Judgments

[1995] 1 F.C. 561

T-279-93

Her Majesty the Queen (Plaintiff)

v.

Elizabeth Ann Poker (Defendant)

T-280-93

Her Majesty the Queen (Plaintiff)

v.

F. Marianne Folster (Defendant)

Indexed as: Canada v. Poker (T.D.)

Trial Division, Cullen J.—Winnipeg, September 19; Ottawa, October 13, 1994.

Native peoples — Taxation — Appeals from TCC decisions employment income earned for services performed in school, hospital located off reserve, but servicing Indian communities, exempt from taxation — Indian Act, s. 90(1)(a) deeming personal property purchased by Crown with Indian moneys or moneys appropriated by Parliament for use of Indians, situated on reserve — S. 90(1) not applicable — Salary, wages not purchased, but paid — Indian Act, s. 87 exempting from taxation personal property of Indian situated on reserve — Taxpayers residing on reserve — Situs of employment income — Purpose of ss. 87, 90 to prevent erosion of use of property on reserve lands — Liberal, purposive interpretation of statutes relating to Indians — Employment earnings from school, part of system of reserve schools, administrative office of which on reserve, deemed situated on reserve — Employment earnings from hospital not situated on reserve as employer not residing thereon; duties performed off reserve — Absent connecting factor other than taxpayer’s residence, employment duties benefitting Indians on reserve insufficient to tie income to reserve.

Income tax — Exemptions — Appeals from TCC decisions employment income earned for services performed in school, hospital located near, but not on reserve, servicing Indian communities, exempt from taxation — Parliament funding construction, operation of school, health care of Indians using hospital pursuant to Constitution Act, s. 91 responsibility for Indians — Indian Act, s. 87 exempting from taxation personal property of Indians situated on reserve — Situs of employment income — Taxpayers residing on reserve — Circumstances surrounding employment closely connected to reserve — As administrative office on reserve, school part of system of reserve schools, employer residing on reserve — Employment earnings from school deemed situated on reserve — Employment earnings from hospital not situated on reserve as employer, hospital, not residing on reserve; duties performed off reserve.

Construction of statutes — Tax exemption under Indian Act, s. 87 — Purpose of legislation considered — Statutes relating to Indians to be liberally construed but courts to determine purpose intended by Parliament — Necessity for comprehensive approach to situs of employment income — All connecting factors interpreted in light of purpose of tax exemption.

These were appeals from Tax Court decisions holding that employment income earned for services performed in a school and hospital that serviced Indian communities were exempt from taxation even though the facilities were not physically located on an Indian reserve.

The defendants were Indians who resided on the Norway House Indian Band reserve. Poker was employed by the Frontier School Division, the administrative office of which was located on the reserve, and her duties were primarily performed at the school, located adjacent to, but not within, the geographical boundaries of the reserve. The school primarily serviced Indian children. Funding for the school came primarily from the Government of Canada, pursuant to Parliament’s responsibility for Indians under the Constitution Act, 1867, section 91.

Folster was employed by and at the Norway House Indian Hospital which was outside the geographical boundaries of the reserve. The hospital had been built by the Federal Government. About 80 per cent of the persons served by the hospital are status Indians. The funds for the status Indians who use the hospital come from Health and Welfare Canada, again under section 91 of the Constitution Act, 1867.

Indian Act, section 87 provides that the personal property of an Indian situated on a reserve is exempt from taxation. Paragraph 90(1)(a) provides that for the purposes of sections 87 and 89, personal property that was purchased by Her Majesty with Indian moneys or moneys appropriated by Parliament for the use and benefit of Indians or bands shall be deemed to be situated on a reserve.

The Tax Court held that employment earnings are personal property and a tax on employment income is a tax on personal property. With respect to Poker, it concluded that, as the funds were paid by the Government of Canada to operate the school which had been established pursuant to treaty obligation, the defendant’s employment earnings were deemed to be situated on the reserve and exempt from taxation. With respect to Folster, the Court concluded that the establishment of the hospital pursuant to the decision to provide health care to Indians by the Government of Canada, the continuing funding of the health services at the hospital by that Government, and the specific location of the hospital in relation to the reserve lands, taxpayer’s employment earnings were deemed to be situated on the reserve and were exempt from taxation.

The issues were: (1) whether income earned off the reserve is personal property purchased by the Crown with Indian moneys or moneys appropriated by Parliament for the use and benefit of Indians or bands by virtue of the Indian Act, subsection 90(1); and (2) whether income earned off the reserve is personal property situated on the reserve and exempt from taxation by virtue of Indian Act, section 87.

Held, the Poker appeal should be dismissed; the Folster appeal should be allowed.

Salary or wages are not purchased, but are paid, by Her Majesty, for services rendered by her employees out of monies appropriated for that purpose by Parliament. The employment income of the defendants was not property purchased by Her Majesty and was not situated on a reserve. The employment income was not exempt from taxation under subsection 90(1).

Most of the requirements of section 87 had been met. The receipt of employment income was personal property. The property was owned by Indians. The Indians were being taxed in respect of that property, since it was included in their income for the purpose of income taxation. The remaining question was whether the property was situated on a reserve.

A purposive approach should be adopted when considering the situs of employment income. The first step is to identify the various connecting factors, analyze them, and determine the weight to be placed thereon in identifying the location of the property, in light of (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 purpose of sections 87 and 90 is to preserve the entitlement of Indians to their reserve lands and to ensure that the use of their property on reserve lands would not be eroded by the ability of governments to tax or creditors to seize. The Court must ask whether taxation of that form of property would amount to the erosion of the entitlement of that property of the Indian qua Indian on a reserve. Treaties and statutes relating to Indians should be liberally construed. Courts should attempt to construe provisions of treaties as the Indians may be taken to have understood them. Courts should attempt to glean the purpose of statutes intended by Parliament. A liberal interpretation of the statutory tax exemption provisions, coupled with an interpretation of Parliament’s intent for the provisions, demands a comprehensive approach to the situs of employment income. Not any one condition determines the situs of employment income; rather it is all of the connecting factors interpreted in light of the purpose of the tax exemption. The factors to be given the greatest weight in determining the situs of employment income herein were the residence of the employer and the location where the duties of employment were performed. Residence of the taxpayers was less important than the above-mentioned factors.

