The Federal Court of Appeal allowed an appeal by an Aboriginal taxpayer in relation to whether business income earned between 1993 and 2004 was exempt pursuant to section 87 of the Indian Act. The Court held that an earlier judgment of the Tax Court could not be sustained in light of the recent Supreme Court of Canada decisions in Bastien Estate and Dubé, and remitted the matter back to the Tax Court for redetermination. In particular, the Court criticized the treatment of the “commercial mainstream” connecting factor by the Tax Court. The Federal Court of Appeal also summarized a list of seven basic propositions for the s. 87 analysis to guide the Tax Court’s redetermination.

The appellant Kelly is a Traditional Elder of the Anishinaabe Nation and a member of the Medewe’in, the Sacred Law and Medicine Society of the Anishinaabe. He operated a consulting business relating to traditional strategic planning and traditional governance. He resided in Winnipeg but his business was conducted both on and off reserve. For the years in question, Mr. Kelly spent about 30% of his time on reserve.

The appellant Kelly sought an exemption under section 87 of the Indian Act, for the taxation years of 1994 to 2003, in relation to the business income that he earned on reserve. The CRA did not allow the exemption, and the Tax Court of Canada dismissed Mr. Kelly’s appeal in April 2009: 2009 TCC 189. The Tax Court held that, although Mr. Kelly’s activities were of great value to the preservation of the traditional way of life of aboriginal communities, he was carrying on a business in the commercial mainstream. Winnipeg was the centre of his business operations, and his income was kept in off-reserve banks. There was no nexus between the income he earned and the occupancy of reserve lands by him personally.

Since the decision of the Tax Court in 2009, the Supreme Court of Canada released two major decisions relating to the scope of s. 87: Bastien Estate v. Canada, 2011 SCC 38 and Dubé v. Canada, 2011 SCC 39.  Stratas J.A. noted that these cases “rolled back developments” fashioned by the Federal Court of Canada in the past two decades. In particular, the SCC decisions cast doubt on the Federal Court of Canada decision in Recalma v. Canada (1998) and the application of the “commercial mainstream” connecting factor. The Federal Court of Canada had previously discussed the impact of Bastien and Dubé in Canada v. Robertson, 2012 FCA 94.

The standard of review in this appeal was the standard of correctness. The Federal Court of Canada held that the reasoning of the Tax Court could not be sustained in light of Bastien. Rather than substituting its own judgment, the Federal Court of Canada held that it was appropriate to remit the matter to the Tax Court so that the parties have the opportunity to adduce new evidence responsive to the test stated in Bastien.

Stratas J.A. also held that it was appropriate to provide “some guidance” on the application and interpretation of Bastien. He set out seven basic propositions for the s. 87 analysis, while emphasizing that it was not meant to be a comprehensive list. There must always be flexibility in the case by case approach. The seven propositions were as follows:

  1. “Always implement the statutory language”: The focus must remain on whether the property is situated on a reserve.
  2. “In cases of non-physical property, certain factors, known as connecting factors, are useful indicia of location
  3. The relevance and weight of the connecting factors depends on the type of property, the nature of the taxation of the property and the purposes behind section 87”
  4. The type of property must be properly identified and factored into the analysis of relevance and weight
  5. The nature of the taxation must be properly identified and factored into the analysis of relevance and weight”.
  6. The purposes of the section 87 exemption must be properly identified and factored into the analysis of relevance and weight: Stratas J.A. reviewed and summarized the findings in Bastien, and commented that the SCC “to some extent, reformulated the purposes underlying section 87”. He also noted that the Federal Court of Appeal has subsequently observed “the lack of clarity” in what the SCC stated in Bastien. Stratas J.A. agreed with the comments of his colleagues in the Robertson decision that the juggling of multiple connecting factors is apt to result in “arbitrary results”. Simply listing the connecting factors in the abstract, as if they are deserving of weight in all cases, is no longer the proper approach. Giving one factor too much weight may undermine the purposes underlying s. 87 and lead to error. The factor of the “commercial mainstream” was specifically noted.
  7. Beware of artificial or abusive connections

Section 87 requires the Court to consider whether the property is situated on a reserve, not whether the owner of the property (such as Mr. Kelly) is situated on a reserve. The Tax Court erred by considering whether Mr. Kelly obtained his business income “as part of the entitlement of an Indian qua Indian on a reserve”. The calculation of Mr. Kelly’s time spent on a reserve was overly simplistic, and could lead to attaching too much weight to this factor in isolation. Business income is more complex and nuanced than just the physical location of the persons providing the services. More significant is what Mr. Kelly was doing at various times and the connection of those activities to the reserves, in light of the purposes of s. 87.

The concept of the “commercial mainstream” loomed large in the Tax Court’s analysis. The SCC changed the meaning of this factor in Bastien, and the April 2009 decision of the Tax Court cannot be correct. Stratas J.A. commented:

If the place where the money enters the economy were determinative, section 87 would seldom, if ever, be available to Indians who earn income from trade and commerce. As noted above, the Supreme Court in Bastien has emphasized that the commercial mainstream factor should be only an “aid” in determining the location of property for the purposes of section 87, not a determinative test …  An activity that is off-reserve and bears resemblance to a commercial activity does not automatically oust the application of section 87. That would imply, incorrectly, that “trade and commerce is somehow foreign to the First Nations” …

The Federal Court of Appeal therefore remitted the matter back to the Tax Court for redetermination. The parties will be allowed to adduce new evidence to construct their cases to address the post-Bastien legal framework for the interpretation of s. 87. The applicant Kelly was awarded his costs of the appeal, but the costs of the earlier and future Tax Court proceedings will be left to the discretion of the Tax Court judge hearing the redetermination.

Decisions available here.

Author

Scott Kerwin 
SKerwin@blg.com
604.640.4029

Other Author

Isabella Mentina

Expertise

Aboriginal Law