Date: 20090408
Docket: A-7-08
Citation:
2009 FCA 109
CORAM: NADON J.A.
BLAIS J.A.
PELLETIER J.A.
BETWEEN:
ALEXANDRE DUBÉ
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
NADON J.A.
[1]
This is an appeal from the decision of Justice
Angers of the Tax Court of Canada, 2007TCC393, dated December 6, 2007,
dismissing the appeal of Alexandre Dubé (the appellant) from the assessments
made by the Minister of National Revenue (the Minister) under the Income Tax
Act, R.S.C. 1985 (5th Supp.), c. 1, (the ITA), for the taxation years
1997 to 2002 inclusive.
[2]
This appeal raises the question
of whether the investment income of the appellant, an Indian under the Indian
Act, R.S.C. 1985, c. I-5, was situated on a reserve and is therefore exempt
from taxation pursuant to paragraph 81(1)(a) of the ITA and section 87
of the Indian Act.
The facts
[3]
The following summary of
facts is necessary to fully understand the issues raised by the appeal.
[4]
The appellant, who has been
a member of the Obedjiwan First Nation since birth, uses the services of the
Caisse populaire Desjardins de Pointe-Bleue (the Caisse) situated on the
Mashteuiatsh Reserve. There
is no financial institution on the Obedjiwan Reserve, which is located
approximately 300 kilometres from the Mashteuiatsh Reserve.
[5]
It is likely that the
majority of the members of the Caisse are Native people. The Caisse has three
main sources of revenue. First, 25 percent of the Caisse members’ deposits are
invested with the Fédération des caisses populaires Desjardins (the
Federation), which makes investments in investment funds and liquidity funds that,
in turn, are invested in the economic mainstream off the reserve. Second, the
remainder of the deposits, namely 75 percent of the total, is lent to members
of the Caisse residing on or off the reserve. Last, the Caisse receives income
from other revenue sources, such as administrative fees, brokerage fees and
others.
[6]
The appellant considers
himself to be a resident of the Obedjiwan Reserve, even though, for a few
years, he owned a residence in St-Félicien and then in Roberval. The main
reason he acquired these homes was to enable his children to attend schools in
St-Félicien. His spouse and two of his children lived in these homes during the
school year, which is ten months of the year. The appellant acknowledged having
also lived in them, but clarified that he returned to Obedjiwan almost every
weekend.
[7]
The appellant used the
services of the Caisse for personal purposes and for the purposes of his
business, through which he offers transportation services, including
transportation from the Obedjiwan Reserve to Roberval, for reserve residents in
need of medical care. However, it is not certain that the appellant’s business
income was used as funds to generate the investment income, since the appellant
was not able to clearly identify the source of the funds in question to the
satisfaction of the trial judge.
[8]
The Minister made
assessments and reassessments for 1997 to 2002. For 1997 to 1999, the Minister
added the investment income from the Caisse in computing the appellant’s
taxable income. For 2000, 2001 and 2002, the appellant included his investment
income from the Caisse in his returns but claimed a deduction for the same
amounts. However, the Minister refused the deduction. In addition, the Minister
imposed a penalty for late filing for the 1997, 1998, 2000 and 2001 taxation
years. The penalties imposed are respectively 7 percent, 8 percent, 10 percent
and 6 percent of the tax payable for each of those taxation years.
[9]
The appellant's
investment income for each of the taxation years in question is $19,956 for
1997, $12,115 for 1998, $73,210 for 1999, $82,303 for 2000, $80,116 for 2001
and $49,530 for 2002.
[10]
The appellant appealed these assessments to the
Tax Court of Canada.
Decision of Justice Angers
[11]
To begin with, Justice
Angers noted that in order for the exemption from taxation provided for at paragraph
87(1)(b) of the Indian Act to apply, three elements must be
present: being an Indian within the meaning of the Indian Act, having
possession of personal property, and that property being situated on a reserve. The judge noted that, in this case, it is
admitted that the appellant was an Indian and that the investment income was
personal property. Accordingly, the issue in
dispute was whether the investment income was, in fact, situated on a reserve.
[12]
To answer this question, the
judge carefully reviewed the legal principles established in case law,
particularly those from the Supreme Court’s decisions in Williams v. Canada,
[1992] 1 S.C.R. 877 (Williams) and Mitchell v. Peguis Indian
Band, [1990] 2 S.C.R. 85 (Mitchell) and from the decision of this
Court in Recalma v. Canada (1998), 98 D.T.C. 6238 (Recalma).
