Tax Court of Canada Judgments

Date: 19980623

Docket: 92-2735-IT-G

BETWEEN:

GEORGE DESNOMIE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

ARCHAMBAULT, J.T.C.C.

[1] Mr. George Desnomie is appealing a reassessment issued by the Minister of National Revenue (Minister) with respect to the 1989 taxation year. Mr. Desnomie, an Indian within the meaning of the Indian Act, R.S.C. 1985, c. I-5, claimed an exemption pursuant to paragraph 81(1)(a) of the Income Tax Act (Act) and pursuant to sections 87 and 90 of the Indian Act.

[2] The main issue in this case is whether Mr. Desnomie’s employment income constitutes personal property situated on a reserve within the meaning of section 87 of the Indian Act.

Facts

[3] The parties filed an Agreed Statement of Facts which I reproduce here:

AGREED STATEMENT OF FACTS

1. The Appellant, George Desnomie (“Desnomie”), is an Indian within the meaning of the Indian Act (Canada), R.S.C. 1985, c. I-5.

2. During the 1989 taxation year Desnomie was employed as the Executive Director of the Manitoba Indian Education Association (the “MIEA”).

3. The MIEA is a non-profit, non-commercial organization, the purpose of which is to preserve and advance the education goals of Indian people and to otherwise assist the social, cultural and economic development of Indian people in Manitoba.

4. The MIEA was incorporated without share capital by Articles of Incorporation dated October 16, 1981.

5. In 1989, the registered office of the MIEA was located in the City of Winnipeg.

6. At the time the MIEA was incorporated, the Federal Government was in the process of transferring responsibility for the provision of Indian student assistance from the Department of Indian and Northern Development (“DIAND”) to Indians. The MIEA was established to facilitate such transfer, and was incorporated at the instance of the Federal Government.

7. The members of the MIEA are the Assembly of Manitoba Chiefs and certain Indian Bands in the Province of Manitoba, all of which are resident on reserve land in Manitoba.

8. During 1989 the participating members of the MIEA included the following Indian Bands and Tribal Councils: the Keewatin Tribal Council, Western Region Tribal Council, Interlake Tribal Division for Schools, Dakota Ojibway Tribal Council, Fisher River Band, Cross Lake Band, Norway House Band, Keeseekoowenin Band, Moose Lake Band, Red Sucker Lake Band, Fort Alexander Band, and Little Saskatchewan Band. The said Bands were located in various parts of Manitoba.

9. The MIEA is controlled by a Board of Directors (the “Board”) elected by the members. During the relevant time, the Board was comprised of approximately seven individuals, each of whom was an Indian within the meaning of the Indian Act (Canada) and was resident on a reserve.

10. The articles of the MIEA provide that:

“The undertaking of the corporation is restricted to the following:

To promote, advance and protect the interests of the membership and to do all things that are lawful, incidental and conducive to the attainment of the undertaking of the corporation; and, in particular, to preserve and advance the education goals of Indian people in a manner consistent with the direction adopted from time to time by the Indian Chiefs of Manitoba; to provide leadership and organizational support to Indian Bands and Indian Associations in the field of education; to compile and disseminate information to the Indian community on developments in the field of education; to identify areas for study and conduct research on Indian education matters; to assist in the planning and coordination of local control of Indian education in a matter [sic] consistent with the direction established by individual Indian Bands or Indian School Board authorities; and to organize, coordinate and provide Indian student services as delegated from time to time by an individual Indian Band, Tribal Council or education authority in the Province of Manitoba.”

11. The MIEA Board passed a by-law (“By-Law No.1”) relating to the transaction of the affairs of the MIEA on November 27, 1981. By-Law No.1 was in effect at all times material to this Appeal, and the MIEA conducted itself in accordance with By-Law No.1 at all times material hereto.

12. At all times material hereto Desnomie lived in Winnipeg, and worked at the MIEA’s Winnipeg office.

13. Desnomie was first employed by the MIEA (or its predecessor) in September of 1980 as an education counsellor. After three years, he became the Director of Student Services. In 1987 he became the Executive Director of MIEA.

14. In his capacity as Executive Director, Desnomie was responsible for the overall administration and financial management of the MIEA, including the hiring and supervision of staff and counsellors and the monitoring of spending. Desnomie also acted as a liaison between the MIEA and those Indian Bands and Tribal Councils which had designated the MIEA as their agent for the provision of services to Indian students.