Poker was paid by the Frontier School Division. The administrative office of the employer was located on the reserve. Accordingly, the residence of the debtor (the employer) was on the reserve. Taxpayer as well resided on the reserve. Although the place of employment was not physically on the reserve, the nature or purpose of taxpayer’s employment was closely connected to the reserve. The school in question and schools on the reserve were seen by the Frontier School Division and the Band as one system. The defendant’s work was performed off the reserve on instructions from her employer. Most of the students were Indians. The Government of Canada provided operating funds as part of its programme to fund services, including education, for Indians. The circumstances surrounding the employment, and the income earned therefrom, point to the reserve. The taxpayer’s employment earnings were deemed to be situated on the reserve and exempt from taxation.

Folster’s employer was the hospital. She performed her duties of employment at the hospital which was not on the reserve. Her employer was not resident on the reserve; likewise she performed her employment duties off the reserve, although she lived there. The nature or purpose of, and the circumstances surrounding the employment were closely connected to the reserve. Absent any connecting factor other than taxpayer’s residence, employment duties which are to the benefit of Indians on a reserve are not sufficient to tie the income arising from the employment to the reserve. The employment earnings were not situated on the reserve.

STATUTES AND REGULATIONS JUDICIALLY CONSIDERED

An Act to amend the Tax Court of Canada Act and other Acts in consequence thereof, R.S.C., 1985 (4th Supp.), c. 51, s. 27.

Canadian Charter of Rights and Freedoms, being Part I of the Constitution Act, 1982, Schedule B, Canada Act 1982, 1982, c. 11 (U.K.) [R.S.C., 1985, Appendix II, No. 44].

Constitution Act, 1867, 30 & 31 Vict., c. 3 (U.K.) (as am. by Canada Act 1982, 1982, c. 11 (U.K.), Schedule to the Constitution Act, 1982, Item 1) [R.S.C., 1985, Appendix II, No. 5], s. 91.

Income Tax Act, S.C. 1970-71-72, c. 63, s. 81(1) (as am. by S.C. 1980-81-82-83, c. 140, s. 46).

Indian Act, R.S.C. 1970, c. I-6, ss. 2(1), 87, 89, 90.

Tax Court of Canada Act, R.S.C., 1985, c. T-2, s. 12 (as am. by R.S.C., 1985 (4th Supp.), c. 51, s. 4).

CASES JUDICIALLY CONSIDERED

APPLIED:

Mitchell v. Peguis Indian Band, [1990] 2 S.C.R. 85; (1990), 71 D.L.R. (4th) 193; [1990] 5 W.W.R. 97; 67 Man. R. (2d) 81; [1990] 3 C.N.L.R. 46; 110 N.R. 241; 3 T.C.T. 5219; Williams v. Canada, [1992] 1 S.C.R. 877; (1992), 90 D.L.R. (4th) 129; 41 C.C.E.L. 1; [1992] 3 C.N.L.R. 181; [1992] 1 C.T.C. 225; 92 DTC 6320; 136 N.R. 161; R. v. National Indian Brotherhood, [1979] 1 F.C. 103 (1978), 92 D.L.R. (3d) 333; [1978] CTC 680; 78 DTC 6488 (T.D.); affd [1985] F.C.J. No. 820 (QL) (F.C.A.); leave to appeal to S.C.C. denied [1986] 1 S.C.R. xi (as to interpretation of Indian Act, s. 90(1)(a)); Horn v. M.N.R., [1989] 3 C.N.L.R. 59; [1989] 1 C.T.C. 2208; (1989), 89 DTC 147 (T.C.C.); Nowegijick v. The Queen, [1983] 1 S.C.R. 29; (1983), 144 D.L.R. (3d) 193; [1983] 2 C.N.L.R. 89; [1983] CTC 20; 83 DTC 5041; 46 N.R. 41 (for proposition receipt of employment income is personal property for the purposes of tax exemption); Brant (H.W.) v. M.N.R., [1992] 2 C.T.C. 2635; (1992), 92 DTC 2274 (T.C.C.); McNab (B.) v. Canada, [1992] 2 C.T.C. 2547 (T.C.C.).

CONSIDERED:

Federation of Saskatchewan Indians v. M.N.R., [1992] 2 C.T.C. 2117; (1992), 92 DTC 1749 (T.C.C.); Boissoneau v. Canada (Minister of National Revenue—M.N.R.), [1992] T.C.J. No. 338 (QL) (T.C.C.); R. v. National Indian Brotherhood, [1979] 1 F.C. 103 (1978), 92 D.L.R. (3d) 333; [1978] CTC 680; 78 DTC 6488 (T.D.); affd [1985] F.C.J. No. 820 (QL) (F.C.A.); leave to appeal to S.C.C. denied [1986] 1 S.C.R. xi (as to test for determining situs of property under s. 87); Nowegijick v. The Queen, [1983] 1 S.C.R. 29; (1983), 144 D.L.R. (3d) 193; [1983] 2 C.N.L.R. 89; [1983] CTC 20; 83 DTC 5041; 46 N.R. 41 (as to test to be applied in determining the situs of property under s. 87).

