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Citation: 2004TCC711
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Date: 20041126
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Dockets: 2001-3163(IT)G
2001-3164(IT)G
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BETWEEN:
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GILLES CLEARY,
DANNY CLEARY,
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Appellants,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Archambault J.
[1] Gilles and Danny Cleary are
Aboriginals living in Longueuil who are claiming the tax
exemption enacted under section 87 of the Indian Act
(IA) with respect to business income they say is situated
on an Aboriginal reserve in the Lac Saint-Jean region.
Under the Income Tax Act (Act), the Minister of
National Revenue (Minister) assessed that income earned
through a partnership, Atuhk. Atuhk's net income for the
financial year ending December 31, 1992, was
$1,262,602 and was divided equally between both Appellants.
In addition to the taxation issue regarding that business income,
which is at issue, there is also the issue of a taxable benefit
with regard to Gilles Cleary resulting from the personal use
of a home on Migneault Street in Longueuil. The home belongs to
the company Constructions Cleary (1992) Inc. (CCI). The
Minister added to Gilles Cleary's income taxable benefits of
$9,113 for the 1992 taxation year and $5,164 for the 1993
taxation year. At the start of the hearing, counsel for the
Respondent acknowledged that the amount of $5,164 should be
reduced to $608.
[2] Lastly, for the 1994 taxation
year, the Minister included $5,866 in Danny Cleary's
income as a taxable capital gain from the disposition of a vacant
lot on Guillet Street in Longueuil. At the start of the
hearing, counsel for the respondent acknowledged that the capital
gain on that lot should be reduced from $7,821 to
$4,321 because of taxes in the amount of $3,500 added to the
cost of the lot. Therefore, taxable capital gain should be
reduced from $5,866 to $3,241.[1]
Facts
[3] Gilles Cleary and his son,
Danny Cleary, were both "Indians" within the
meaning of the IA. Gilles Cleary was born on the
Pointe-Bleue reserve, now known as the Aboriginal community
of Mashteuiatsh, located near Roberval, in the Lac
Saint-Jean region. He left Mashteuiatsh at approximately 12
or 13 years of age. Danny Cleary never lived on that
reserve. He was born in Kénogami and, like his father, has
been living in Longueuil for many years.
[4] Both men held all of CCI's voting
shares equally. As of 1993, that company held all of the shares
of 2431-8107 Québec Inc. (2431). That
company, which was formerly known as Les Constructions
Cleary Inc. (CCI), operated a construction business for
residential homes on the South Shore of Montréal, as did
CCI. CCI's headquarters are also located in Longueuil. Not only
is this company not running its business on an Aboriginal
reserve, its clients are not residents of a reserve.
[5] The Appellants provided the
following explanation with regard to the establishment of Atuhk.
Gilles Cleary's brother, a resident of Mashteuiatsh,
supposedly informed him of some economic and social problems
faced by that Aboriginal community. They included a high
unemployment rate, that is, one in two Aboriginals, according
to Ralph Cleary, Gilles Cleary's nephew. There was
also the problem of idleness among some youth, who were becoming
addicted to inhaling gas fumes.
[6] In order to promote economic
development in Mashteuiatsh, the Appellants apparently
established Wigwam, a 32-unit construction project divided
into eight townhomes. This project used a
[translation] "new architectural design that resembles
the habitats of our ancestors."[2] The project prospectus refers to a
funding plan and selling prices for those homes as well as a
description of all partners involved in carrying out the project.
Under the heading, [translation] "Funding Plan,"
it states that the Conseil des Montagnais would save
approximately $27,250 based on interest rates in effect in
May 1992, which would confirm that the prospectus was
prepared at that time. Unfortunately, the testimony of Gilles and
Danny Cleary did not further clarify the date of this
document.
[7] In order to carry out the Wigwam
project, in the spring of 1992, the Clearys established a new
business corporation, Les Constructions Amishk Inc.
(Amishk). This corporation was to form a "joint
venture" with two construction companies operating out of
Mashteuiatsh, that is, B.C. Construction and
Les Constructions Paul. A draft agreement between
those three companies appears at Exhibit A-1,
Tab 23, and sets out the business relationships among the
three partners. This document is not signed.