15. The MIEA paid Desnomie the sum of $41,375.54 in 1989.

16. The MIEA offered numerous services to Indian students attending school off reserves including:

a) assistance in adjusting to City living;

b) arranging for financial support;

c) the provision of personal, financial, academic education and career counselling; and

d) the provision of tutorial services.

17. The students to whom such services were provided were all Indians within the meaning of the Indian Act (Canada).

18. Most schools located on reserves only provide education up to Grade 10. There are no post-secondary institutions located on reserves in Manitoba. There are three Universities in Manitoba, two of which are located in the City of Winnipeg and one in the City of Brandon. The largest community college in Manitoba (Red River Community College) is located in the City of Winnipeg. Private institutions such as Robertson Career College and Herzing Career College only have establishments in the City of Winnipeg.

19. Most, if not all, of the students to whom MIEA provided services were individuals who left their reserves in order to continue their education at institutions located off reserves, primarily in the City of Winnipeg.

20. The MIEA’s administrative office was located in Winnipeg because the majority of the students for whom it provided services attended institutions located in Winnipeg.

21. By the terms of certain numbered Treaties concluded between Her Majesty the Queen in right of Canada and bands of Indians in Manitoba, the Crown undertook 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” (Treaty No. 5), or “... to maintain a school in the reserve allotted to each band as they settle on said reserve ...” (Treaty No. 4). Other numbered Treaties contain similar wording in describing the obligation of the federal government in respect of education for Indians.

22. Administration funding for the payment of MIEA staff salaries was provided by DIAND to MIEA pursuant to a Contribution Arrangement under which MIEA agreed to administer the programs, activities and contribution funds covered by the Contribution Arrangement in the areas of education and resource and economic and employment development.

23. By Notice of Reassessment dated March 11, 1991, the Minister of National Revenue included the amount of $41,375.54 as employment income of the Appellant for the 1989 taxation year.

24. The Appellant duly filed a Notice of Objection to the Reassessment of March 27, 1991.

25. The Minister confirmed the Reassessment by Notification of Confirmation dated November 20, 1992. The Appellant filed a Notice of Appeal on November 30, 1992 and an Amended notice of Appeal on April 14, 1997. The Respondent filed a reply to the original Notice of Appeal on February 16, 1993 and a reply to the Amended Notice of Appeal on May 14, 1997.

[4] At the hearing, Mr. Desnomie testified in order to provide further evidence. He stated that he was raised on the Peepeekisis Indian Reserve situated 20 miles east of Fort Qu’Appelle in Saskatchewan. Mr. Desnomie also described in greater detail some of the work that he had performed in Winnipeg for the Manitoba Indian Education Association Inc. (MIEA). One of the services offered to native students was an emergency telephone line to respond to their after-hours needs in Winnipeg. Mr. Desnomie maintained contact — mainly by telephone — with the various bands from which the students came.

[5] He also confirmed that the MIEA Board of Directors met three times in 1989 and that all the meetings took place in Winnipeg. Given the geographical dispersion of the various bands across the province, it only made sense to meet in Winnipeg. The closest reserve to Winnipeg was the Dakota Ojibway Reserve situated 100 kilometres from Winnipeg.

Analysis

Section 87 of the Indian Act

[6] The most relevant statutory disposition for the purposes of this appeal is section 87 of the Indian Act, which reads as follows:

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

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

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

(2) No Indian or band is subject to taxation in respect of the ownership, occupation, possession or use of any property mentioned in paragraph (1)(a) or (b) or is otherwise subject to taxation in respect of any such property.

[7] Mr. Desnomie contends that his employment income earned in 1989 constitutes personal property situated on a reserve. It is admitted that Mr. Desnomie is an Indian within the meaning of the Indian Act, and the Supreme Court of Canada, in Nowegijick v. The Queen, 83 DTC 5041, has recognized that employment income constitutes personal property within the meaning of paragraph 87(1)(b) of the Indian Act. Therefore, the only issue is whether Mr. Desnomie’s employment income is situated on a reserve.

[8] Determining where employment income is situated is not an easy issue to resolve. At least one judge has stated that employment income, which constitutes a chose in action, does not really have a situs. See The Queen v. National Indian Brotherhood, 78 DTC 6488, [1979] 1 F.C. 103 (F.C.T.D.) at 109. The approach that has to be followed by this Court in determining where employment income is situated has been described by Gonthier J. of the Supreme Court of Canada in Williams v. The Queen, 92 DTC 6320 at 6326:[1]

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.