REFERRED TO:

Paul (D.N.) v. M.N.R., [1990] 1 C.T.C. 2413; (1990), 90 DTC 1298 (T.C.C.); Gamble and Marion v. M.N.R., 83-1126 (IT) and 85-593 (IT), Cardin T.C.J., decision dated 24/9/87, T.C.C., not reported; Pachanos (V.) v. M.N.R., [1990] 2 C.T.C. 2273; (1990), 90 DTC 1668 (T.C.C.); Kirkness (M.F.) v. M.N.R., [1991] 2 C.T.C. 2028; (1991), 91 DTC 905 (T.C.C.); Faries (B.L.) v. M.N.R., [1992] 1 C.T.C. 2295; (1992), 92 DTC 1485 (T.C.C.); Clarke (W.) v. M.N.R., [1992] 2 C.T.C. 2743; (1992), 92 DTC 2267 (T.C.C.).

AUTHORS CITED

Canada. Department of National Revenue. Taxation. Interpretation Bulletin IT-62, August 18, 1972.

Morry, Howard L. “Taxation of Aboriginals in Canada” (1992), 21 Man. L.J. 426.

APPEALS from Tax Court decisions [Clarke (W.) v. M.N.R., [1992] 2 C.T.C. 2743] holding that employment income earned for services performed in a school and hospital servicing Indian communities were exempt from taxation even though the facilities were not physically located on an Indian reserve. Appeal concerning income of school employee dismissed; that concerning income of hospital employee allowed.

COUNSEL:

Barbara M. Shields for plaintiff.

Sidney Green, Q.C. for defendants.

SOLICITORS:

Deputy Attorney General of Canada for plaintiff.

Sidney Green, Q.C., Winnipeg, for defendants.

The following are the reasons for judgment rendered in English by

Cullen J.: These are appeals by the plaintiff from decisions of the Tax Court of Canada [Clarke (W.) v. M.N.R., [1992] 2 C.T.C. 2743] concerning the defendants dated September 29, 1992, and were heard together.

Amendments made by S.C. 1988, c. 61, now R.S.C., 1985 (4th Supp.), c. 51 [s. 4] to the Tax Court of Canada Act [R.S.C., 1985, c. T-2, s. 12] gave the Tax Court exclusive original jurisdiction on most income tax matters. However, pursuant to section 27 of R.S.C., 1985 (4th Supp.), c. 51, any appeal from a decision in a proceeding before January 1, 1991 is instituted before the Federal Court, Trial Division, as though the amendments had not been enacted. Although the Tax Court decision is dated in 1992, the Minister’s decisions arose prior to January 1, 1991. Accordingly, this Court has jurisdiction to consider the appeals.

The Tax Court allowed the appeals of the defendants from a decision of the Minister of National Revenue. The Court found that employment income earned for services performed in health and educational facilities that serviced Indian communities were exempt from taxation even though the facilities were not physically located on an Indian reserve.

FACTS

The defendants are Indians within the meaning of subsection 2(1) of the Indian Act, R.S.C. 1970, c. I-6, as amended, and resided on the reserve of the Norway House Indian Band (the reserve).

ELIZABETH ANN POKER

This appeal concerns the 1981 and 1982 taxation years. In computing her income for those years, the defendant reported her earnings from the Jack River School (the school) as $11,132.48 and $12,875.83 respectively. In 1984, the defendant requested an adjustment on her earnings for 1981 and 1982 on the grounds that the above-noted amounts were exempt from taxation pursuant to section 87 of the Indian Act. Although a reassessment was issued, on further investigation, the Minister again included the earnings in the defendant’s taxable income for the 1981 and 1982 taxation years. The correcting reassessment was dated January 7, 1986. The defendant objected by notices of objection, but the Minister’s position was confirmed by a notice of confirmation dated December 21, 1987. On appeal to the Tax Court of Canada, Hamlyn T.C.C.J. referred the matter back to the Minister for reconsideration and reassessment on the basis that the employment earnings in question were deemed to be situated on a reserve and were exempt from taxation.

The defendant was employed by the Frontier School Division at the school and her duties of employment were primarily performed at the school. The school is located adjacent to, but not within, the geographical boundaries of the reserve. The ownership of the land is disputed by the Norway House Indian Band.

The Frontier School Division, under which the school operates, is responsible for 37 schools in 34 northern Manitoba communities. For the 1991 school year, it received its operating revenue from the following sources:

Provincial Government	54.0%
Indian Bands	26.5%
Federal Government	11.5%
Private Organizations	6.5%
Municipal Levy	1.5%

It is believed by the parties that the percentage of operating revenue for the Frontier School Division was approximately the same in 1981 and 1982, the taxation years in question. In 1981, there were 468 students at the Jack River School, of which 314 were status Indians; in 1982, there were 421 students at the school, of which 302 were status Indians. Although the school admits non-native students, it primarily services Indian children.

A tuition agreement between the Government of Canada, the Manitoba Indian Brotherhood, and the Government of the province of Manitoba was in effect for the taxation years in question. Under this agreement, the federal government paid the Frontier School Division directly on a per capita basis for Indian students attending the school. In 1987, the Norway House Indian Band opted for Alternative Funding Arrangement status (AFA status) with Indian and Northern Affairs. AFA status permits the Band to receive a lump sum of money from Indian and Northern Affairs. In turn, the Band “purchases” educational services from the Frontier School Division.

Although the funding for the school came primarily from the Government of Canada, the defendant and the plaintiff agree that the defendant’s employer was the Frontier School Division. The administrative office for the Frontier School Division was located on the reserve. Accordingly, the defendant’s employer was situated on the reserve.