[8] In addition to the grouping of
those three construction companies, the draft agreement
stipulated that the materials required to carry out the Wigwam
project would be acquired through Atuhk. Thus, on
March 25, 1992, Gilles and Danny Cleary filed a
declaration at the Protonotary's Office, Firm Names, Superior
Court of Québec, that they wanted to do business under the
name of Société Atuhk as of
March 25, 1992, and that the place of business of this
partnership was located at 9 Atuhk Street, in Mashteuiatsh.
Gilles Cleary did not personally sign that declaration;
instead, he gave his son a power of attorney signed on
March 25, 1992, in Longueuil, for the registration of
the firm name. Atuhk was to act as construction materials broker
and as intermediary for subcontracting agreements. According to
Ralph Cleary, the market targeted by Atuhk was not only
Mashteuiatsh, but all Aboriginal communities in Quebec.
[9] According to the Minister's audit
report dated December 16, 1998, the prospectus prepared
by the Clearys was never submitted to the band council; it was
only submitted to its economic development committee. The Wigwam
project was apparently never completed. When asked about the
reasons for its failure, Danny Cleary stated that he did not
know. While he was the one who conceived of the project, he did
not negotiate with the band council. He left that responsibility
to Ralph Cleary who, in his opinion, was better known on the
reserve. At page 15 of his report, the Minister's auditor
provided the following as the reason for the failure:
[TRANSLATION]
. . . It would seem that the other partners referred
to in the project did not want to get involved in this project
because they would have assumed a lot of risk and did not have
confidence in either "Atuhk" or in Construction Amishk,
directed by Tony Connolly and Ralph Cleary,
respectively, because neither had proven itself in the
construction field. As for "Gilles" and
"Danny," they were not known or not well known within
the community; thus, no one could give an opinion about them.
[10] Since the Wigwam project was never
completed, Atuhk's only business activity in 1992 was to act as
intermediary between CCI and its suppliers. An agreement
dated March 26, 1992, the date after Atuhk's
declaration of firm name was filed, was apparently signed between
CCI and Atuhk.[3]
Page 1 of that agreement sets out that CCI wants to retain
the services of Atuhk in order to centralize the purchase of
materials and the awarding of sub-contracts. This is an
exclusive agreement relating to the purchase of new materials.
All construction materials had to be purchased through Atuhk and
all sub-contractors had to be hired through Atuhk, with the
exception of electricians and fireplace-installation
professionals.
[11] In its Reply to the Notice of Appeal,
the Minister said that most of Atuhk's suppliers were
off-reserve, on the South Shore of Montréal, and
that suppliers' materials ordered by Atuhk were delivered
directly to CCI's construction sites, off-reserve. The
Appellants admitted this fact. Yet, evidence did not reveal, with
regard to the 1992 taxation year, the existence of any supplier
on the Mashteuiatsh reserve. The only supplier not located on the
South Shore of Montréal was a door and window manufacturer
from the Québec region, found by Ralph Cleary. Ralph
Cleary also confirmed that nothing had been purchased from the
sawmill on the Mashteuiatsh reserve.
[12] An agreement with Amishk similar to the
one entered into between Atuhk and CCI was apparently signed on
March 26, 1992. Yet, evidence revealed no transactions
between Atuhk and Amishk. Danny Cleary acknowledged that no
financial statement had been prepared for Amishk because few
transactions had been carried out in its name. In fact, apart for
approximately $75, all deposits made in 1992 by Atuhk into its
account at the Caisse populaire de Pointe-Bleue were
amounts paid by CCI. The auditor's report states the following
with respect to those deposits:
[TRANSLATION]
We received from the Caisse Populaire de Pointe Bleue account
statements as well as the deposit slips for 1992, 1993 and 1994
regarding "Atuhk" bank account # 4218.
For 1992, we find that the deposits total $6,660,091.94,
99.996% of which came from "CCI", or $6,660,016.94.
...
We can conclude that for 1992 and 1993
"CCI" was "Atuhk's" client.
(Page 17 of the auditor's report)
[13] It is important to note that apparently
some transactions also occurred in 1993 and 1994 between Atuhk
and CCI and perhaps with other clients. However, no financial
statements were prepared for those two taxation years and the
Minister did not see fit to assess any income earned throughout
those years. No explanation was provided regarding that rather
surprising situation.
