Citation: 2009 TCC 358
Date: 20090703
Docket: 2005-2632(IT)G
BETWEEN:
MARCEL PELLETIER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bowie J.
[1] Mr. Pelletier
brings these appeals from reassessments under the Income Tax Act (the Act)
for the taxation years 1999, 2000, 2001 and 2002. The amount of his income for
those years is not in dispute. The only issue is whether the appellant is
exempt from taxation of his income by reason of paragraph 81(1)(a) of
the Act and section 87 of the Indian Act. These provisions have been
interpreted by the Supreme Court of Canada to exempt income received by an
Indian on a reserve from taxation under the Act. There is no dispute either
about the status of Mr. Pelletier; he is a member of the Red Rock First
Nation (the Band) and a status Indian within the definition contained in the Indian
Act. The only matter in dispute is, as the Supreme Court put it in Williams,
“…whether the property in question is situated on a reserve.” The property in this case
is the appellant’s income derived from a logging business.
[2] The Band’s reserve,
Lake Helen Reserve #193, is at Lake Helen, near Nipigon, Ontario, some 100 kilometers northeast of Thunder Bay.
The predominant industry in that part of Ontario is logging, and the appellant
has been engaged in logging all his working life, most recently carrying on
business under the name 4 K Logging. His evidence was that he is good at it,
and I have no doubt that is correct. The Band was not so good at it, however,
and that is where the evidence in this case began. Mr. Pelletier was the only
witness, and his evidence was far from clear. The appellant’s only other
evidence consists of eight volumes of copies of documents that were entered
upon the agreement of counsel. These stand some 25 cm. high and weigh 10 kg.
The vast majority of these were neither referred to by the appellant in giving
his evidence, nor by his counsel in argument. Many of these documents are
contracts or work orders for logging work entered into between various paper
companies and sawmills and either the Band or Mr. Pelletier. Many of them are
invoices or cheques pertaining to the work under such contracts, and some are
bank statements. Many of these are in the name of Pierre Pelletier; the
appellant explained in his evidence that he has been universally known as
Pierre Pelletier since a very early age, and that frequently his name, or that
of 4 K Logging, appears on documents prepared by paper companies or lumber
companies when in fact he was acting as agent for the Band. The evidence is
both incomplete in some respects, and confused in others. That said, I accept
that Mr. Pelletier’s evidence was truthful, and accurate in all important
respects.
[3] The Band was engaged
in logging operations for some years prior to 1993, cutting on Crown land the
timber rights to which were granted either to the Band or to companies that
contracted with the Band to harvest for them. According to the appellant, the
Band accumulated substantial losses in this endeavour, and in 1993 or 1994 he
was approached by the Band council and asked to take over and carry on the
operation. He agreed to do this, and there is in the evidence a contract
entered into between the Band and PIERRE PELLETIER FOUR K’S LOGGING covering
the period from April 1, 1997 to March 31, 2000. The terms are simply stated.
The appellant was to have “full management of the logging operations granted to
him by the Band, he was to pay the Band $3.50 per cord for wood harvested
on the Band’s licensed areas, and he was to “abide by the roles [sic] and
responsibilities” listed, which were the following:
a) Will
be fully informed of Operations.
b) Will
ensure all payments are made.
c) Will
have full knowledge of licensed areas.
d) Will
monitor all movement and delivery of wood.
e) Will
ensure licenses are in place.
f) Will
ensure Contractor reports weekly.
h) Will
ensure Lawrence Martin, In Trust, is kept informed
i) Will ensure all expenditures paid out are kept on file at
the Red Rock Indian Band Office.
j) Will
ensure all invoices are paid.
k) Will
ensure all transactions are kept separate from other Band business.
l) Will
ensure Contractor abides by the conditions of the license.
m) Will meet once a week with Contractor, Band manager, Person
in Trust, Chief and Council and Woodlands Clerk to update operations.
n) Will
ensure Contractor abides by the BCR (Band Council Resolution).
o) Will ensure Contractor does his job properly and in the
best interests of the operations and all parties concerned.
There
is much that is not covered in this contract, but it appears that the appellant
was to carry on the logging business both on Crown lands where the Band itself
had cutting rights from time to time and where third parties had the rights and
the Band, generally through Mr. Pelletier as agent, was able to negotiate
contracts to harvest for them. In either case Mr. Pelletier would receive
payment from the mills on delivery of the wood, and he would pay stumpage to
the Band. For the most part, the documentary evidence is simply illustrative of
the execution of these arrangements.