[13]
Justice Angers highlighted
that in Recalma, above, this Court restated the principles enunciated in
Williams, above, and identified four connecting factors to be considered
in determining the situs of investment income: (1) the investment
income’s connection to the reserve; (2) the benefit of the investment income to
the traditional Native way of life; (3) the potential danger of the erosion of
Native property; and (4) the extent to which the investment income may be
considered as being derived from economic mainstream activity. However, according to
Justice Angers, the fourth factor was the most important in that case.
[14]
Based on an analysis of the
connecting factors, the judge found that there were indeed several connections
between the investment income and the reserve. For one thing, the reserve was the appellant’s place of
residence, the source of the capital, the location of the Caisse, the place where
the investment income, or at least a good part of it, was used, the location of
the investment vehicle, and the place where the investment income was paid. The
judge nonetheless found that these were factors of lesser importance in
determining the situs of investment income and that for that purpose,
the emphasis should mainly be placed on how the income was earned. In the case, the judge found that the income-generating
activities were derived from an economic mainstream activity and not closely
connected to the reserve. Consequently, the
investment income was not exempt from taxation.
Submissions of the parties
A. Appellant’s
submissions
[15]
The appellant’s first ground
for challenging Justice Angers’ decision is that the judge made an error in his
assessment of certain facts: among others, the appellant submits that his
St-Félicien residence or Roberval residence was only a secondary residence,
that there is no evidence that his income came from any source but his business
and that the Caisse is involved in Native economic development.
[16]
Second, the appellant submits
that the judge erred in his assessment of the connecting factors by placing
undue importance on the criterion of the location of the sums used to produce
the investment income. According to the appellant, Recalma, above,
suggests that funds invested in a banking institution situated on a reserve may
be exempt from taxation if the funds are used exclusively or mainly to grant
loans to Native people on the reserve. The appellant alleges that in this case,
the Caisse’s loans were mainly granted to Native people on the reserve. The
appellant also alleges that the case at bar must be distinguished from Lewin
v. Canada, 2002 FCA 461 (Lewin).
[17]
Third, the appellant alleges
that the judge erred in neglecting to assess the danger of the erosion of
Native property presented by taxation of investment income and to adequately
consider the benefit of investment income to the
traditional Native way of life.
[18]
Last, the appellant, submits
that his bank account is clearly situated on a reserve and that the judge erred
in making a distinction between the capital, which would not be threatened by
the taxation in question, and the product of that capital.
B. Respondent’s submissions
[19]
The respondent submits that
this Court has already dealt with the question of connecting factors on a
number of occasions and that this case provides no basis for reconsidering the
method used to identify the situs of investment income when applying
section 87 of the Indian Act.
[20]
According to the respondent,
Justice Angers’ decision is consistent with the principles developed by the
case law. In particular, the
respondent alleges that there is no major distinction between this case and Lewin,
above, which dealt with interest income from deposit certificates with the same
establishment at issue, namely the Caisse populaire du Village Huron.
Issue
[21]
It is common ground, in this
case, that the appellant is an Indian and that investment income is personal
property. Therefore, the
appeal raises a single issue, which is whether Justice Angers erred in
concluding that the appellant’s investment
income was not property “situated on a reserve” and was therefore not exempt
from taxation.
Analysis
A. Statutory provisions
[22]
Paragraph 81(1)(a) of the
ITA provides that an amount that is declared to be exempt from taxation by any
other enactment of Parliament shall not be included in computing the income of
a taxpayer:
|
81.
(1) There shall not be included in computing the income of a taxpayer for a
taxation year,
(a)
an amount that is declared to be exempt from income tax by any other
enactment of Parliament, other than an amount received or receivable by an
individual that is exempt by virtue of a provision contained in a tax
convention or agreement with another country that has the force of law in Canada.
|
81. (1) Ne sont pas inclus dans le calcul du revenu
d’un contribuable pour une année d’imposition :
a)
une somme exonérée de l’impôt sur le revenu par toute autre loi fédérale,
autre qu’un montant reçu ou à recevoir par un particulier qui est exonéré en
vertu d’une disposition d’une convention ou d’un accord fiscal conclu avec un
autre pays et qui a force de la loi au Canada.
|
[23]
The exemption provided by another enactment is found at
section 87 of the Indian Act, which reads as follows:
|
87.
(1) Notwithstanding any other Act of Parliament or any Act of the legislature
of a province, but subject to section 83, the following property is exempt
from taxation, namely,
(a)
the interest of an Indian or a band in reserve lands or surrendered lands;
and
(b)
the personal property of an Indian or a band situated on a reserve.