(Emphasis is mine.)

[9] The first step is to identify the various connecting factors which are potentially relevant. In this particular case, these factors would include: i) the residence of the employer; ii) the residence of the employee; iii) the location where the work is performed; and iv) the nature of the services performed and the special circumstances in which they are performed.

i) Residence of employer

[10] Here, Mr. Desnomie’s employer is a non-profit corporation whose head office is located in Winnipeg where its main activities are carried on. The Board of Directors meets in Winnipeg even though each member of that Board lives on a reserve. The MIEA’s Executive Director lives and works in Winnipeg. According to the standard criteria developed by the courts, the residence of the employer is in Winnipeg.

ii) Residence of Mr. Desnomie

[11] Mr. Desnomie is an Indian who was raised on a reserve situated in Saskatchewan. The Peepeekisis Band is not a member of the MIEA. Mr. Desnomie has been living in Winnipeg since 1980. Winnipeg seems to be the centre of his life although he calls his birthplace home. Mr. Desnomie clearly resides in Winnipeg.

iii) Where the services were performed

[12] In his capacity as Executive Director, Mr. Desnomie is responsible for the overall administration and financial management of the MIEA. His employer’s head office and main place of business is in Winnipeg. His employer’s clientele resides in Winnipeg during the school year and the raison d’être of the MIEA is to provide assistance, guidance and counselling to native students attending school in Winnipeg. Mr. Desnomie maintains close contact with the various bands serviced by the MIEA but this is mainly done through telephone conversations. Meetings of the Board take place in Winnipeg. It is pretty clear that almost all Mr. Desnomie’s services are performed in Winnipeg.[2]

iv) Special circumstances

[13] Pursuant to its obligation towards native people, the federal government must maintain schools for instruction on Indian reserves in Manitoba. The evidence disclosed that the government has discharged this obligation by providing schools on reserves up to grade 9 and, on some reserves, up to grade 10 or 11. Given the size of reserves, it is not surprising that native students may have to attend school off their reserve to complete high school and receive post-secondary education. It seems obvious that such further education has to be provided to native students in locations such as Winnipeg which offers both secondary and post-secondary education.

[14] In 1981 the government’s functions in providing student assistance to native people were transferred from the Department of Indian Affairs to the MIEA, whose role it is to assist the various native bands across the province in educating their children. It receives its administration funding from the DIAND. The clientele of the MIEA is made up exclusively of native students most, if not all, of whom come from reserves.

[15] So the strongest factors connecting Mr. Desnomie’s employment income to a “reserve” are the fact that the people benefiting from his services come mostly from reserves and the fact that funding for his salary comes from the federal government in the discharge of its obligation to provide education to natives on reserves.

[16] The last step, as stated by Gonthier J. in Williams,supra, is to determine what weight is to be placed on these various connecting factors. The weighing process must be done in the light of three considerations: i) the purpose of the exemption under the Indian Act; ii) the type of property in question; and iii) the nature of the taxation of that property.

[17] Dealing with the last two considerations, it should be noted that Gonthier J. himself recognized in Williams that they may not play an important role in determining the weight that should be given to the connecting factors in determining the situs of employment income for the purposes of section 87 of the Indian Act. He stated at page 6328:

In the context of unemployment insurance we were able to focus on certain features of the scheme and its taxation implications in order to establish one factor as having particular importance. It is not clear whether this would be possible in the context of employment income, or what features of employment income and its taxation should be examined to that end.

The analysis of employment income is, in my view, important for the purposes of determining to what extent the taxing of income affects an Indian qua “Indian on a reserve”.

[18] Employment income represents salary or remuneration paid for services rendered by one person (an employee) to another (the employer). Pursuant to subsection 5(1) of the Act, employment income is taxable upon receipt by an employee. This income can be distinguished from other income such as unemployment insurance benefits which are aimed at providing financial support to employees who are temporarily out of work. Employment income is also different from social assistance payments, scholarships and bursaries, which must be included in income pursuant to subsection 56(1) of the Act. It is the nature of salary that it is paid for a consideration, i.e. as compensation for services rendered, while social assistance payments and scholarships are in the nature of a gift given by society to people in need.