I cannot find that the school in question was built pursuant to an obligation under Treaty No. 5 (between Her Majesty the Queen and the Saulteaux and Swampy Cree Tribes of Indians at Beren’s River and Norway House with adhesions). In this Treaty, Her Majesty the Queen “agrees to maintain schools for instruction in such reserves hereby made as to Her Government of the Dominion of Canada may seem advisable, whenever the Indians of the reserve shall desire it.” There are two schools on the reserve lands (an elementary school and a high school) and it would be reasonable to find an obligation to maintain them pursuant to the Treaty. However, the school in question, also an elementary school, is off reserve lands and I cannot find that the Treaty provides for its maintenance, regardless that it serves primarily Indian students. However, I find that under section 91 of the Constitution Act, 1867 [30 & 31 Vict., c. 3 (U.K.) (as am. by Canada Act 1982, 1982, c. 11 (U.K.), Schedule to the Constitution Act, 1982, Item 1) [R.S.C., 1985, Appendix II, No. 5]] the Parliament of Canada is granted responsibility for Indians. This responsibility intrudes into areas of provincial jurisdiction, like education. Pursuant to its obligations under the Constitution, the Government of Canada built and provided money for the operation of the school.

Status Indians employed at Frontier Division schools on the reserve are entitled to a tax exemption for their employment income under the Indian Act, whereas Indians employed at the school are denied. I accept that the schools situated on the reserve and the school in question are seen as one system by the Norway House Indian Band.

F. MARIANNE FOLSTER

This appeal by the plaintiff is in respect of the 1984 and 1985 taxation years. The defendant claimed as a deduction from her income the amounts of $26,173.23 and $22,528.27 respectively. The defendant claimed that 100 per cent of her employment income for the 1984 taxation year and 82 per cent of her employment income for the 1985 taxation year was exempt from taxation pursuant to section 87 of the Indian Act. By notices of assessment dated June 13, 1985 and May 22, 1986, the Minister of National Revenue disallowed the deduction. The defendant objected by notices of objection. The Minister’s position was confirmed by a notice of confirmation, dated December 21, 1987. On appeal to the Tax Court of Canada, Hamlyn T.C.C.J. referred the matter back to the Minister for reconsideration and reassessment on the basis that the employment earnings in question were deemed to be situated on a reserve and were exempt from taxation.

The defendant was employed as an administrator at the Norway House Indian Hospital (the hospital) which is in the vicinity of, but not within, the geographical boundaries of the reserve. The hospital in question replaced an original facility which was located on the reserve. The old Norway House Indian Hospital required expansion and it was demolished when the new Norway House Indian Hospital was constructed.

The hospital is a general acute care facility, built by the Government of Canada. The hospital provides services to the people of the reserve. Approximately 80 per cent of the persons served by the hospital are status Indians although non-Native persons can and do occasionally make use of the facilities.

The funds for the status Indians who use the hospital come from Health and Welfare Canada. Specified funds may be found in the estimates for Health and Welfare Canada for medical health services for Indians. Although health care falls under provincial authority, under section 91 of the Constitution Act, 1867, the Government of Canada has assumed responsibility for the health care of Indians.

The hospital was built by Health and Welfare Canada, but there is a local administrator for the facility who works at the hospital. The defendant’s duties of employment were performed at the hospital. I find that the defendant’s employer was the hospital and that her employer is located off the reserve lands.

THE DECISION OF THE TAX COURT

The Tax Court reviewed the relevant provisions of the Indian Act and the case law which concerned the interpretation of tax legislation relating to Indians. The Court determined that employment earnings are personal property. Accordingly, a tax on employment income is a tax on personal property. However, under section 87 of the Indian Act, personal property situated on the reserve is exempt from taxation. The purpose of section 87 is to preserve Indian entitlement to reserve land and to ensure that the use of property on reserve land is not eroded by the ability of governments to tax or creditors to seize.

With respect to the matter of Elizabeth Ann Poker, the Court concluded that, given the substantive designated funds paid by the Government of Canada to operate the school on a continuing basis and the establishment of the school pursuant to treaty obligation, the defendant’s employment earnings were deemed to be situated on the reserve and were exempt from taxation.

Likewise, with respect to F. Marianne Folster, the Court concluded that the establishment of the hospital pursuant to the decision to provide health care to Indians by the Government of Canada, the present and continuing funding of the health services at the hospital by the Government of Canada, and the specific location of the hospital in relation to the reserve lands, the employment earnings of the defendant were deemed to be situated on the reserve and were exempt from taxation.

ISSUES

There are two issues before this Court:

1. whether income earned off the reserve is personal property purchased by Her Majesty with Indian moneys or moneys appropriated by Parliament for the use and benefit of Indians or bands by virtue of subsection 90(1) of the Indian Act; and

2. whether income earned off the reserve is personal property situated on the reserve and exempt from taxation by virtue of section 87 of the Indian Act.[1]

RELEVANT STATUTORY PROVISIONS

For ease of reference, I will set out the relevant provisions of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended [subsection 81(1) (as am. by S.C. 1980-81-82-83, c. 140, s. 46)], and the Indian Act.

Income Tax Act

81. (1) There shall not be included in computing the income of a taxpayer for a taxation year,

(a) an amount that is declared to be exempt from income tax by any other enactment of Parliament of Canada, other than an amount received or receivable by an individual that is exempt by virtue of a provision contained in a tax convention or agreement with another country that has the force of law in Canada;

Indian Act

87. Notwithstanding any other Act of the Parliament of Canada or any Act of the legislature of a province, but subject to subsection (2) and to section 83, the following property is exempt from taxation, namely:

(a) the interest of an Indian or a band in reserve or surrendered lands; and

(b) the personal property of an Indian or band situated on a reserve;

and no Indian or band is subject to taxation in respect of the ownership, occupation, possession or use of any property mentioned in paragraph (a) or (b) or is otherwise subject to taxation in respect of any such property; and no succession duty, inheritance tax or estate duty is payable on the death of any Indian in respect of any such property or the succession thereto if the property passes to an Indian, nor shall any such property be taken into account in determining the duty payable under the Dominion Succession Duty Act, being chapter 89 of the Revised Statutes of Canada, 1952, or the tax payable under the Estate Tax Act, on or in respect of other property passing to an Indian.