[14] In 1992, 1993 and 1994, Atuhk had
perhaps up to four employees. However, evidence is rather vague
with regard to the periods during which those employees
apparently held their employment. The following information
regarding Atuhk's employees appears in the auditor's report
(page 16):
[TRANSLATION]
Information to that effect is not unanimous. According to
some, Ralph Cleary and Dominic Gill worked for
"Atuhk." According to others, "Atuhk"
and the other companies owned by "Gilles" and
"Dany" [sic] had two (2) employees:
Tony Connolly and Ralph Cleary. According to yet
another person, the only known "Atuhk" employee was
Tony Connolly.
[15] One of the four persons,
Dominic Gill, apparently held employment for only a few
days. It appears that at the start of Atuhk's operations,
Tony Connolly was in charge of operations. His name moreover
appears in the aforementioned agreements entered into with CCI
and Amishk. Amishk's representative regarding the agreement with
Atuhk is Ralph Cleary, who apparently then became an Atuhk
employee. It even appears that he ended up replacing
Mr. Connolly. Ralph Cleary had earned a bachelor's
degree in administration, human resources management,
two years prior to starting to work for Atuhk and Amishk.
During those two years, he worked for the Conseil des Montagnais
in the human resources department.
[16] According to Ralph Cleary, it was
mostly Mr. Connolly who looked after receiving orders for
the provision of construction materials for CCI. He would
apparently contact Estelle, the clerk hired by CCI in Longueuil.
It is Ralph Cleary who apparently dealt with the suppliers.
However, he acknowledged that some requests for credit made to
suppliers in the Montréal region had been faxed directly
to CCI. In addition, Ralph Cleary said that
Danny Cleary established the price list for products sold by
Atuhk to CCI. According to Ralph, Atuhk's profit margin was
between 5% and 10%. According to Danny Cleary, Atuhk
calculated a profit margin of 10% or 11% and there was no
detailed selling price list for the various materials. As we will
see later, Atuhk's gross profit margin for 1992 was almost two
times greater.
[17] Ralph Cleary indicated that two
signatures were needed on Atuhk's cheques, including one from
Gilles or Danny Cleary. As both of them lived in Longueuil,
cheques had to wait until they were on site or had to be sent by
mail or by courier, even though Ralph Cleary stated that he
had to sign cheques on a daily basis. He confirmed that Atuhk's
major decisions were made by the owners. According to Ralph, it
was Danny Cleary himself who tried to develop new markets in
Quebec's other Aboriginal communities. However, Danny confirmed
in his testimony that he did not take specific steps in that
regard. He limited himself to mentioning his project only if the
opportunity to do so presented itself. Even though he personally
negotiated with the Montagnais of Mashteuiatsh with respect to
the Wigwam project, Ralph Cleary was incapable of explaining
why that project did not get off the ground.
[18] Despite the fact that Danny and
Gilles Cleary stated a number of times that they went to
Mashteuiatsh regularly, it is rather surprising that during his
audit, the auditor was unable to find travel expenses indicated
by Atuhk for the partners regarding their commuting between
Longueuil and Mashteuiatsh. Furthermore, Gilles Cleary was
unaware of what was done regarding the Wigwam project. He also
did not know where 9 Atuhk Street or 131-B
Ouiatchouan Street were located. He had no knowledge of
Amishk's activities or of its earnings. Lastly,
Gilles Cleary had no recollection and no knowledge of
whether he had invested $25,000 in Atuhk or whether he had
received $1.2 million, or half that amount worth of CCI
shares. Danny Cleary gave the auditor the wrong information
regarding where 9 Atuhk Street was located. Yet,
Danny Cleary had said that he was more actively involved on
the Mashteuiatsh reserve at the start of Atuhk's operations.
Consequently, it is difficult to understand that he was unable to
correctly inform the Minister's auditor regarding Atuhk's
location at the start of operations. Lastly, neither
Danny Cleary nor Gilles Cleary knew
Dominic Gill.
[19] While the Respondent did not contest
the existence of Atuhk before the court, evidence submitted by
the Appellants clearly reveals that this partnership filed the
documentation required to establish its existence, including the
declaration of firm name, the permit it acquired from the band
council and the registration numbers from the taxation
authorities.
[20] In Atuhk's only financial
statements-which were prepared by Samson Bélair
Deloitte & Touche (also CCI's accountants)-that is, those of
December 31, 1992, dated January 29, 1993,
Atuhk paid wages of $30,680 and benefits of $2,713. Atuhk's sales
were $7,062,829[4]
and the cost of sales was $5,749,275. Net earnings were
$1,262,602. These net earnings represent a net profit margin of
17.9% while the gross profit margin is 18.6%.[5]
[21] Among Atuhk's assets, there was office
equipment and furniture that cost $9,774. According to
Ralph Cleary's testimony, this furniture included desks,
chairs, a computer, a fax machine and a photocopier. Rent for the
financial year ending December 31, 1992, was $1,900.
