Recalma v. Canada, 98 DTC 6238, [1998] 2 C.T.C. 403 (FCA)

Linden J.A.:

1 The issue in these cases is whether certain investment income earned in 1991 by the appellants is exempt from income taxation by virtue of section 87 of the Indian Act because it is “personal property ... situated on a reserve”. Notices of Reassessment were issued by the Minister, the taxpayers appealed unsuccessfully to the Tax Court of Canada and they are now before this Court claiming the benefit of the exemption. All three cases were heard together and these reasons cover them equally.

2 The Recalma family is a successful and community-oriented Native family, members of the Qualicum Band, living on the Qualicum Indian Reserve on Vancouver Island. The two male appellants have been elected chief of their band at different times. They, along with the female appellant, operate a fishing business through various corporations which has been very successful over the years yielding for them in the 1991 taxation year alone (which was not atypical) over $1,000,000 in income.

3 Some of the Recalmas' accumulated wealth, over $4,000,000, was invested in certain financial investments called Bankers' Acceptances and Mutual Funds. A Bankers' Acceptance is a short-term note issued by a third party which the bank selling the note is primarily responsible for (or guarantees) repayment. They are sold at a discount and are redeemed at face value, the money being paid directly into the customer's accounts. The units of the Mutual Funds purchased were part of the First Canadian Money Market Fund, which invests in short-term debts issued by Canadian governments and corporations and in the First Canadian Mortgage Fund, which invests in mortgages. Upon redemption, these proceeds are deposited in the investors' accounts or as directed. These investments are very different from ordinary bank deposits in reserve banks which yield interest, income from which, until recently at least, have not been taxed by the Minister. These investments in Bankers' Acceptances and Mutual Funds yielded for the Recalmas in the 1991 taxation year, over $170,000 the tax on which is here being disputed. In other years, similar amounts were earned but these are not relevant here.

4 This money had been invested in these securities through a Bank of Montreal branch located on rented premises in a shopping centre called Park Royal on a Squamish Band Reserve in West Vancouver. The purpose of using this branch, it was said, was both to support Native economic advancement as well as to obtain certain tax advantages.

5 There is, of course, nothing wrong with Canadians arranging their affairs in order to minimize their tax burden. This is no less so for Natives than it is for other entrepreneurs who arrange mergers and offshore vehicles to reduce their tax burdens. Some efforts made to save taxes are successful and others are not. We must decide whether this one succeeded or whether it has failed. In our view, it has not succeeded.

6 It is common ground that this case involves personal property, owned by Indians who are being taxed in respect of that property. What is at issue is whether this personal property is situated on the reserve, a question that has become extremely complicated in recent years.

7 Our Court approaches the interpretation of section 87 with a keen eye on its purpose, which was designed to “shield Indians from any efforts by non-natives to dispossess Indians of the property which they hold qua Indians”, but “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.” (See La Forest, J. in Mitchell v. Sandy Bay Indian Band, [1990] 2 S.C.R. 85 (S.C.C.)at page 131.)

8 Building on Mitchell, the Supreme Court of Canada has developed a complex test involving the analysis of certain connecting factors in order to determine whether various types of personal property are so linked to a reserve as to be considered as “situated” there. Mr. Justice Gonthier has explained in Williams v. R., [1992] 1 S.C.R. 877 (S.C.C.), at 892:

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.

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.

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

10 It is plain that different factors may be given different weights in each case. Extremely important, particularly in this case, is the type of income being considered as attracting taxation. Where the income is employment or salary income, the residence of the taxpayer, the type of work being performed, the place where the work was done and the nature of the benefit to the Reserve are given great weight. (See Folster, supra). Where the income is unemployment insurance benefits, the most weighty factor is where the qualifying work is performed. (See Williams, supra) Where business income is involved, most weight was placed on where the work was done and where the source of the income was situated. (See Southwind v. R., January 14, 1998, Docket No. A-760-95 (F.C.A.)) [reported(1998), 222 N.R. 222 (Fed. C.A.)]

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.

12 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.

13 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.

14 To hold otherwise would open the door to wealthy Natives living on reserves across Canada to place their holdings into banks or other financial institutions situated on reserves and through these agencies invest in stocks, bonds and mortgages across Canada and the world without attracting any income tax on their profits. We cannot imagine that such a result was meant to be achieved by the drafters of section 87. 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.

15 The argument of the appellant in relation to subsection 87(2), which was not properly pleaded, is unpersuasive on its merits in any event and, therefore, cannot succeed.

16 This appeal should be dismissed with costs.