Status Indian’s Income Situated On Reserve
Section 81 of the Income Tax Act and section 87 of the Indian Act work together to exempt status Indians from tax on income situated on reserve.[1] But determining when income is situated on reserve is a convoluted task that frequently leads to disputes between status Indians and the CRA. 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.[2]
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 Indians 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 Indians.
In such instances, the courts will undertake a two-step analysis to conclude whether the income is situated on reserve:[3]
1) Identify the connecting factors between the 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
The location of the activities that resulted in the payment[4]
The courts will look at each factor and determine whether the income was situated on- or off-reserve.
2) Accord weight to each connecting factor
The courts weigh each connecting factor based on the purpose, type of property, and nature of taxation. For example, 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.[5] If there was no business purpose underlying the payee’s decision, the courts will give this connecting factor less weight.[6]
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 applications, we consider three cases: Robertson v Canada, Baldwin v Canada, and Dickie v Canada.
Robertson: off-reserve business, on-reserve intermediary
In Robertson, the courts ruled that the business’ income was tax-exempt because the on-reserve aspects of the business outweighed the off-reserve fishing.[7] One of the business owners was a status Indian who lived and fished off-reserve but stored 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 Indians, 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.[8]
Baldwin: on-reserve intermediary, off-reserve locations
In Baldwin, the taxpayers’ employment income was taxable because it was insufficiently connected to the reserve.[9] The taxpayers were employed by an organization, Native Leasing Services (NLS), located on-reserve. NLS would lease the employees to organizations located 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 courts found that the true provider of the leased employees’ income were the organizations located off- reserve. The employees were already working for these organizations before NLS became involved and they reported to and were supervised by the organizations. In contrast to Robertson, where the court gave more weight 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.
Dickie: off-reserve locations, on-reserve business
In Dickie, the taxpayer’s business income was tax-exempt because its on-reserve office played a large role in it generating its business income.[10] 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.[11]
Concluding Remarks
The three case examples above demonstrate the extent to which the outcomes are determined by the factual nuances. It is therefore unsurprising that status Indians continue to report that the issue of on-reserve versus off-reserve income causes them uncertainty when filing their tax returns.
Status Indians who are seeking to have their income considered to be situated on reserve should carefully analyze the potential impact of the off-reserve connections that allow them to earn their income. In circumstances where the CRA has concluded that a status Indian’s income is not situated on reserve, the cases above also demonstrate that it is possible to successfully dispute the CRA’s decision.
Disclaimer
This article is for informational purposes only and does not constitute legal advice. If you wish to discuss your issue with a lawyer, contact us today at (613) 702-0322 or info@blachfordtaxlaw.com
[1] Income Tax Act, RSC 1985, c 1 (5th Supp), s 81; Indian Act, RSC 1985, c I-5, s 87.
[2] Canada Revenue Agency “Final Report – Qualitative Research: The Experiences of Indigenous Communities with Tax Filing”, 18, online: <http://epe.lac-bac.gc.ca/100/200/301/pwgsc-tpsgc/por-ef/canada_revenue_agency/2017/040-16-e/report.pdf>.
[3] Williams v Canada, [1992] 1 SCR 877.
[4] Baldwin v Canada, 2014 TCC 284, at para 54, citing Desnomie v R, [1998] 4 CTC 2207 (TCC) [Baldwin].
[5] In Dickie v Canada, 2012 TCC 242, the business owners requested payments be mailed to their management location on-reserve. The court upheld this to be a factor that weighed in favour of the business income being situated on a reserve.
[6] In Baldwin, wages were paid to the employees’ on-reserve bank accounts, but the court decided that the employer was trying to manipulate where the income was situated and accorded it no weight.
[7] Canada v Robertson, 2012 FCA 94.
[8] Ibid at para 86.
[9] Supra note 4.
[10] Supra note 5.
[11] Ibid at paras 10, 11.