According to Danny Cleary's testimony, Atuhk did business at
9 Atuhk Streetfor only a few weeks before it was transferred
to 131-B Ouiatchan Street. Assuming that the
$1,900 rent covers an eight-month period, it would
represent monthly rent of $237. Although Danny Cleary
described Atuhk's activities as purchase and resale, there was no
warehouse on the reserve.
[22] Ralph Cleary said that he had
never seen the financial statements prepared by Samson
Bélair. He also did not recall how the business' records
were kept. He did not know why Atuhk had not grown more or why
more effort was not made in relation to the two construction
companies on the reserve, that is, B.C. Construction and
Les Constructions Paul.
[23] CCI's gross profit margin was 10% in
1992 and 17% in 1993. Yet the gross profit margin for 2431 was
20.2% for the 1991 financial year and 25.7% in 1990 (see
auditor's report, at pages 10 and 11,
Exhibit I-9). It should be recalled that 2431 was
formerly known as Les Constructions Cleary Inc. and that its
name was changed on February 8, 1993. This company was
incorporated on April 6, 1987. CCI was incorporated on
February 7, 1992. It appears that it was incorporated
as a result of the separation of Gilles Cleary from his
wife, Mariette Gagnon. She was not from the Mashteuiatsh
reserve.
[24] At page 20 of its report, the
auditor stated the following as information gathered when he
investigated further.
[TRANSLATION]
11. - Despite our requests, "CCI's" invoices for
purchases made at "Atuhk" were never submitted to us;
. . .
13. - That the manager of the C.P. de Pointe Bleue never
advised the Clearys to set up on the reserve. The only
justification he saw for the action taken was the reduced tax
burden for "CCI";
14. - That a good share of "CCI's" profits were transferred to
"Atuhk".
[25] When asked whether tax considerations
led them to set up Atuhk on the Mashteuiatsh reserve,
Danny Cleary did not provide a direct answer to the
question. He limited his comments to saying that all partnerships
that involve Aboriginals are either general partnerships or
limited partnerships. However, he acknowledged that he had used
the services of a tax expert.
Analysis
Tax exemption under section 81 of the ITA
[26] The relevant provision to resolve the
issue of the exemption of Atuhk's profits is found at
paragraph 81(1)(a) of the Act, which provides:
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;
[Emphasis added]
[27] The relevant provision from the other
act is section 87 of the IA, which sets out the
following:
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.
[Emphasis added]
[28] Since the decision rendered by the
Supreme Court of Canada in Nowegijick v. The Queen,
[1983] 1 S.C.R. 29, the income earned by an Aboriginal
may be deemed the personal property of an Indian for the purposes
of section 87 of the IA. What must be determined
in this case is whether the income was situated on the reserve
within the meaning of the IA. The leading case on the matter is
another Supreme Court of Canada case: Williams v.
Canada, [1992] 1 S.C.R. 877. In this case, the
Supreme Court developed the approach the courts must follow in
determining the situs of Indian property. Gonthier J.
in particular relied on the in-depth analysis of La Forest
J. in Mitchell v. Peguis Indian Band, [1990]
2 S.C.R. 85. In that decision, La Forest J.
described the purpose of sections 87 and 89 of the IA, as noted
by Gonthier J. at paragraph 16 in Williams:
. . . the purpose of these sections was to
preserve the entitlements of Indians to their reserve lands and
to ensure that the use of their property on their reserve lands
was not eroded by the ability of governments to tax,
or creditors to seize. The corollary of this conclusion was
that the purpose of the sections was not to confer a general
economic benefit upon the Indians
(at pp. 130-131) . . .
[Emphasis added]
[29] At paragraphs 18 and 19 of the
Williams decision, Gonthier J. went on to add:
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. Where it is necessary to decide amongst various
methods of fixing the location of the relevant property, such a
method must be selected having regard to this purpose.