Section 83 of the Indian Act, referred to in section 87, has no application. Subsection 87(2), also mentioned, was repealed in 1960 by S.C. 1960, c. 8, although the reference to it in what was formerly subsection 86(1) remains in the legislation quoted above.

89. (1) Subject to this Act, the real and personal property of an Indian or a band situated on a reserve is not subject to charge, pledge, mortgage, attachment, levy, seizure, distress or execution in favour or at the instance of any person other than an Indian.

(2) A person who sells to a band or a member of a band a chattel under an agreement whereby the right of property or right of possession thereto remains wholly or in part in the seller, may exercise his rights under the agreement notwithstanding that the chattel is situated on a reserve.

90. (1) For the purposes of sections 87 and 89, personal property that was

(a) purchased by Her Majesty with Indian moneys or moneys appropriated by Parliament for the use and benefit of Indians or bands, or

(b) given to Indians or to a band under a treaty or agreement between a band and Her Majesty,

shall be deemed always to be situated on a reserve.

(2) Every transaction purporting to pass title to any property that is by this section deemed to be situated on a reserve, or any interest in such property, is void unless the transaction is entered into with the consent of the Minister or is entered into between members of a band or between the band and a member thereof.

(3) Every person who enters into any transaction that is void by virtue of subsection (2) is guilty of an offence, and every person who, without the written consent of the Minister, destroys personal property that is by this section deemed to be situated on a reserve, is guilty of an offence.

THE NATURE AND PURPOSE OF THE EXEMPTION FROM TAXATION

The purpose of sections 87 and 90 of the Indian Act was discussed by La Forest J. in Mitchell v. Peguis Indian Band, [1990] 2 S.C.R. 85, and cited with approval in Williams v. Canada, [1992] 1 S.C.R. 877. In Mitchell, supra, La Forest J. [at pages 130-131] expressed the view that the purpose of the sections was to preserve the entitlement 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 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.

Accordingly, in keeping with the purpose of sections 87 and 90 of the Indian Act, it is necessary to determine whether the Indian holds the property in question qua Indian on a reserve.

ANALYSIS, SECTION 90

It was not strenuously argued that the skills or services of the defendants were purchased by Her Majesty with Indian moneys or moneys appropriated by Parliament for the use and benefit of Indians. This proposition was discussed and rejected by Thurlow A.C.J. in R. v. National Indian Brotherhood, [1979] 1 F.C. 103(T.D.) [at page 108]; affd [[1985] F.C.J. No. 820 (QL)] (F.C.A.); leave to appeal to S.C.C. denied, February 28, 1986 [[1986] 1 S.C.R. xi]:

In my opinion, it is not possible to regard the salaries here in question as “personal property that was purchased by Her Majesty” within the meaning of paragraph 90(1)(a) and I am unable to accept counsel’s submission that the paragraph should be interpreted as if it read “personal property that was … moneys appropriated by Parliament” as I think that grammatically the word “purchased by Her Majesty with” govern the whole of the remainder of the paragraph. The provision therefore cannot apply.

In Horn v. M.N.R., [1989] 3 C.N.L.R. 59 (T.C.C.), the Court also found that the appellant’s skills, training and background were not and could not have been purchased by Her Majesty. Lamarre Proulx T.C.J. stated [at page 62]:

With respect to the first proposition, I would say that Her Majesty cannot purchase the appellant’s skills and training as the appellant cannot divest herself of such skills or training. Such a proposition appears to me as a contract for slavery, something which is surely not meant by counsel for the appellant. In Rapistan Canada Ltd. v. M.N.R., 48 D.L.R. (3d) 613 at page 616, Chief Justice Jackett stated that:

… as far as I know, under no system of law in Canada, does knowledge, skill or experience constitute “property” that can be the subject matter of a gift, grant or assignment …. As I understand the law, knowledge or ideas, as such, do not constitute property.

The decisions in National Indian Brotherhood, supra, and Horn, supra, were subsequently applied in Paul (D.N.) v. M.N.R., [1990] 1 C.T.C. 2413 (T.C.C.) and Boissoneau v. Canada (Minister of National Revenue—M.N.R.), [1992] T.C.J. No. 338 (QL).

I accept the reasoning articulated in the above-noted cases. Salary or wages are not purchased by Her Majesty. Rather, salary or wages are paid by Her Majesty for services rendered by her employees out of monies appropriated for that purpose by Parliament. Accordingly, the employment income of the defendants is not property purchased by Her Majesty and is not situated on a reserve. The employment income is not exempt from taxation by virtue of subsection 90(1) of the Indian Act.

ANALYSIS, SECTION 87

(1)       Employment Income and the Incidence of Taxation:

The Supreme Court’s decision in Nowegijick v. The Queen, [1983] 1 S.C.R. 29, stands for the proposition that the receipt of employment income is personal property for the purpose of the exemption from taxation provided by the Indian Act. Moreover, the inclusion of personal property in the calculation of a taxpayer’s income gives rise to a tax in respect of that personal property within the meaning of the Indian Act, despite the fact that the tax is on the person rather than on the property directly. Dickson J. (as he then was) reasoned [at page 41]:

As I read it, s. 87 creates an exemption for both persons and property. It does not matter then that the taxation of employment income may be characterized as a tax on persons, as opposed to a tax on property.

