontario in Brown, Gow, Wilson et al. v. Beleggings-Societeit N.V. (1961), 29 D.L.R. (2d) 673 at 691 noted that:

When considering the cases dealing with situs of shares one must pay close attention to the care with which judges have kept in mind the purpose of the particular legislation.

20. It is submitted therefore, that in the circumstances of the within Appeal, an approach to determining the situs of business income that is consistent with the scheme and purpose of the Indian Act and Income Tax Act is that set out in paragraph 6(h)(ii) of Interpretation Bulletin IT-62. That is:

(h) Different types of income have different criteria for establishing whether they are on or off the reserve:

(ii) Business income is normally allocable to the permanent establishment.

For example, for a self-employed merchant it would be his store.

22. The term "permanent establishment" is defined in the tax treaties between Canada and other countries in connection with provisions directed toward avoiding the taxation of the same income in two jurisdictions.

E.g. Canada-United States Tax Convention, 1980, Article V and VII

Canada-United Kingdom Tax Convention, Article V and VII

23. It is also respectively defined in regulations 400 and 2600 of the Income Tax Regulations in connection with the determination of taxable income earned by a corporation in the year in a province for purposes of the deduction under Section 124 of the Income Tax Act and the addition to tax for income not earned in a province by an individual under Section 120 of the same Act.

24. Having been used to determine where income has been earned it is submitted that, by analogy, the concept of permanent establishment can be adopted to determine the situs of business income.

25. Moreover, to the extent that practical considerations play a role in choosing between competing solutions to a legal problem, it is submitted that the difficulties associated with determining the situs of income on the basis of a debtor's residence in respect of an Indian who carries on a business and enters into contracts with many people would favour an allocation based on the business' permanent establishment.

To paraphrase counsel's argument, he submits that income under the provisions of the Indian Act and the Act is property and the test to ascertain its situs is not the same for employment income and business income and the location of the latter may vary depending on the applicable legislation. Therefore, in accordance with the scheme and purpose of the Indian Act and the Act the concept of permanent establishment can be invoked to determine the situs of business income for the appellant.

This reasoning leads to the conclusion that since the appellant resided in Saskatoon, had an office in his residence which constituted a permanent establishment, his income from the practice of his profession was not exempt from taxation as itmust be allocated to this establishment and therefore is not personal property situated on a reserve as required by subsection 87(b) of the Indian Act.

At first glance this reasoning may appear to have some validity, but a closer scrutiny of the relevant legislation confirms that it cannot be accepted as it is in direct contradiction with both the scheme and purpose of the legislation.

I cannot agree with counsel that the concept of permanent establishment falls within the scheme of the Indian Act. Nowhere in the provisions of that legislation related to taxation is there a reference to this concept.

Section 87 of the Indian Act says:

87. Notwithstanding any other Act of Parliament or any Act of the legislature of a province, but subject to section 83, [3] 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.

and 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; .. .”

The purpose of paragraphs (a) and (b) of section 87 of the Indian Act is to exempt the specified property related to Indians and Indian bands from taxation. It is not designed to impose taxation. Insofar as the Act is concerned its basic purpose is to levy a tax on the income of taxpayers and under the scheme of the Act, liability to taxation is governed by the residence of taxpayers.

If a person is a resident of Canada, that person is taxable on his world income irrespective of the situs of that income (subsection 2(1)). If a person is a non-resident, that person is nonetheless taxable in Canada (subsection 2(3)):

(a) if that person was employed in Canada;

(b) carried on business in Canada;

(c) disposed of a taxable Canadian property.

In the present appeal we are dealing with a taxpayer who was carrying a business and therefore I will limit my observations to that situation only.

Business is defined in subsection 248(1) and what is relevant therein for present purposes provides that:

"Business” includes a profession, calling, trade, manufacture or undertaking of any kind whatever and an adventure or concern in the nature of trade, but does not include an office or employment.

While a person resident in Canada who is carrying business either in Canada or outside of Canada is taxable on his world income, a person who is a non-resident of Canada is governed by section 253. It provides:

253. Extended meaning of carrying on business.—Where, in a taxation year, a non-resident person

(a) produced, grew, mined, created, manufactured, fabricated, improved, packed, preserved or constructed, in whole or in part, anything in Canada whether or not he exported that thing without selling it prior to exportation, or

(b) solicited orders or offered anything for sale in Canada through an agent or servant whether the contract or transaction was to be completed inside or outside Canada or partly in and partly outside Canada,

he shall be deemed, for the purposes of this Act, to have been carrying on business in Canada in the year.