[Emphasis added]
[30] Gonthier J., at paragraph 32,
concluded the following with regard to the method that had to be
applied in determining the situs of unemployment insurance
benefits:
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
purposes of the conflict of laws have little or nothing in common
with the purposes underlying the Indian Act. It is simply not
apparent how the place where a debt may normally be enforced has
any relevance to the question whether to tax the receipt of the
payment of that debt would amount to the erosion of the
entitlements of an Indian qua Indian on a reserve. 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.
[Emphasis added]
[31] Lastly, Gonthier J. established
the following approach at paragraph 37:
. . . The first step is to identify the various
connecting factors which are potentially relevant. These
factors should then be analyzed to determine what weight they
should be given in identifying the location of the property,
in light of three considerations: (1) the purpose of
the exemption under the Indian Act; (2) the type of
property in question; and (3) the nature of the taxation
of that property. The question with regard to each connecting
factor is therefore what weight should be given that factor in
answering the question whether to tax that form of property in
that manner would amount to the erosion of the entitlement of the
Indian qua Indian on a reserve.
[Emphasis added]
[32] It should also be noted that the
Federal Court of Appeal had, on numerous occasions, the
opportunity to analyze the situs of business income,
notably in Southwind v. Canada, [1998] F.C.J. No. 15
(Q.L.); 98 DTC 6084, and in Bell v. Canada,
[2000] F.C.J. No. 680 (Q.L.). In Southwind, Crown
counsel had suggested the following factors in deciding whether
business income was situated on the reserve: (1) the
location of the business activities, (2) the location of the
customers (debtors) of the business, (3) where decisions
affecting the business are made, (4) the type of business
and the nature of the work, (5) the place where the payment
is made, (6) the degree to which the business is in the
commercial mainstream, (7) the location of a fixed place of
business and the location of the books and records, and
(8) the residence of the business' owner.
[33] At paragraph 14 of that decision,
Linden J. expressed the following opinion:
14 According to the
Supreme Court in Mitchell, where an Indian enters into the
"commercial mainstream", he must do so on the
same terms as other Canadians with whom he competes. Although
the precise meaning of this phrase is far from clear, it is clear
that it seeks to differentiate those Aboriginal business
activities that deal with people mainly off the Reserve, not
on it. It seeks to isolate those business activities that
benefit the individual Aboriginal rather than his
community as a whole, recognizing, of course, as Mr. Nadjiwan
says, that a person benefits his or her community by earning a
living for his family.
[Emphasis added]
[34] In my opinion, the factors set out in
Southwind are perfectly relevant for the purposes of this
appeal. I will therefore analyze them individually and add others
that also appear relevant to me here.
(1) The location of the business activities
[35] It is clear that Atuhk performed part
of its commercial activities on the Mashteuiatsh reserve. Atuhk
in fact had a place of business there, which it leased and where
furniture that cost over $9,000 was located. There were desks,
chairs, a computer, a fax machine, a photocopier, etc. This
equipment might have been enough. There was also at least
one employee-perhaps two or even three-who took orders from
CCI and who, if the evidence is to be relied on, took the
necessary steps to deliver the construction materials to the
South Shore. If the location of the business activities test had
to be strictly applied, it would be clear that the business
income could be situated on the reserve. However, two comments
need to be made. First, this test is not the determinative one,
since its importance must be weighed in light of the purpose of
the Act, that is, it must be determined whether the Aboriginal
holds the property in question as part of the entitlement of an
Indian qua Indian on a reserve. Secondly, even if it can
be considered that part of Atuhk's place of business was
situated on a reserve, few components show the permanence and
significance of that place of business. There was also no
evidence of accounting books and records kept on the reserve.
(2) The location of the customers of the business
[36] While counsel for the Appellants argued
strenuously that it was important to consider the business plan
followed by the Appellants in establishing Atuhk, whose plan was
to serve a clientele on reserves, the reality of the matter is
that Atuhk's only client during 1992 was CCI, which ran its
business hundreds of kilometres from the reserve. No client on
the reserve was named.
(3) The location of the business' suppliers
[37] In addition to the factors set out in
Southwind, we must also add the location of the business'
suppliers, given the intermediary nature of Atuhk's business.
In this case, the evidence reveals that not only were Atuhk's
suppliers located off the reserve, they were situated over
400 kilometres (i.e. a drive of over 5 hours[6]) from the reserve.
Moreover, not only were products sold by Atuhk to CCI located
over 400 kilometres from the reserve, but they were also
very close to CCI, its only client in 1992. In fact, almost all
suppliers were located on the South Shore of Montréal,
where CCI operated its business.