Most of the requirements of section 87 of the Indian Act have been met in the cases at bar. The receipt of employment income is personal property, as determined by Nowegijick, supra. The property is owned by Indians. The Indians are being taxed in respect of that property, since it is being included in their income for the purpose of income taxation. The remaining question is whether the property in question is situated on a reserve.

(2)       The Test for Situs Under the Indian Act:

The Supreme Court of Canada considered the situs of property pursuant to section 87 of the Indian Act in both Nowegijick, supra and Williams, supra.

Traditionally, the residence of the debtor—the person paying the income—was of primary importance. In National Indian Brotherhood, supra, Thurlow A.C.J. stated [at page 109]:

A chose in action such as the right to a salary in fact has no situs. But where for some purpose the law has found it necessary to attribute a situs, in the absence of anything in the contract or elsewhere to indicate the contrary, the situs of a simple contract debt has been held to be the residence or place where the debtor is found. See Cheshire, Private International Law, seventh edition, pp. 420 et seq.

This conclusion was cited with approval in Nowegijick, supra [at page 34]:

The Crown conceded in argument, correctly in my view, that the situs of the salary which Mr. Nowegijick received was sited on the reserve because it was there that the residence or place of the debtor, the Gull Bay Development Corporation, was to be found and it was there that the wages were payable. See Cheshire and North, Private International Law (10th ed., 1979) at pp. 536 et seq. and also the judgment of Thurlow A.C.J. in R. v. National Indian Brotherhood, [1979] 1 F.C. 103particularly at pp. 109 et seq.

However, in Williams, supra, the Supreme Court moved away from a strict “residence of the debtor” construction of the situs test. Instead, the Court [at pages 890-891] adopted a purposive approach, in keeping with the intent of section 87 of the Indian Act:

In resolving this question, it is readily apparent that to simply adopt general conflicts principles in the present context would be entirely out of keeping with the scheme and purposes of the Indian Act and Income Tax Act. The purposes of the conflict of laws have little or nothing in common with the purposes underlying the Indian Act. It is simply not apparent how the place where a debt may normally be enforced has any relevance to the question whether to tax the receipt of the payment of that debt would amount to the erosion of the entitlement of an Indian qua Indian on a reserve. The test for situs under the Indian Act must be constructed according to its purposes, not the purposes of the conflict of laws. Therefore, the position that the residence of the debtor exclusively determines the situs of benefits such as those paid in this case must be closely reexamined in light of the purposes of the Indian Act. It may be that the residence of the debtor remains an important factor, or even the exclusive one. However, this conclusion cannot be directly drawn from an analysis of how the conflict of laws deals with such an issue.

Although Williams, supra, did not overrule the test applied in Nowegijick, supra, the Court found that the residence of the debtor test alone was not determinative of situs.[2] The personal property at issue in Williams, supra, was unemployment insurance benefits; however, it is reasonable that the same purposive approach should be adopted when considering the situs of employment income.

(3)       The Test for Situs of Employment Income:

In Williams, supra, Gonthier J. set out the test by which to fix the situs of unemployment insurance benefits in the context of the Indian Act [at pages 892-893]:

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 broad test, although adopted in the context of unemployment insurance benefits, applies equally well to employment income. Indeed, it appears that the Court envisioned the application of the more flexible approach to different situations:

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.

In the case at bar, I would apply the connecting factors test to determine the situs of the employment income.

(4)       Case Law:

The connecting factors test, articulated in Williams, supra, has subsequently been applied in two decisions of the Tax Court.[3] This is the first time, since Williams, supra, that this issue is raised in the Federal Court.

In Brant (H.W.) v. M.N.R., [1992] 2 C.T.C. 2635 (T.C.C.), the plaintiff was a status Indian and lived on a reserve. He worked as an auditor for Revenue Canada and claimed that his salary and family allowance payments were not subject to tax, pursuant to section 87 of the Indian Act. The plaintiff further claimed that the taxation of his salary and family allowance payments violated his equality rights under the Canadian Charter of Rights and Freedoms [being Part I of the Constitution Act, 1982, Schedule B, Canada Act 1982, 1982, c. 11 (U.K.) [R.S.C., 1985, Appendix II, No. 44]]. Sobier T.C.C.J. determined the relevant connecting factors for employment income and concluded that the source of Brant’s employment income was general government revenue and not property from a source situated in a reserve which required protection from erosion. Brant earned his income in the general commercial mainstream. If an Indian chose to work in the general commercial mainstream, the income was not exempt from taxation. To allow an exemption in such a case would attempt to remedy the economically disadvantaged position of Indians who cannot find employment on a reserve. He rejected arguments that taxation of the plaintiff’s income was a violation of his equality rights.

In McNab (B.) v. Canada, [1992] 2 C.T.C. 2547 (T.C.C.), the plaintiff was a status Indian and resided on a reserve. She was employed by the Saskatchewan Treaty Women’s Council. The Council was partially funded by the Governments of Canada and Saskatchewan. Its mandate was to promote health care and protection for Native women and children in Saskatchewan. The Tax Court found that the Council was located on a reserve and the plaintiff was paid on the reserve. However, she performed most of the duties of her employment off the reserve. Beaubier T.C.C.J. concluded [at pages 2551-2552] that the salary paid to the plaintiff constituted personal property of an Indian situated on a reserve:

All of her work was with Indians and all of her work was on the instructions of an employer whose sole purpose was to benefit Indians on reserves.

The preponderance of evidence presented in this case enables the appellant to fall within the exemptions contained in subsection 87(1) of the Indian Act because the combined force of the connecting factors, when taken together, indicate that the salary was the personal property of an Indian situated on a reserve.

(5)       Application to the Case at Bar:

In determining whether the employment income in question is situated on the reserve, 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 (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 Court must ask whether taxation of that form of property would amount to the erosion of the entitlement of that property of the Indian qua Indian on a reserve. This test depends on all of the circumstances surrounding the property being taxed.

