A thorough explanation of income tax exemption involving indigenous people.
Section 81 of the Income Tax Act and section 87 of the Indian Act work together to exempt indigenous people with Indian status from tax on income situated on reserve. But determining when income is situated on reserve is a convoluted task that frequently leads to disputes between status Indians and the CRA (Canada Revenue Agency). In a recent study commissioned by the CRA, indigenous communities identified uncertainty surrounding whether income was considered to be earned on-reserve or off-reserve to be one of the difficulties they face when filing their taxes.
In this article, we outline the legal test that the courts use to determine when property is situated on reserve and discuss how the test has been applied in the Tax Court of Canada and the Federal Court of Appeal.
Overview of the legal test: what does ‘situated on reserve’ mean?
Income earned on reserve between status holders will always be tax-exempt. The uncertainty arises when an element of the income is derived outside the reserve or as a result of interactions with non-status holders.
In such instances, the courts will undertake a two-step analysis to conclude whether the income is situated on reserve.
1. Identify the connecting factors between income and the reserve. These connecting factors include, but are not limited to; the residence of the payer, the residence of the payee, the place of payment, and the location of the activities that resulted in the payment. The courts will look at each factor to determine whether the income was situated on or off reserve.
2. Accord weight to each connecting factor. The courts weight each connecting actor based on the purpose, type of property and nature of taxation. For ex-ample, if the payee chooses to receive payment for their product or service on-reserve, the courts will ask why the payee chose this location. If receiving payment on reserve facilitated the payee’s business operations, then the courts will give it more weight. If there was no business purpose underlying the payee’s decision, the courts will give this factor less weight.
Once these two steps are complete, the courts will balance all weighted factors to decide whether the property was situated on reserve. To better understand its application, we consider three cases: Robertson v Canada, Baldwin v Canada and Dickie v Canada.
Robertson:
In Robertson (off reserve business, on-reserve intermediary), the court ruled that the business’ income was tax-exempt because the on reserve aspects of the business outweighed the off reserve fishing. One of the business owners was a status holder who lived and fished off-reserve but stored the most of his fishing equipment on reserve. He received his fishing quotas from the Norway House Fisherman’s Cooperative (the Co-Op), located on reserve, but the business used the Co-Op’s off reserve fish packaging stations. These packaging stations were mainly staffed by status holders, most of whom were living on reserve. The courts ultimately decided in favour of the business because the Co-Op was an on reserve institution and played an anchoring role in the business generating its income.
In Baldwin (on reserve intermediary, off reserve locations), the taxpayers’ employment income was taxable because it was insufficiently connected to the reserve. The taxpayers were employed by an organization, Native Leasing Services (NLS), located on reserve. NLS would lease the employees to organizations off reserve. The placement company would send NLS the leased employees’ salaries and NLS would pay the employees through its bank account at a branch located on reserve.
The fourth found that the true provider of the leased employees’ income were the organizations located off reserve. The employees were already working for the organizations before NLS became involved and they reported to an were supervised by the organizations. In contrast to Robertson, where the court gave more eight to the on reserve Co-Op than the off reserve packaging stations, in Baldwin, the on reserve NLS was given less weight than the off reserve organizations.
In Dickie (off reserve locations, on reserve business), the taxpayer’s business income was tax-exempt because its on reserve office played a large role in it generating its business income. The employer taxpayer owned a corporation located on reserve. Similarly to Baldwin, the corporation would send employees to off reserve locations to do work for its off reserve clients. The courts held, however, that the head office’s on reserve location outweighed the actual labour being conducted off reserve. Unlike in Baldwin, there was no pre-existing relationship between the business’ employees and the companies to whom they provided service and the business maintained direct supervision over its employees.
The three case examples above demonstrate the extent to which the outcomes are determined by the factual nuances. It is therefore unsurprising that status holders continue to report that the issue of on reserve versus off reserve income causes them uncertainty when filing their tax returns.
Status holders who are seeking to have their income considered to be sited on reserve should carefully analyze the potential impact of the off reserve connections that allow them to earn their income. In circumstances whereto CRA has concluded that a status holder’s income is not situated on reserve, the cases above also demonstrate that it is possible to successfully dispute the CRA’s decision.
Slight changes have been made to the original text to offer a comfortable reading format for the intended audience.