(2)
No Indian or band is subject to taxation in respect of the ownership,
occupation, possession or use of any property mentioned in paragraph (1)(a)
or (b) or is otherwise subject to taxation in respect of any such
property.
|
87. (1) Nonobstant toute autre loi fédérale ou
provinciale, mais sous réserve de l’article 83, les biens suivants sont
exempts de taxation :
a)
le droit d’un Indien ou d’une bande sur une réserve ou de terres cédées;
b)
les bien meubles d’un Indien ou d’une bande situés sur une réserve.
(2) Nul indien ou bande n’est assujetti à une
taxation concernant la propriété, l’occupation, la possession ou l’usage d’un
bien mentionné aux alinéas (1)a) ou b) ni autrement soumis à
une taxation quant à l’un de ces biens.
|
B. Standard of review
[24]
From the decision of the Supreme Court in Housen v.
Nikolaisen, [2002]
2 S.C.R. 235, we know that the standard of review on a question of law is
correctness, and that the trial judge’s finding of fact or of mixed fact and
law cannot be overturned unless the judge made a palpable and overriding error.
C. Is the investment income situated on an Indian reserve?
[25]
In my opinion, Justice Angers properly grounded his
analysis in the legal principles that have been established in the case law and
did not err in law or make a palpable and overriding error. Furthermore, I can
find no error in Justice Angers’ analysis of the connecting factors developed
by this Court in Recalma, above.
[26]
To determine whether an Indian’s investment income is
situated on a reserve, it is first necessary to consider the intent of the
exemption provided in the Indian Act and the principles set forth by the
Supreme Court in Mitchell and Williams, above.
[27]
The intended purpose of the exemption provided
at paragraph 87(1)(b) of the Indian Act was explained in the
following manner by Justice La Forest in Mitchell, above, at
paragraphs 86 and 88:
… The exemptions from taxation and distraint
have historically protected the ability of Indians to benefit from this
property in two ways. First, they guard against the possibility that one branch
of government, through the imposition of taxes, could erode the full measure of
the benefits given by that branch of government entrusted with the supervision
of Indian affairs. Secondly, the protection against attachment ensures that the
enforcement of civil judgments by non-natives will not be allowed to hinder
Indians in the untrammelled enjoyment of such advantages as they had retained
or might acquire pursuant to the fulfillment by the Crown of its treaty
obligations. In effect, these sections shield Indians from the imposition of
the civil liabilities that could lead, albeit through an indirect route, to the
alienation of the Indian land base through the medium of foreclosure sales and
the like; see Brennan J.’s discussion of the purpose served by Indian tax
immunities in the American context in Bryan v. Itasca County, 426 U.S.
373 (1976), at p. 391.
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.
[Emphasis added]
… As is the case with the restrictions
on alienability to which I drew attention earlier, the intent of these
sections is to guard against the possibility that Indians will be victimized by
“sharp dealing” on the part of non-natives and dispossessed of their
entitlements.
[Emphasis added]
[29]
In Williams, above, Justice Gonthier
discussed the choice that Native taxpayers have as to how they organize their
personal property and whether they situate them on or off a reserve. At
paragraph 18, he states the following:
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.
[30]
At paragraph 61, Justice Gonthier also explained
how to determine the location of intangible personal property:
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.
[Emphasis added]
[31]
Moreover, at paragraph 35, Justice Gonthier also
stressed that each case must be decided on its own facts:
Furthermore, it would be dangerous to
balance connecting factors in an abstract manner, divorced from the purpose of
the exemption under the Indian Act. A connecting factor is only
relevant in so much as it identifies the location of the property in question
for the purposes of the Indian Act. In particular categories of cases,
therefore, one connecting factor may have much more weight than another. It
would be easy in balancing connecting factors on a case by case basis to lose
sight of this.
[32]
These connecting factors were restated in Recalma,
above, where this Court identified certain factors to consider in determining
the situs of investment income. The substantive portion of the reasoning
in this case was set forth by Justice Linden at paragraph 11:
[11] So too, where investment
income is at issue, it must be viewed in relation to its connection to the
Reserve, its benefit to the traditional Native way of life, the potential
danger to the erosion of Native property and the extent to which it may be
considered as being derived from economic mainstream activity. In our view,
the Tax Court judge correctly placed considerable weight on the way the
investment income was generated, just as the Courts have done in cases
involving employment, U.I. benefits and business income. Investment income,
being passive income, is not generated by the individual work of the taxpayer.
In a way, the work is done by the money which is invested across the land. The
Tax Court judge rightly placed great weight on factors such as the residence of
the issuer of the security, the location of the issuer’s income generating
operations, and the location of the security issuer’s property. While the
dealer in these securities, the local branch of the Bank of Montreal, was on a
Reserve, the issuers of the securities were not; the corporations which offered
the Bankers’ Acceptances and the managers of the Mutual Funds in question were
not connected in any way to a Reserve. They were in the head offices of the
corporations in cities far removed from any reserve. Similarly, the main income
generating activity of the issuers was situated in towns and cities across Canada and around the world, not on Reserves. In addition,
the assets of the issuers of the securities in question were predominantly off
Reserves, which in case of default would be most significant.