[19] For most Canadians, employment income is their main financial means of subsistence. Most people work in order to be able to provide food and shelter for their family. In Mr. Desnomie’s case, he is not living on a reserve. He has been working and living in Winnipeg since at least 1980. In 1989, this represented nine or ten years of living off a reserve. Taxing Mr. Desnomie’s employment income in these circumstances does not, in my view, erode his “entitlement [as an] Indian qua Indian on a reserve”.

[20] I believe that the most important consideration that must be taken into account in the weighing process is the purpose for which section 87 was adopted. The best source for identifying this purpose is the Supreme Court of Canada’s decision in Mitchell et al. v. Peguis Indian Band et al., [1990] 5 W.W.R. 97. This case dealt with restrictions on the mortgaging and seizure of property and Mr. Justice La Forest provided an excellent analysis of the history and the purpose of section 87 of the Indian Act. He said the following with respect to sections 87 and 89 at pages 131-32.

I take it to be obvious that the protections afforded against taxation and attachment by ss. 87 and 89 of the Indian Act go hand-in-hand with these restraints on the alienability of land. I noted above that the Crown, as part of the consideration for the cession of Indian lands, often committed itself to giving goods and services to the natives concerned. Taking but one example, by terms of the “numbered treaties” concluded between the Indians of the prairie regions and part of the Northwest Territories, the Crown undertook to provide Indians with assistance in such matters as education, medicine and agriculture, and to furnish supplies which Indians could use in the pursuit of their traditional vocations of hunting, fishing and trapping. 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 fulfilment 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 at 391, 48 L. Ed. 2d 710, 96 S. Ct. 2102 (1976).

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.

(Emphasis is mine.)

[21] Furthermore, La Forest J. also described what section 87 is not intended to achieve:

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.

(Emphasis is mine.)

[22] The issue to be determined is: does the taxing of the salary of a native who lives off a reserve, who works for an employer residing off a reserve and who provides his services off a reserve amount to, in the words of Gonthier J., an “erosion of the entitlement of an Indian qua Indian on a reserve” or, as is more explicitly stated by La Forest J., a dispossession of “property which [Indians] hold qua Indians, i.e., their land base and the chattels on that land base”? I do not think so. I believe that, in determining what weight should be given in this particular case to the factors outlined above, more weight should be given to the residence of the employee, the location where the services were provided and the place of business of the employer to whom they were provided.

[23] The fact that the clientele of the employer was made up of native students coming from reserves should not be given much weight. Those native students were living off the reserve for at least eight to ten months while they benefited from the services provided to them by the MIEA. It should also be stressed that it is Mr. Desnomie’s personal property that has to be “situated on a reserve” and not the personal property of native students. Expressed in a slightly different manner, the “erosion of the entitlement of an Indian qua Indian on a reserve” has to be determined by reference to the person whose income is involved and not by reference to the different reserves that are benefiting directly or indirectly from the services of this person.

[24] Mr. Desnomie was working, like many other Canadians, in the mainstream of a large urban centre. Many employees in Winnipeg work in government at various levels, be it federal, provincial, municipal or school. I think that Mr. Desnomie’s situation fits the description in Williams,supra, where Gonthier J. stated at page 6324:

Therefore, under the Indian Act, an Indian has a choice with regard to his personal property. The Indian may situate this property on the reserve, in which case it is within the protected area and free from seizure and taxation, or the Indian may situate this property off the reserve, in which case it is outside the protected area, and more fully available for ordinary commercial purposes in society. Whether the Indian wishes to remain within the protected reserve system or integrate more fully into the larger commercial world is a choice left to the Indian.

The purpose of the situs test in s. 87 is to determine whether the Indian holds the property in question as part of the entitlement of an Indian qua Indian on the reserve. Where it is necessary to decide amongst various methods of fixing the location of the relevant property, such a method must be selected having regard to this purpose.

[25] Here, by accepting living for so many years in a city like Winnipeg — at least eight years at the time of the relevant taxation year and 18 years at the time of the hearing — I believe that Mr. Desnomie has accepted living in an environment where his property is not protected. Granting him the exemption that he is seeking would be granting him a privilege that his fellow citizens of Winnipeg do not enjoy while working in that city.[3]

[26] In the recent decision of Henry Southwind v. The Queen, dated January 14, 1998, file number A-760-95, the Federal Court of Appeal concluded that the taxation of an Indian residing on a reserve and earning business income from logging activities carried on outside the reserve did not constitute an erosion of his “entitlement qua Indian on a reserve”.