According to the interpretation provided by Revenue Canada in Interpretation Bulletin IT-62, the location where the duties of employment are carried out is paramount in determining the situs of the employment income. Paragraphs 6(g) and (h) of the Interpretation Bulletin provide:

6…. 

(g) The key factor in determining whether or not a specific item of income received by an Indian is taxable or exempt is the location of where the income is earned. Income earned on a reserve by an Indian is considered exempt. Income earned away from the reserve is taxable.

(h) Different types of income have different criteria for establishing whether they are on or off the reserve. Some of the types of income may be classified as follows:

(i) Salary and wages are considered to be earned where the services are performed. For an office worker this is the office at or out of which his duties are performed; for a construction worker employed on a project it is the job-site; for a teacher it is the school and so on. The principal office of his employer, the location where he is paid or from which his pay is issued are not usually relevant in determining the location of income from an office or employment. In some cares it will be found that employment is partly on and partly off the reserve. In these cases a reasonable allocation must be made between exempt and taxable income, based on the facts of the particular case.

However, Interpretation Bulletins are not law and I would respectfully disagree with the emphasis Revenue Canada has placed on the location where the duties of employment are performed in determining the situs of the income. Indians who work for non-Indian businesses, provided they work on the reserve, receive their tax exemption without question. The effect of Revenue Canada’s emphasis is to penalize Indians who may work for an on-reserve employer or whose employment services Indian communities, but who perform their duties off the reserve.

In Nowegijick, supra, Dickson J. urged a liberal interpretation of statutes relating to Indians [at page 36]:

It is legal lore that, to be valid, exemptions to tax laws should be clearly expressed. It seems to me, however, that treaties and statutes relating to Indians should be liberally construed and doubtful expressions resolved in favour of the Indians. If the statute contains language which can reasonably be construed to confer a tax exemption that construction, in my view, is to be favoured over a more technical construction which might be available to deny the exemption.

In Mitchell, supra, La Forest J. somewhat tempered the liberal interpretation rule as it applies to statutes. However, he did not take issue with the principle that treaties and statutes relating to Indians should be liberally construed. In the case of treaties, the courts should attempt to construe various provisions as the Indians may be taken to have understood them. In the case of statutes, although they should still be given a liberal interpretation, the role of the courts is to glean the purpose intended by Parliament [at page 143]:

But as I view the matter, somewhat different considerations must apply in the case of statutes relating to Indians. Whereas a treaty is the product of bargaining between two contracting parties, statutes relating to Indians are an expression of the will of Parliament. Given this fact, I do not find it particularly helpful to engage in speculation as to how Indians may be taken to understand a given provision. Rather, I think the approach must be to read the Act concerned with a view to elucidating what it was that Parliament wished to effect in enacting the particular section in question. This approach is not a jettisoning of the liberal interpretative method. As already stated, it is clear that in the interpretation of any statutory enactment dealing with Indians, and particularly the Indian Act, it is appropriate to interpret in a broad manner provisions that are aimed at maintaining Indian rights, and to interpret narrowly provisions aimed at limiting or abrogating them. Thus if legislation bears on treaty promises, the courts will always strain against adopting an interpretation that has the effect of negating commitments undertaken by the Crown; see United States v. Powers, 305 U.S. 527 (1939), at p. 533.

At the same time, I do not accept that this salutary rule that statutory ambiguities must be resolved in favour of the Indians implies automatic acceptance of a given construction simply because it may be expected that the Indians would favour it over any other competing interpretation. It is also necessary to reconcile any given interpretation with the policies the Act seeks to promote.

A liberal interpretation of the statutory tax exemption provisions, coupled with an interpretation of Parliament’s intent for the provisions, demands a comprehensive approach to the situs of employment income. It is not any one condition that determines the situs of employment income; rather, it is all of the connecting factors interpreted in light of the purpose of the tax exemption.

Gonthier J. in Williams, supra, identified a number of potentially relevant connecting factors for determining the situs of unemployment insurance benefits: the residence of the debtor, the location of the employment which gives rise to the income, and the residence of the person receiving the employment income.

Although the Supreme Court declined to comment on the relevant connecting factors that are to be used in determining the situs of employment income, the same factors can also be applied to the case at bar. However, in the case of employment income, the factors to be given the greatest weight in this circumstance are the residence of the employer and the location where the duties of employment were performed. The residence of the defendants is also important, but less important than the previous factors.

The application of the connecting factors test to each defendant will be considered in turn.

ELIZABETH ANN POKER

The defendant received her pay cheque from the Frontier School Division. The administrative office of the employer is located on the reserve and the school is operated administratively from this office. Accordingly, the residence of the debtor (the employer) is on the reserve. Likewise, the defendant resided on the reserve. These connecting factors—the residence of the debtor and the residence of the person receiving the employment income—point to the reserve.

However, the location of the defendant’s employment was not on the reserve. The school is located adjacent to, but not within, the geographical boundaries of the reserve. The defendant’s duties of employment were primarily performed at the school, off the reserve.

Although the place of employment was not physically on the reserve, the nature or purpose of the defendant’s employment is closely connected to the reserve. The school in question and the schools on the reserve were seen as one system by the Frontier School Division and the Norway House Indian Band. The defendant’s work was performed off the reserve on instructions from her employer. Most of the students attending the school were Indians. The Government of Canada provided substantial operating funds to the school as part of its programme to fund services, including education, for Indians. The circumstances surrounding the employment, and the income earned therefrom, overwhelmingly point to the reserve.