This extended meaning of the definition "carrying on business” was first introduced in the Canadian tax legislation in 1927 by an addition to then Income War Tax Act. It has survived in substance with minor amendments ever since.

Canada was not the only country to have such a far-reaching provision in its tax legislation. Many countries had similar provisions and after the first World War, With the expansion of trade between countries, its impact created a need for co-operation on the international scene in the field of taxation with the result that the concept of "permanent establishment” was formulated and introduced in the tax agreements between countries. [4]

It was made applicable not with the intent of expanding the meaning of "carrying on business”, but for the purpose of restricting its application under domestic legislation of countries to commercial and industrial activities carried on in their jurisdiction by nationals or persons from other countries. The expression" permanent establishment" is not to be found in the Act. Reference is made to this concept in the Regulations made under the Act and has application in respect of very specific provisions.

In Canada the concept is found in the bilateral tax agreements to which Canada is a party and in addition in two sets of circumstances. First, in Regulation 400 to determine the income of a corporation earned in a province for the purpose of the ten per cent deduction from its tax otherwise payable as provided in subsection 124(1). Secondly, in Regulation 2600 to submit the income of an individual that was not earned within a provincial jurisdiction to an increase in the rate of his federal tax of 47 per cent, to compensate for the deduction of the federal tax on income earned in a province. In both instances these specific Regulations enacted by the Governor General in Council have a very limited application in the scheme of the Act.

I cannot agree with the comment in Bulletin IT-62, relied on by counsel, that “business income is normally allocable to the permanent establishment”. The concept of permanent establishment is not a precept of common law, but is a legal notion that derives its existence from specific legislative enactments. It may not be invoked at large as seems to be implied by the Bulletin.

In his paragraph 24 counsel says:

24. Having been used to determine where income has been earned it is submitted that, by analogy, the concept of permanent establishment can be adapted to determine the situs of business income.

The reply to this submission is that there is no taxation by analogy. This principle has been expressed in a number of court decisions. Some of these authorities were referred to and endorsed by the Supreme Court of Canada. In the absence of legislative enactments capable of being interpreted or construed as charging provisions with which taxpayers must comply, the respondent may not assess taxes on the simple proposition that it appears to be consistent with the scheme and purposes of the legislation [5] or for any other reason.

Estey, J. of the Supreme Court of Canada said this in Stubart Investments Ltd. v. The Queen, [1984] S.C.R. 536; [1984] C.T.C. 294; 84 D.T.C. 6305 at page 316 (D.T.C. 6323):

Professor Willis, in his article, supra, accurately forecast the demise of the strict interpretation rule for the construction of taxing statutes. Gradually, the role of the tax statute in the community changed, as we have seen, and the application of strict construction to it receded. Courts today apply to this statute the plain meaning rule, but in a substantive sense so that if a taxpayer is within the spirit of the charge, he may be held liable. See Whiteman and Wheatcroft, supra, at 376. [6]

[Emphasis added.]

While not directing his observations exclusively to taxing statutes, the learned author of Construction of Statutes, 2nded., (1983), at p. 87, E. A. Dreidger, put the modern rule succinctly:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament. [7]

[Emphasis added.]

The question comes back to a determination of the proper role of the court in construing the Income Tax Act in circumstances such as these where the Crown relies on the general pattern of the Act and not upon any specific taxing provision. The Act is to be construed, of course, as a whole, including section 137 but, for reasons already noted, without applying that section specifically to these assessments. The appellant stands to save taxes if its program is successful. The Crown loses revenue it might otherwise receive. At least in theory, the burden falls on other taxpayers to make up the lost revenue. Lord Simon of Glaisdale had this to say in not dissimilar circumstances:

It may seem hard that a cunningly advised taxpayer should be able to avoid what appears to be his equitable share of the general fiscal burden and cast it on the shoulders of his fellow citizens. But for the Courts to try to stretch the law to meet hard cases (whether the hardship appears to bear on the individual taxpayer or on the general body of taxpayers as represented by the Inland Revenue) is not merely to make bad law but to run the risk of subverting the rule of law itself. Disagreeable as it may seem that some taxpayers should escape what might appear to be their fair share of the general burden of national expenditure, it would be far more disagreeable to substitute the rule of caprice for that of law.

Ransom v. Higg, 50 Tax Cas. 1 at p. 94 (1974).

All this may reflect the tradition of annual amendments to the Income Tax Act when the government budget for the ensuing year is presented to Parliament for approval. Perhaps the facility of amendment to the Income Tax Act is one of the sources of the problem since the practice does not invite the courts to intervene when the legislature can readily do so.