[4] In February 1995, on
the advice of his accountants, Mr. Pelletier transferred the business of 4 K,
which he had been operating as a proprietorship, to an inter vivos
trust. The trustee is a numbered company created for the purpose, and its sole
shareholder is Mr. Pelletier. The directors of the company are residents of the
Lake Helen Reserve, and the address of the registered office of the company is 57 Creekside Street, Lake Helen Reserve #193, which is the address of a modular home owned
by the appellant and situated on the reserve. The settlor of the trust is
Selena Pelletier, and the beneficiaries are the appellant and his family. I was
told that the appellant operates the business on behalf of the trust. Mr.
Pelletier testified that he had no understanding of these arrangements, and
there was no apparent operational purpose to them. They appear to be an attempt
at manipulation and abuse of the kind that Gonthier J. referred to in paragraph
36 of his Reasons in Williams:
However, an overly rigid test which identified one or two factors as
having controlling force has its own potential pitfalls. Such a test
would be open to manipulation and abuse, and in focusing on too few factors
could miss the purposes of the exemption in the Indian Act as easily as
a test which indiscriminately focuses on too many. (emphasis
added)
Counsel
did not rely to any significant extent on the situs of the trust in argument,
and for these reasons I do not consider them to be a factor that I should take
into account in considering whether the appellant’s business income, routed to
him through the trust, qualifies for exemption from income tax as personal
property of an Indian situated on a reserve.
[5] When invited to do
so, Mr. Pelletier effectively took over the logging operations formerly managed
by the Band. Cutting rights were allotted to the Band by the provincial
government annually, and Mr. Pelletier, along with Mr. Lawrence Martin as
the representative of the Band, made the selection on the Band’s behalf from
the areas made available each year. The lands selected were within a radius of
35 to 50 miles from the reserve, and were within what Mr. Pelletier called
the Band’s “traditional lands”. While he did not clearly explain what he meant
by this, I took it to mean lands occupied by the Band prior to their surrender
to the Crown by the Robinson-Superior Treaty. It is certainly clear from the
evidence that all the logging in question in this case was done on Crown land
pursuant to cutting licenses granted periodically by the provincial Crown to
the Band, or sometimes under rights granted to a paper or lumber company, and
by that company to the Band. In every case the Band had the cutting rights,
either directly or indirectly, and it contracted with the appellant to exercise
those rights for a price. Typically, he contracted with the mills to sell the
wood to them at the price he could negotiate with them. From that he paid the
expenses of cutting the wood and delivering it to the mill, and he paid $3.50
per cord for pulpwood and $5.00 per cord for sawlogs to the Band. What remained
was his profit.
[6] Mr. Pelletier was
definitely a hands-on manager of his operations. He testified that he spent
little time with his family at their home in Thunder Bay, and I am sure
that is correct. He clearly spent a portion of his time negotiating contracts
with the paper companies and the saw mills that purchased the product. He also
spent some time at his other house, a 72-foot modular home, on the reserve. It
had two bedrooms, a kitchen and bathroom, as well as the office from which he
ran the business with the assistance of a clerk who worked there. He also had a
workshop and fuel tank there where he stored and repaired equipment used in the
business. Repairs were sometimes done at a larger workshop on the reserve that
was owned by the Band.
[7] Mr. Pelletier also
spent time in the woods with the crews. Harvesting forest products requires not
only cutting and hauling logs. Roads have to be built, the trees have to be
limbed and skidded to the road, and then trucked to the mills. Mr. Pelletier
used subcontractors to do most of that work, and in 2001 or 2002, after the
Band had made sufficient money from the new arrangement to retire its debt and
purchase trucks, he contracted with the Band to haul the product to the mills.
He himself worked at many of the jobs when circumstances required it. 4 K had
18 or 20 people employed during the busy season, most of whom were Indians.
There also were a number of Indians working for his subcontractors. Mr.
Pelletier described his mandate from the Band as being to train Band members to
work in the industry, to help the Band to pay off its debt through payments for
cutting rights, and to operate as a viable First Nations logging contractor.
[8] In Williams, the Supreme Court had this
to say about the nature and purpose of the exemption from taxation afforded to
the income of Indians on a reserve:
The question of the purpose of ss. 87, 89 and
90 has been thoroughly addressed by La Forest J. in the case of Mitchell
v. Peguis Indian Band, [1990] 2 S.C.R. 85. La Forest J.
expressed the view that 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. 130‑31):
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.
La Forest J. also noted that the protection from
seizure is a mixed blessing, in that it removes the assets of an Indian on a
reserve from the ordinary stream of commercial dealings (at pp. 146-47).
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.
[9] The Court then
addressed the approach to be taken in applying these principles:
The approach which best reflects these concerns is
one which analyzes the matter in terms of categories of property and types of
taxation. For instance, connecting factors may have different relevance
with regard to unemployment insurance benefits than in respect of employment
income, or pension benefits. 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.