(4) The residence of the business' owners and the place
where decisions affecting the business were made
[38] An important factor to note here is the
residence of the two Atuhk partners. Both partners had been
residents of Longueuil for many years. Gilles Cleary had
left the Mashteuiatsh reserve when he was 12 or 13 years
old, and his son Danny had never lived there. While they
indicated that they visited the reserve regularly, evidence on
this point is far from convincing. In fact, it is rather
surprising that Gilles Cleary was not able to say where
Atuhk and Ouiatchouan Streets were located, and he was unable to
name employees of Atuhk and Amishk. In addition, it should be
added that Gilles Cleary was unaware of the activities of
Atuhk and Amishk. Lastly, there were no travel expenses indicated
by Atuhk regarding both partners' commuting between
Montréal and Roberval.
[39] Signing cheques certainly does not
constitute making a major decision, though it does reveal an
important degree of control over the activities of a business.
Nonetheless, both partners lived on the South Shore of
Montréal; this supports the finding of fact that this is
where the most important decisions affecting the business were
made. Ralph Cleary, at least at some point, appeared to be
the person in charge of Atuhk's activities in Mashteuiatsh.
However, he does not appear to have played a major role in the
operation of Atuhk: specifically, it was Danny Cleary who
determined the prices of products sold to CCI. Ralph Cleary
did not look after the accounting and did not supervise the
preparation of financial statements. Ralph did not even develop
new markets in other Aboriginal communities: Danny Cleary
was in charge of doing that.
(5) The type of business and the nature of the work
[40] It is important to note that the very
nature of the services provided by Atuhk was very different from
that of services provided by a business such as a sawmill. Atuhk
required very little investment, few fixed assets and few
employees. The only asset used in the operation of its business
was the furniture, which originally cost $9,700. There was no
need to own a large amount of space, including a warehouse. This
business could have been operated from any location. All that was
important was a telephone connection with clients and suppliers.
It certainly would have been more convenient if the business was
located in the same location as the client and all, or almost
all, of its many suppliers. Lastly, the minimal role played by
Atuhk's employee or employees should also be noted. In 1992,
those employees were incapable of generating an activity other
than to serve Atuhk's sole client, CCI, which belonged to Atuhk's
partners.
(6) The place where the payment is made
[41] The evidence reveals that a large
number of deposits were made at the Caisse populaire de
Pointe-Bleue. However, it should be noted that most of the
money deposited into that account was moved through that account.
A very small amount remained on the Mashteuiatsh reserve. Of the
$6.6 million that flowed through the Caisse populaire de
Pointe-Bleue accounts, only an amount under $34,000 was
used to pay wages and employee benefits for one or more of
Atuhk's employees living in Mashteuiatsh. The remaining
significant amount was $1,900, which was used to pay the rent. It
should be noted that the money was used more to pay the suppliers
in the Montréal region or to pay profits to Gilles and
Danny Cleary, profits which did not remain on the reserve. A
good part of these benefits apparently did not even flow through
the Caisse populaire de Pointe-Bleue, if the accounting
entries that show a capitalized amount of $1 million on
CCI's records are to be relied on. Most of the $1.2 million
in profit was apparently not even deposited on the Mashteuiatsh
reserve.
(7) Degree to which the business is in the commercial
mainstream
[42] Atuhk acted as intermediary in the
provision of construction materials from the South Shore,
delivered on the South Shore and used on the South Shore.
This is a purely commercial activity run primarily off the
Mashteuiatsh reserve.
[43] An overall analysis of all of these
components reveals that $1.2 million in profit made by Atuhk
essentially constitutes an artificial extraction of profit made
by CCI in the operation of its business in the Montréal
region. It can be recalled that 2431, previously run by Gilles
and Danny Cleary, had a gross profit margin of approximately
20% to 25% before they introduced an intermediary such as
Atuhk between their business-initially operated by 2431 and
then by CCI-and their suppliers. Once Atuhk came into the
picture, CCI's gross profit margin was reduced to half, falling
to approximately 10%.