The jurisprudence abounds with pronouncement to the same effect.

In assessing the appellant on the basis that his income must be allocated to his permanent establishment the respondent has misconstrued the provisions of the legislation applicable to Indians already referred to and has also disregarded fundamental jurisprudential edicts.

It must be noted that the wording of section 87 begins with these words: “Notwithstanding any other Act of the Parliament of Canada. . .” and it must also be noted that this provision makes no distinction between income front employment or business income. What is exempt is property which translates into income according to the jurisprudence. It seems to me that the intent of Parliament in this legislation is clearly expressed and leaves no room for conjectural interpretation.

Furthermore the Supreme Court of Canada in the judgment Nowegijick v. The Queen, [1983] C.T.C. 20; 83 D.T.C. 5041 Dickson, J. (as he then was) had this to say with regard to the interpretation of the Indian Act at page 24 (D.T.C. 5044): “It seems to me, however, that treaties and statutes relating to Indians should be liberally construed and doubtful expressions resolved in favour of the Indian."

Later on at page 26 (D.T.C. 5046) he added with respect to the provisions of section 87 of the Indian Act:

We must, I think, in these cases, have regard to substance and the plain and ordinary meaning of the language used, rather than to forensic dialectics. I do not think we should give any refined construction to the section. A person exempt from taxation in respect of any of his personal property would have difficulty in understanding why he should pay tax in respect of his wages. And I do not think it is a sufficient answer to say that the conceptualization of the Income Tax Act renders it so.

In the same fashion that same person would have difficulty in understanding why he should pay tax on his professional or business income.

For these reasons, I cannot accept that the appellant was taxable on his professional income considered personal property situated on a reserve by the jurisprudence or deemed to be personal property situated on a reserve by the provisions of the Indian Act.

The preceding determination with respect to the “concept of permanent establishment” does not dispose of the appeals. In his argument, counsel submitted that if the Court came to the conclusion that it could not be invoked in the support of the assessments, that nonetheless some of the income claimed as exempt by the appellant was in fact taxable because it did not meet the test of personal property situated on a reserve as required by the provisions of subsection 87(b) of the Indian Act.

It should be mentioned that this allegation was not included in his reply to the notice of appeal as one of the alternative assumptions upon which the respondent relied to assess the appellant. However, no objection was raised by the appellant concerning this omission in the pleadings and he did not claim that he was being taken by surprise. In his statement of facts the appellant listed the source of each payment for professional services he received during the years under appeal. The information on this statement as to the quantum of income under discussion was used by both parties without reference to the amounts shown on the 17W-C issued with the notices of assessment. For the taxation year 1978 the respondent did not file a copy of the income tax return of the appellant as it was not available according to counsel. As evidence was adduced only with respect to amounts mentioned on this statement, I will not attempt to reconcile them with those appearing on the T7W-C.

The jurisprudence is clear as to what determines the situs of personal property. Subsection 90(1) of the Indian Act reads:

90. (1) For the purposes of sections 87 and 89, personal property that was

(a) purchased by Her Majesty with Indian moneys or moneys appropriated by Parliament for the use and benefit of Indians or bands, or

(b) given to Indians or to a band under a treaty or agreement between a band and Her Majesty

shall be deemed always to be situated on a reserve.

In the appeal of Glenn Williams v. Canada, [1990] 2 C.T.C. 124; 90 D.T.C. 6399, the Federal Court of Appeal confirmed that the situs of a simple debt was located where the debtor resides. At page 130 (D.T.C. 6403), Stone, J. who delivered the unanimous decision of the Court says:

It is also suggested that the intention to introduce the place where a debt is payable as the basis of a new test for determining the situs of a chose in action falling under paragraph 87(b) of the Indian Act emerges from the language of Dickson, J. in Nowegijick, when he stated that the wages there in question were situated on a reserve because the debtor resided there "and it was there the wages were payable”. I find the respondent's assertion difficult to accept. Dickson, J., like the learned Associate Chief Justice, based himself on an edition of Cheshire where such a test is simply not espoused. Also, the debtor-employer in Nowegijick had its office on a reserve where, in point of fact, the wages were payable. I do not find in that case a manifest intention to expand the test for determining the situs of a simple debt falling within paragraph 87(b).