The defendant’s employer and her residence are on the reserve. The location of her employment is off the reserve. However, the circumstances surrounding her employment are very closely connected to the reserve. Accordingly, I have determined that the defendant’s employment earnings are deemed to be situated on the reserve and were exempt from taxation.

By no means am I extending the definition of a “reserve” or creating a “notional reserve” outside of the reserve boundaries. There is a long line of authority that admonishes against such an extension: see National Indian Brotherhood, supra; Gamble and Marion v. M.N.R. (September 24, 1987), 83-1126 (IT) and 85-593 (IT) (T.C.C.) [not reported]; Pachanos (V.) v. M.N.R., [1990] 2 C.T.C. 2273 (T.C.C.); Kirkness (M.F.) v. M.N.R., [1991] 2 C.T.C. 2028 (T.C.C.); Faries (B.L.) v. M.N.R., [1992] 1 C.T.C. 2295 (T.C.C.). It is undisputed that the defendant performed the duties of her employment off the reserve.

Rather, in concluding that the defendant’s income is situated on the reserve, I am taking into account the combined force of the connecting factors and the circumstances surrounding the employment. Not to consider the circumstances surrounding the employment does not accord with the purpose of the tax exemption in the Indian Act as stated in Mitchell, supra, and Williams, supra. The predominance of a single connecting factor, be it the residence of the debtor or the location where the duties of employment were performed, does not address the erosion of the entitlement of an Indian qua an Indian on a reserve. In Williams, supra, Gonthier J. stated [at page 891] that “it is simply not apparent how the place where a debt may normally be enforced has any relevance to the question whether to tax the receipt of the payment of that debt would amount to the erosion of the entitlement of an Indian qua Indian on a reserve.” To look solely at where the duties of employment are performed, without considering the circumstances surrounding the employment or the residence of the employer, is similarly too restrictive.

It is true that the purpose of the tax exemption provision, as stated by La Forest J. in Mitchell, supra, is not to remedy the economically disadvantaged position of Indians. Indians who acquire and deal in property outside the reserve do so in the commercial mainstream, on the same basis as other Canadians. I would not want to be perceived as contradicting this statement. However, the defendant in the case at bar is not dealing with property in the “commercial mainstream,” despite that she performed her duties of employment off the reserve. Norway House and the community surrounding it are relatively isolated. The defendant, on instructions from her employer, worked almost exclusively for the Indian population which was primarily located on the reserve.

In summary, I find that the defendant’s income from her employment at the school is situated on the reserve and is exempt from taxation.

F. MARIANNE FOLSTER

The defendant’s employer was the hospital. She performed her duties of employment at the hospital which is in the vicinity of, but not within, the geographical boundaries of the reserve. The defendant’s employer is not resident on the reserve; likewise, she performed the duties of her employment off the reserve. However, the defendant did reside on the reserve.

As in the case of Elizabeth Ann Poker, the place of employment was not physically on the reserve, but the nature or purpose of the defendant’s employment was closely connected to the reserve. The hospital was established pursuant to the decision to provide health care for Indians by the Government of Canada. It was built to replace a hospital that was originally located on the reserve. It is funded by the Government in its decision to support the health care of Indians. Approximately 80 per cent of the persons served by the hospital are status Indians. The circumstances surrounding the employment are closely connected to the reserve.

However, despite the circumstances surrounding the defendant’s employment, neither the defendant’s employer nor the location of her employment were on the reserve. It is not sufficient, in my view, to find that the defendant’s employment was for the benefit of Indians on the reserve. Such an interpretation would go beyond preventing the erosion of the entitlement of an Indian qua Indian on a reserve. Conceivably, such an interpretation could mean that all Indians who lived on a reserve would not be subject to income tax, regardless of where or for whom they worked. Although this may be a means to redress economic disadvantage, it does not accord with the purpose of the tax exemption provisions.

In summary, although the defendant resided on the reserve, her employer and her place of employment were off the reserve. The circumstances surrounding her employment are closely connected to the reserve. However, absent any connecting factor other than the taxpayer’s residence, employment duties which are to the benefit of Indians on a reserve are not sufficient to tie the income arising from the employment to the reserve. Accordingly, I have determined that the employment earnings of the defendant are not situated on the reserve.

CONCLUSION

The purpose of the tax exemption provisions in the Indian Act is to preserve Indian entitlement to reserve land and to ensure that the use of property on reserve land is not eroded by the ability of governments to tax or creditors to seize. It is this purpose that must be kept in mind in determining the situs of employment income.

The test to determine the situs of property, set out by the Supreme Court in Williams, supra, must take into account the combined force of the connecting factors and the circumstances surrounding the employment. To not consider the circumstances surrounding the employment does not accord with the purpose of the tax exemptions in the Indian Act. The predominance of a single connecting factor, be it the residence of the debtor or the location where the duties of employment were performed, does not address the erosion of the entitlement of an Indian qua Indian on a reserve.

In considering of all of the connecting factors and the circumstances surrounding the employment of the defendant Elizabeth Ann Poker, I find that the plaintiff’s appeal should be dismissed and the matter referred back to the Minister for reassessment.

The plaintiff’s appeal with respect to F. Marianne Folster is allowed. Although the circumstances surrounding her employment at the hospital were strongly connected to the reserve, neither her employer nor the location where she performed the duties of her employment was located on the reserve. Although the denial of her tax exemption leads to an intuitively anomalous result, given the physical proximity of the hospital to the reserve and the population serviced by the hospital, I am hesitant to find that work for the benefit of Indians is sufficient to bring income arising from that work into tax exempt status, absent other connecting factors. Such an interpretation would go beyond preventing the erosion of the entitlement of an Indian qua Indian on a reserve and act as a means to redress economic disadvantage. Although that is a worthwhile goal, it is the role of Parliament, and not of this Court, to find the way to reach it.

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