Aboriginal Taxation: Does the Indian Act Exempt Interest Income? Find Out Soon in Dubé v Canada
The Supreme Court of Canada (“SCC”) is currently considering the very modern problem of Alexandre Dubé’s capital gains tax woes.
As a member of the Obejiwan First Nation (as defined by the Indian Act, RSC 1985, c I-5), living on a reserve in Quebec, many of Mr. Dubé’s sources of income are exempt from federal and provincial taxation schemes. He makes a living offering transportation services, including transporting reserve residents to the nearest city for medical care. There is no bank on his reserve, so in order to maintain his practice of banking within the Native community, he drives to the Caisse populaire Desjardins de Pointe-Bleue (the “Caisse”) on the Mashteuiatsh Reserve, some 300km away.
The issue deliberated was whether the appellant’s investment income, garnered from his dealings with the Caisse, is to be considered “situated on the reserve” and therefore exempt from taxation pursuant to para 8(1)(a) of the Income Tax Act, RSC 1985, c 1 (5th Supp), and s. 87 of the Indian Act.
Dubé v R is an appeal from the decision of Nadon, J.A. and the concurring reasons of Pelletier and Blais JJ of the Federal Court of Appeal (“FCA”) (see 2009 FCA 109), which itself was appeal from the Tax Court of Canada (see 2007 TCC 393).
Banking On a Reserve
The appellant has been a member of the Obedjiwan First Nation since birth, and spends at least every weekend on the Reserve. The customers at the Caisse where he banks are also mostly Native peoples. The Caisse deposits 25% of their customer’s reserves into the Federation des caisses populaires Desjardins (the “Federation”) which makes investments in both investment and liquidity funds that are in turn invested in the economic mainstream. The remainder of the deposits are lent to members of the Caisse, both on and off the reserve.
Between 1997 and 2002, Mr. Dubé earned close to $300, 000 from his investments with Caisse. He included this in his taxable income, and then deducted it. When he was assessed in 2002, the Minister of Finance disallowed Mr. Dubé’s deductions from this source of income. In addition, late penalties were applied. The appellant now finds himself owing a large sum to the Canada Revenue Agency because of contrary interpretations of the relevant statutory provisions. Members of First Nations communities are eagerly anticipating the SCC’s decision for some clarity in the tax laws that apply to them, so they can plan their finances accordingly.
Not Very Taxing
In order for the Indian Act to apply and the income be exempt from taxation, three elements must be satisfied:
- The taxpayer is an Indian as defined by the Indian Act
- Having possession of personal property
- Which is situated on a reserve.
Justice Angers of the Tax Court highlighted that in Recalma v Canada (1998), 158 DLR (4th) 59 (FCA) [Recalma], the Court restated the principles enunciated in Williams v Canada,  1 SCR 877 [Williams], that identified the four connecting factors used to determine the where (“situs” ) of the earned income. They are:
- The investment income’s connection to the reserve
- The benefit of the investment to the traditional Native way of life
- The potential danger of the erosion of Native property
- The extent to which the investment income may be considered as being derived from economic mainstream activity.
It’s easy to identify several connecting factors between the appellant’s investment income and the reserve: Mr. Dubé’s place of residence, the source of the capital, the location of the Caisse and the place where the investment income was paid. Angers J nevertheless found that the fourth factor was the most significant area of analysis, and found that the Federation’s investments were integrated with the economic mainstream and thus not closely connected to the reserve.
In his appeal, Mr Dubé submitted to the FCA that the Tax Court judge erred in finding that the investment income was situated off the reserve. He submitted that according to Recalma, funds invested in banking institutions may be exempt from taxation if the funds are used exclusively for Native development. To this end, he pointed out that the Caisse in question is directly involved in Native economic development through its loans to natives on the reserve.
The appellant also alleged that the judge erred in neglecting to assess the danger of “erosion to Native property” presented by the taxation of investment income. The judge found that there was no danger to his initial investment, but the analysis falls short of addressing whether Aboriginals have the right to protect their capital property from the erosion of inflation through capital investments.
Since the Industrial Revolution, modern capitalist economies have thrived through the accumulation of returns on investment capital. By choosing to tax this particular form of income, it could be argued that the government is choking Native benefits by imposing taxes on the very method that could be used to end the abject poverty that has plagued many reserves. This is not to say that allowing the interest income to be non-taxable would have this effect, or that disallowing it would preclude it. It is to say that it may seem counter-intuitive to some that economically successful Natives would be taxed where it hurts most, while most Natives on reserves, who earn less than the lowest tax bracket, are “exempt” from a taxation system that would hardly tax them anyway.
The purpose of the tax exemptions is articulated nicely in an older SCC decision:
Justice LaForest in Mitchell v Peguis Indian Band,  2 SCR 85, noted that
“…The exemptions from taxation…have historically protected the ability of the Indians to benefit from [their] property [by guarding] 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.” [para 86].
In Williams, Justice Gonthier referred to the choice that Natives have as to how to organize their financial affairs: if it’s off the reserve, it is open to taxation but is also “more fully available for commercial purposes in society.” (para 18).
He also noted that each case had to have its facts specifically turned over the four connecting factors, and therefore that this issue had to be approached on a case by case basis.
Nadon J.A. relies almost exclusively on the final connecting factor from Williams, deciding that, “if all or part of the funds were invested in the general mainstream of the economy, the exemption from taxation provided at Para 87(1)(b) of the Indian Act cannot apply.”
The intention of the Indian Act, he notes, is not to allow First Nations peoples to acquire and negotiate for property that is situated outside of a reserve on better terms than other Canadians.
As Pelletier remarks in his concurring reasons, “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.” (para 4, emphasis mine).
Tax, Tax, Tax…Exemption!
There’s something missing from the Federal Court’s decision which I hope is addressed in the Supreme Court’s rendering: coaxing lucrative returns on capital investments is no longer reserved for the super-elite.
On the one hand, if it looks like the funds from the gains on capital invested are going to be reinvested in the reserves, then allowing them to be tax-free could be a huge windfall for traditionally impoverished and neglected communities. It could be the ultimate self-help system. Or, the tax-free nature of returns could be used to profit only the wealthy elite and further entrench economic disparity on those reserves.
One thing is certain: the taxation exemptions that currently exist should not be used by unscrupulous business people who happen to have Indian status, and who are going to capitalize on this benefit, that is intended for communities, for their own private gain.
I would suggest, however, that there is another issue at play. Not only is there no bank on the appellant’s reserve, but there may be very little in the way of investment opportunities. It seems like Mr. Dubé has done his best to direct his energies and investments into preserving the way of life he so cherishes. If the Supreme Court chooses to limit his and others’ tax-free investments to activities that are not part of “the global economy,” then the entrenched and systemic poverty that affects many Aboriginal communities may continue unabated.