Bastien Estate and Dube — Taxation of Income of Registered Indians

The Supreme Court of Canada has overturned a long line of Federal Court of Appeal cases that had held that registered Indians who earned interest from investments held in financial institutions located on reserve were liable for tax.

On the face of it, the decisions of the Federal Court seemed to directly contradict section 87 of the Indian Act, which provided that the “personal property of an Indian …. situated on a reserve” was exempt from taxation. Since the 1998 case, Recalma v. R., the Federal Court had reasoned that savings in financial institutions located on reserve were taxable because the financial institutions generated their income from participating in the “commercial mainstream.”  The reasoning was related to a belief that the tax exemption under s.87 of the Indian Act should be related to preserving a traditional way of life or related to Indians qua Indians.

In Bastien Estate v. Canada, 2011 SCC 38 and Dubé v. Canada, 2011 SCC 39 the majority of the Supreme Court (per Cromwell J, McLachlin CJ and Binnie, Fish and Charron JJ concurring) was very clear in reformulating the purpose of section 87:

Section 87 protects the personal property of Indians that is situated on a reserve from taxation. In determining the location of personal property for the purpose of s. 87, there is no requirement that the personal property be integral to the life of the reserve, or that it, in order to be exempted from taxation, must benefit what the court takes to be the traditional Indian way of life. (at para. 30)

The two cases were held together, but the facts were slightly different.

Rolland Bastien had a moccasin making business on the Wendlake reserve. He deposited his savings from his business in the Caisse populaire Desjardins du Village Huron, which was located on his reserve. Bastien also lived on the reserve. Cromwell J. characterized the “property” in this case to be the contractual right to interest from the investment certificates. Whether the financial institution generated the funds to fulfill its obligation to pay from the “commercial mainstream” or not was not relevant.

Rather, Cromwell J. returned to the connecting factors test developed in Williams v. R. (1992) to determine whether the property was situated on the reserve.   First, he found that the “place of contracting, the place of performance and the residence of the debtor”  were all on reserve. Second, the residence of the payee was on reserve. And third, the “source of the capital which was invested to produce the interest income” was also on reserve.

Alexandre Dubé was born on the Obedjiwan Reserve in Quebec. He had a business transporting people from this reserve to the town of Roberval for medical treatment.  It appears that he did not live on the reserve itself. Because there was not financial institution situated on his reserve, he kept his savings in the  Caisse populaire Desjardins de Pointe-Bleue, which was located on a different reserve – the Mashteuiatsh Reserve.

The trial judge found that not all the savings came from his transportation business. The trial judge also found that the majority of the members of the caisse populaire were native and that 75 per cent of the income was lent to members of the caisse living on and off reserve. In the factual circumstances of this case, Cromwell J  found irrelevant or of little weight Dubé’s place of residence, the fact that not all the savings were generated from an activity connected to the reserve and the fact that he did not spend the interest income on reserve.

Deschamps J (Rothstein J concurring) criticized the majority judgment for placing too much emphasis on the residence of the debtor and raised the fear that the majority’s reasoning could lead to artificial tax avoidance schemes. She felt that if the income invested had been generated on the reserve, as was the case with Bastien, the interest on that income should not be taxed. However, Dubé had not generated his funds from activity on the reserve. Consequently, Deschamps concurred in the result in Bastien Estate but dissented in Dubé.

In my view, the majority decision accords with the spirit and intent of the provisions of the Indian Act, but I do not think that these cases open the way for a wholescale avoidance of tax by channelling investment vehicles through on-reserve financial institutions. Cromwell J. was careful to restrict his reasons to the fact that these cases dealt with guaranteed investment certificates.

Nonetheless, it is encouraging to see that all the judges reject the line of cases that put a cultural gloss on the Indian Act by tying tax exemptions to “traditional” activities. If economic development is to be important to reserve communities, they should be able to rely on the statutory framework that is provided in the Indian Act. Of course, this framework is riddled with problems and new self-government agreements have done away with the tax exemptions in favour of a more sophisticated set of economic development tools, including greater access to benefits from traditional lands.

For those communities still living under the Indian Act, however,  these decisions can be seen as a step in the right direction.