[27] Before dealing with the second issue raised by Mr. Desnomie, I should make a few comments on the decision rendered by the Federal Court of Appeal in Folster v. The Queen, 97 DTC 5315, which was relied on by Mr. Desnomie’s counsel. First, it should be remembered, as Linden J.A. stated at page 5324 that each case must be determined on its particular facts:

... a central premise of Williams is that, in the final analysis, the relative weighting of connecting factors must proceed on a case by case basis.

[28] In Folster, supra, the situation was quite different from the facts of this case. First, the taxpayer was residing on a reserve. Her services as an employee were being provided to a hospital which had been on a reserve, was relocated on land adjacent to the reserve after a fire, and was in the process of being annexed by the reserve.

[29] Furthermore, approximately 80% of the hospital’s clients were status Indians who were presumably living on the reserve. As stated by Linden J.A. who wrote the decision in Folster, the employment of the taxpayer was “intimately connected with the ... Reserve”. Here, we do not have this intimate connection. The closest reserve, the Dakota Ojibway reserve, was 100 kilometres away from Winnipeg, while the furthest away, the Keewatin reserve, was located so far north that an overnight airplane trip was required to get to Winnipeg. Furthermore, unlike the clients of the hospital in Folster, the students of the MIEA were away from their reserve for 8 to 10 months. Finally, unlike Mrs. Folster — and Mr. Williams in Williams —, Mr. Desnomie was not living on the reserve that benefited from his work.

Section 90 of the Indian Act

[30] Mr. Desnomie also relied on subsection 90(1) of the Indian Act which deems any money given to an Indian or to a band under a treaty or an agreement between a band and Her Majesty to be always situated on a reserve. This subsection reads as follows:

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.

[31] In my view, this subsection does not help Mr. Desnomie’s case in this appeal. Mr. Desnomie’s salary was not “purchased by Her Majesty”. His salary was paid by the MIEA. The money paid to him was not “given” to him pursuant to an agreement between a band and Her Majesty. The money was not given to Mr. Desnomie: it was paid to him in consideration of his services pursuant to an agreement between him and the MIEA.

[32] The money that was used to pay his salary came out of funds given to the MIEA pursuant to its agreement with the DIAND, not under an agreement between the DIAND and a band. The MIEA is a corporation constituted pursuant to The Corporations Act of Manitoba. Given that it is a corporation without share capital, it has a personality distinct from that of its members. In the Contribution Arrangement, there are no indications that the MIEA was acting as an agent on behalf of the bands whose representatives were on the Board of Directors. The Contribution Arrangement specifically creates an obligation on the MIEA to account to the DIAND for the money contributed by the government.

[33] It is true that it is stated in paragraph 14 of the Agreed Statement of Facts that the MIEA acted as an “agent [for Indian bands and tribal councils] for the provision of services to Indian students”. However, I do not believe that this is sufficient evidence that the MIEA was acting as their agent when it entered into an agreement with the DIAND. It is one thing to represent a particular band when it assumes responsibility for assisting a particular native student belonging to that band. It is quite another to say that a corporation without share capital is only acting as an agent for its members.

[34] In his testimony, Mr. Desnomie, who is the executive director of the MIEA, did not say that his employer acted as an agent when it signed the Contribution Arrangement. Mr. Desnomie was the signing officer for the MIEA with regard to the Contribution Arrangement that was filed as an exhibit in this case.

[35] In Kinookimaw Beach Association v. R. in right of Saskatchewan, [1979] 6 W.W.R. 84, the Saskatchewan Court of Appeal concluded that the separate legal existence of a corporation could not be disregarded so that its tax liability would be determined by the character of its individual shareholders. In Kinookimaaw, seven Indian bands had incorporated a company for the operation of a resort on reserve lands. This corporation claimed under section 87 of the Indian Act an exemption from the education and hospital tax on purchases that it had made. Chief Justice Culliton stated at page 89:

To grant to the association the exemption from taxation provided for in s. 87 of the Indian Act would be to destroy the legal obligations of the association as an independent corporate entity and to determine its obligations by the character of its shareholders.

Here, there are no reasons to lift the corporate veil.

[36] For all these reasons, Mr. Desnomie’s appeal is dismissed, with costs.

Signed at Ottawa, Canada, this 23rd day of June, 1998.

« Pierre Archambault »

J.C.C.I.

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