This approach preserves the flexibility of the case
by case approach, but within a framework which properly identifies the weight
which is to be placed on various connecting factors. Of course, the
weight to be given various connecting factors cannot be determined precisely.
However, this approach has the advantage that it preserves the ability to deal
appropriately with future cases which present considerations not previously
apparent.
The
cases in which the principle has been applied necessarily turn on their
specific facts. Nevertheless, there is some guidance to be had from the
judgment of the Federal Court of Appeal in Southwind v. Canada. That case, like the present
one, was concerned with business income derived from the logging industry.
Linden J.A., writing for a unanimous Court, considered eight factors
before concluding that the appellant’s income did not qualify for exemption as
property situated on a reserve. I propose to consider the same factors here.
[10] The first factor is
the location of the business activities. In this case some of the business
activities took place on the reserve, and some off. The physical work of
cutting, limbing, skidding and hauling takes place some 35 to 50 miles from the
reserve. There was evidence of a small amount of logging that took place on the
reserve at one time, but as I understood the appellant’s evidence, it was
before the years under appeal, and it was done for the purpose of clearing the
reserve land rather than as logging on a commercial scale. There was evidence
that some equipment is stored on the reserve from time to time, and may be
repaired there as well. The office work done by the clerk is done on the
reserve, and the books and records are maintained there. This factor is
somewhat equivocal, but in my view the fact that the product is trees that grow
in a location remote from the reserve, and that the physical work must
therefore be done at that location, outweighs the location of the office work,
which could be done either on or off the reserve.
[11] The next factor is the
location of the customers who are the source of the business income. Clearly
they are all situated off the reserve. Subject to a minor exception, the
product is transported by truck from the woods to the mills without entering
the reserve. That exception is Mr. Pelletier’s evidence that sometimes trucks
hauling wood late in the day to a mill at Nipigon that is close to the reserve
would park overnight on the reserve if they were unable to make the delivery
before morning. Clearly this factor suggests that the income is situate off the
reserve.
[12] The third factor is
where the decisions affecting the business are made. No doubt the appellant
does some paper work at his office on the reserve, and he probably makes some
business decisions there. He is the sole manager of the business and, as in Bell
v. Canada,
the management function is carried out by him wherever he happens to be at
any given moment. I think it is inevitable that Mr. Pelletier must make
important business decisions on the reserve when meeting with the Band Council,
and off the reserve when dealing with customers and the Provincial Government, and
when working with the subcontractors in the woods. The evidence on this was
sparse, but in my view it is not a factor that points strongly in either
direction.
[13] The next factor
considered by Linden J.A. is the type of business and the nature of the work.
This should be considered along with the sixth factor, which is the degree to
which the business is in the commercial mainstream. This is not a business that
has any historical, social or cultural connection to the reserve. The appellant
operates at arm’s length from the Band, and from the various mills that are his
customers. If he makes a profit it is his, and if the operation loses money then
it is his loss. There is nothing to distinguish his business from other logging
operations carried on in the commercial mainstream. This factor is strongly
indicative of an income that is not situated on the reserve.
[14] The final two factors
are the location of a fixed place of business and of the books and records, and
the residence of the owner of the business. As I have said, the business is
carried on in a number of locations, but its office and the books and records
are located at the appellant’s modular home on the reserve. This is also the
registered office of 1037738 ONTARIO LTD., the trustee of the 4 K Business
Trust. Like Mr. Walkus, the owner of the business in the Bell case, Mr.
Pelletier has two residences. His wife and children live in a house in Thunder Bay
where the children go to school. Mr. Pelletier splits his time between that
house and the modular home on the reserve. He made no estimate of the
proportion of his time spent at each location during the year, but I think it
is fair to say that during the logging seasons, winter and summer, he spends
more time living on the reserve than he does in the city. I have already
commented on the arrangement by which the business is owned by the 4 K Business
Trust; otherwise, there is no evidence that the location of the office and Mr.
Pelletier’s secondary residence on the reserve are an attempt at manipulation
of the kind referred to at paragraph 36 of Williams. This factor does
not point solely in either direction, but it may weigh more heavily on the side
of exemption than not.
[15] Considering all of
these factors, and bearing in mind what the Supreme Court has said in Mitchell
v. Peguis Indian Band,
I am of the view that the appellant’s income derived from the 4 K Logging
business does not qualify as property situated on a reserve and therefore
exempt from taxation. I can see no basis on which to conclude that to tax that
income would in any way erode Mr. Pelletier’s enjoyment of property held
by him qua Indian; it would simply put him on the same footing
commercially as all the non-Indian logging contractors with whom he competes in
the commercial mainstream of Northern Ontario.
[16] For these reasons,
the appeals are dismissed, with costs
Signed at Ottawa, Canada, this 3rd day of July, 2009.
“E.A. Bowie”
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