[44] Even if Danny Cleary did not want
to admit to the existence of tax planning, the evidence points to
that. According to the auditor's report, the manager of the
Caisse populaire de Pointe-Bleue had this impression. There
is also the fact that Danny Cleary retained the services of
a tax expert working for a well-known Quebec accounting
firm. In any case, whether the project in Mashteuiatsh is a
product of humanitarian considerations, as submitted
by Ralph and Danny Cleary, or a product of
financial-planning opportunism, the reality is this:
Atuhk's profits are essentially profits related to the
construction company, CCI, which is run on the South Shore of
Montréal. There were very few economic benefits for the
Aboriginal community of Mashteuiatsh: only wages and employee
benefits totalling less than $34,000 and the payment of $1,900 in
rent, whereas profits realized by Atuhk were posted at
$1.2 million, including one million that never even
flowed through the Mashteuiatsh reserve.
[45] Under the circumstances, it is
difficult to find that, for the purposes of the ITA, this
business income was situated on a reserve because it constituted
property held by an Indian qua Indian. It is also difficult to
find that it would be inappropriate to tax such amounts because
it would erode the property held by an Indian on a reserve. In
this case, the Appellants had decided to live outside their
Aboriginal reserve. They carried out activities outside the lands
reserved for their use. They were thus subject to the same
conditions as other Canadians. As indicated by Gonthier J.
in Williams, whether the Indian wishes to remain within
the protected reserve system or integrate more fully into
"ordinary commercial purposes in society" is a
choice left to the Indian. The evidence in this case clearly
shows that the Appellants integrated themselves into the business
world outside the reserve, and quite successfully, in my view. It
is even likely that their lack of connection to the reserve
explains, to a large degree, the failure of the Wigwam project.
According to the auditor, the Appellants were not well known by
the band council and Ralph Cleary had little experience in
construction.
[46] For all these reasons, I find that the
Appellants held no property as Indians on a reserve and that the
Atuhk business income was subject to the Act.
Calculation of capital gain from the vacant lot
[47] In his testimony, Danny Cleary
indicated that he had purchased the vacant lot on Guillet Street
in order to build a residence and that he had then sold it to CCI
for what it had cost him to acquire and hold the land. In
addition to the purchase price (which included the goods and
services tax and transfer taxes), Mr. Cleary had to incur
costs for annual property taxes and for landscaping, particularly
levelling. In my opinion, even if it were possible to find that a
portion of those expenses could be capitalized and therefore
included in the cost of the land-I am thinking here of the cost
of levelling the lot-the evidence in no way revealed the amount
of those expenses. With no evidence, I am unable to find that the
amount determined as the adjusted cost base for the vacant lot
was incorrect.
Use of the house on Migneault Street
[48] When Gilles Cleary filed his
income tax return for 1992, he indicated that he was living at
388 Migneault Street in Longueuil. Furthermore, when
CCI borrowed $98,900 from Fiducie Desjardins Inc. on
July 20, 1993 (Exhibit I-1, Tab 14),
the notary indicated in the loan contract that
Gilles Cleary, who had become a party to the contract, lived
at 388 Migneault Street in Longueuil. The Minister
thus had factual elements that could support that Mr. Cleary was
living at that address. During their testimony, Gilles and
Danny Cleary stated that 388 Migneault Streetwas a
model home where CCI had its offices and that Gilles Cleary
had never lived there. Although I may have some doubts about the
probative value of the testimony of Messrs. Cleary, as their
testimony was not corroborated by independent witnesses, I am
ready to give them the benefit of the doubt and find that the
residence in question was not used for personal purposes by
Gilles Cleary. As a result, the Minister's assessment is
incorrect on this point.
[49] For all these reasons, the appeals by
Gilles Cleary regarding the 1994 and 1995 taxation
years are dismissed. Those for 1992 and 1993 are allowed and the
assessments are referred back to the Minister for reconsideration
and reassessment on the basis that no amount is to be included in
Gilles Cleary's income as a benefit from the personal use of
the residence on Migneault Street.
[50] Danny Cleary's appeals regarding
the 1992 and 1995 taxation years are dismissed. His appeal
regarding 1994 is allowed and the assessment is referred back to
the Minister for reconsideration and reassessment on the basis
that the amount of taxable capital gain from the sale of the
vacant lot on Guillet Streetis $3,240.75 rather than
$5,866.
[51] Given the results obtained and the fact
that the Appellants' appeals were heard on common evidence, the
Respondent is awarded one set of costs.
Signed at Ottawa, Canada, this 26th day of
November 2004.
Archambault J.
Translation certified true
on this 18th day of January 2005.
Sophie Debbané, revisor
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