[Emphasis added]
[33]
Recalma, above,
was followed by this Court in Lewin, above, and in Sero v. Canada,
2004 FCA 6 (Sero). Recalma is now the leading authority on
the question of whether section 87 can exempt certain investment income
from tax (see Sero at paragraph 16).
[34]
However, the appellant is attempting to distinguish the
relevant case law on section 87 from the case at bar. In particular, he
submits that Lewin, above, must be distinguished. According to the
appellant, several connecting factors were not present in that case; among
other things, Mr. Lewin did not reside on the reserve, the original
capital investment had been constituted from work done off the reserve, and the
interest paid to Mr. Lewin did not contribute to preserving the traditional
way of life of Native people living on the reserve.
[35]
The state of the law on the issue of taxation of
Indians’ investment income is currently well established. I am persuaded that
there is no essential distinction between this case and the decisions of this
Court in Recalma, Lewin and Sero, above. In my opinion,
the factual distinctions that the appellant is trying to rely on are
immaterial.
[36]
When an Indian invokes paragraph 87(1)(b)
of the Indian Act to obtain a tax exemption on his or her investment
income, and the income in question is generated off the reserve, the exemption
cannot be granted. In such a context, the other connection factors are of
little importance. In particular, the mere fact that the financial institution
is situated on the reserve merits little weight. What matters is whether the
investment income—that is, the profit generated from the capital invested in a
financial institution—was produced on or off the territory of the reserve. In
other words, if all or part of the funds were invested in the general
mainstream of the economy, the exemption from taxation provided at
paragraph 87(1)(b) of the Indian Act cannot apply.
[37]
In Recalma, above, Justice Linden implies at
paragraph 14 of his reasons that “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”.
However, that is not so in this case, and accordingly, we do not have to rule
on such a question. It is important to recall that as, Justice La Forest
emphasized in Mitchell, the intent of the exemption provided at section
87 of the Indian Act is not to allow Indians to acquire and deal with
property situated outside the reserve on better terms than other Canadians.
[38]
Accordingly, I find no error
in the judge’s decision to give considerable weight to the fact that Caisse
populaire Desjardins de Pointe-Bleue was investing its funds in the economic
mainstream.
[39]
Moreover, contrary to the
appellant’s allegations, I do not believe that the judge erred in making a
distinction between the capital invested with the Caisse and the product
generated by that capital. In fact, this is a fundamental distinction that was
at the core of the question at issue. The judge was entirely justified in
concluding that there was no danger of the erosion of Native property, since
the investment income was generated by the capital invested with the Caisse and
the capital itself was not threatened.
Disposition
[40]
For these reasons, I would dismiss the appeal with costs.
“M. Nadon”
Certified true
translation
Sarah Burns
PELLETIER J.A. (CONCURRING REASONS)
[1]
I agree with the reasons
articulated by my colleague Justice Nadon, but I would add the following to his
remarks.
[2]
In Recalma v. Canada
(1998), 98 D.T.C. 6238, Justice Linden acknowledged the possibility that in
some circumstances, particularly when “funds invested directly or through banks
on reserves are used exclusively or mainly for loans to Natives on reserves”,
investment income could be exempt from taxation. This factor was only one of
several in his analysis, but he gave it more weight than the others.
[3]
Perhaps there was once a
time when caisses populaires set themselves apart from other financial
institutions by virtue of their limited activities and the common link that
existed between members, but that is no longer the case. As shown by the
evidence in this case, caisses populaires are no longer limited as to their
geographical and financial operations. The fact that they belong to a group
means that they participate fully in the capital market to the extent that
their cash requirements permit or surplus funds demand.
[4]
Additionally, as events in
recent months have shown, the capital market is a global market. While the sources
of the capital put on the market are local and the projects in which that
capital is invested are local, the fact remains that the market itself is
global. Investors can access that market from their own communities, but the
point of entry does not, in itself, limit the market in which investors make
profits and incur losses.
[5]
I therefore conclude that in
the case of the investment of capital through a financial institution,
including a caisse populaire, the weightiest factor in determining the situs of
the investment income is the nature of the capital market itself, which is not
limited to a reserve, a province or even a country.
[6]
I would therefore dismiss
the appeal as my colleague Justice Nadon proposes.
“J.D. Denis Pelletier”
“I agree.”
Pierre
Blais J.A.
Certified true
translation
Sarah Burns
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