Finally, I! am unable to accept that the residence of the debtor test above discussed ought not to be applied for the reason that it is a conflict of laws test. In National Indian Brotherhood the test was applied in determining the situs of property falling within paragraph 87(b) of the Indian Act, and this was approved in Nowegijick. Although the origin of the principle derives from ecclesiastical law, [8] it has also been applied in the law of probate and administration and of assignment of debts. [9]

For the taxation year 1978 the appellant included the following amounts as professional income:

Counsel for the respondent argues that the amount of $10,050 received for services identified with the Little Pine Indian Reserve was not exempt because it was in fact received from a legal entity incorporated in 1976 under the Societies Act, R.S.S. 1978, c. S-53 called the ” Little Pine Community Counselling Services Society” and this society is not an Indian within the meaning of the Indian Act. Even if that is so I expect that the central control and management of the society is exercised on the Little Pine Reserve and therefore the society is deemed to reside there. In The Queen v. Gurd's Products Co., [1985] 2 C.T.C. 85; 85 D.T.C. 5314 (F.C.A.), Urie, J. said at page 91 (D.T.C. 5318):

Counsel for the parties agreed that a line of jurisprudence commencing with De Beers Consolidated Mines Limited v. Howe (1905), T.C. 198 (H.L.) gave rise to the common law principle that a corporation is deemed to reside where its central control and management is exercised.

With regard to the 1978 taxation year, counsel for the respondent also argues that the amounts paid to the appellant by what is referred to as the Department of Indian Affairs (the Department) or a branch of the Department are not exempt from taxation.

To the best that I can establish from the evidence of the appellant these moneys were paid to him by the Department for services rendered by him in advising the Department on problems related to various Indian reserves. There is no evidence that it was purchased by Her Majesty with Indian moneys or moneys appropriated by Parliament for the use or benefit of Indians or bands as required by the provisions of paragraph 90(1)(a). The contracts referred to in the statement of facts were not produced in evidence and therefore nothing is known as to the source of these moneys. Accordingly, in view of the jurisprudence referred to before, these moneys cannot be considered as personal property of the appellant situated on a reserve since its situs is where the debtor resides and obviously the Department is not located on a reserve. Accordingly, the amounts of $1,249.14, $19,808.10, $5,100, $3,000, $11,524.30 and $173.80 are subject to tax.

iii. Indian Affairs—Saskatchewan Region

Assistance to Department of Indian Affairs Economic

Development—Indian Economic Development Loan Order,

Registration SOR/78-22—29 December 1977

Receipts totalling 22,063.71 These receipts are for services rendered to on reserve based clients of Indian Affairs.

The submission of counsel is the same as for 1978 with regard to the $22,063.71 from the Department. Again I agree with him that it did not constitute personal property of the appellant situated on a reserve as it was paid by the Department for the reasons outlined above.

The amounts reported by the appellant for the taxation year 1980 are the following:

In addition to these amounts the appellant conceded that two other amounts shown on his statement of claims did not qualify as exempt income, $11,794.11 from the Association of Métis and Non-Status Indians and an amount of $250 from B.T. Johnson.

Counsel for the respondent submits that the amount of $2,517.50 from the Tribal Chiefs Association did not qualify as exempt income.

The appellant admitted that he had been paid that amount by that association, but did not give any explanation as to the nature of this association or where it resided and in the absence of such information, I have to agree with counsel that the amount does not constitute personal property of a band situated on a reserve.

The next item questioned by counsel is the $7,690.09 from D.P.A. According to the evidence D.P.A. is a consulting group operating from Ottawa as D.P.A. Consulting Ltd. and while the services rendered by the appellant may have been for the benefit of Indians, as the payor of these fees the amount in question is not exempt as it does not meet the test of section 90.

The last amount for 1980 is the $12,625 received from the National Indian Brotherhood which according to the evidence is an organization operating from Ottawa and again even if it was funded by the government, which was not established in evidence, it is not an organization resident on a reserve.

For 1981 the appellant listed the following amounts as exempt income:

For the reasons mentioned in respect of the taxation year 1980 the amounts of $25,194.49 and $19,000 do not qualify as exempt income.

Included with his income tax returns for the years underappeal, the appellant had filed statements of expenses. It was agreed by the parties that if the Court came to the conclusion that some of the income was not exempt income then the expenses would be prorated in the same ratio as the taxable income is to the exempt income for each taxation year and accordingly the appellant could deduct that share of expenses against the amount of income which the Court has determined as taxable.

For the above reasons the appeals are allowed and the assessments referred back to the respondent for reconsideration and reassessment.

The appellant is entitled to his costs on party-party basis if he has incurred any.

Appeal allowed in part.