Date: 20010525

Dockets: 1999-548-IT-G; 1999-2486-IT-G

BETWEEN:

AUDREY J. SERO, CYRIL FRAZER,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Hamlyn, J.T.C.C.

FACTS

[1]            Audrey J. Sero is appealing the reassessment of her 1995 taxation year and Cyril Frazer is appealing the reassessment of his 1996 taxation year (hereinafter referred to as the "Appellants"). These General Procedure appeals were heard by way of common evidence.

[2]            In computing income for her 1995 taxation year, the Appellant Audrey Sero, did not include investment income earned in the amount of $13,499.00 on the term investments.

[3]            In computing income for his 1996 taxation year, the Appellant Cyril Frazer, did not include investment income earned in the amount of $10,509.55 on the term investments and interest income in the amount of $239.46 from his savings account.

[4]            At the outset of the hearing the Appellants filed the following Partial Agreed Statement of Facts:

PARTIAL AGREED STATEMENT OF FACTS

AUDREY SERO

1.              The appellant, Audrey Sero, is an Indian as defined in the Indian Act, R.S.C. 1985, c. I-5 (the "Indian Act"). Ms. Sero is registered to the Bay of Quinte Mohawk Band No. 140, Six Nations of the Grand River Indian Reserve No. 40 ("Six Nations Reserve").

2.              The Six Nations Reserve is a "reserve" for the purposes of the Indian Act.

3.              Ms. Sero was born in 1928. She has never resided on a reserve. Since 1977, she has resided in Etobicoke, Ontario and not on a "reserve", as defined in the Indian Act. Ms. Sero is a retired library technician. Prior to her retirement, she was employed by the City of York Board of Education, part of the Ontario school system.

4.              The Royal Bank of Canada (the "Royal Bank") is a "Schedule I bank" within the meaning of the Bank Act, S.C. 1991, c. 46.

5.              The Royal Bank operates a branch that is situated on the Six Nations Reserve. This branch is physically located in the Iroquois Village Plaza in Ohsweken, Ontario on land commercially leased from the Crown pursuant to a surrender for leasing by the Six Nations of the Grand River (the "Ohsweken Branch").

6.              Ms. Sero had a savings account, as well as a safety deposit box, at the Etobicoke branch of the Canadian Imperial Bank of Commerce ("CIBC") close to her home and work. Her salary and pension income from the City of York Board of Education was deposited directly into the CIBC savings account.

7.              Ms. Sero and her spouse were advised by the Ohsweken Branch that they would be best suited with a Signature Daily Interest Account at that branch, as marked in the copy of the Royal Bank brochure which was provided to them (see Tab 16).

8.              In 1992, Ms. Sero opened two 60 Plus Royal Money Maker Plus deposit accounts. One of these 60 Plus accounts was a joint account with her spouse, who is also an Indian within the meaning of the Indian Act. At this time, both Ms. Sero and her spouse signed a signature card for this joint account (copy attached at Tab 5 of Volume I of the Joint Book of Documents for Audrey Sero [1]). A 60 Plus Royal Money Maker Plus account is a personal savings deposit account with chequing privileges offered to clients over 60 years of age. Clients have access to these accounts through automated bank machines or point of sale terminals (i.e. Interact Direct Payment). Service fees are waived for clients who are 60 years of age or older.

9.              For the 60 Plus Royal Money Maker Plus account, the following documents are relevant - the signature card (Tab 5) and the "Personal Deposit Account" brochure (Tab 6).

10.            Periodically, Ms. Sero transferred funds from the Etobicoke branch of the CIBC to the Ohsweken Branch to make investments. Usually, she transferred funds by telephone, but she would travel to the Ohsweken Branch about once a year.

11.            In order to purchase a term investment, a client is required to enter into what is described as a "Term Deposit Account Agreement". Attached at Tab 1 is a Term Deposit Account Agreement in the name of Audrey Sero dated January 17, 1992 (that was mistakenly signed by her spouse and not by Ms. Sero herself). The "Conditions" to this agreement were set out on the back of the Term Deposit Account Agreement. A retyped version of the Conditions is attached at Tab 1.

12.            Pursuant to this Term Deposit Account Agreement, from 1992 to 1995 Ms. Sero acquired nine term investments at the Ohsweken Branch ("term investments"), giving rise to the interest income at issue. The funds used by Ms. Sero to purchase the term investments were derived from income not earned on a Reserve. One of these term investments (account number 7014335-03) was held jointly with her spouse. Funds contributed by her spouse to this term investment were not earned by him on a Reserve. He derived those funds from his employment with Selkirk Communications and from the sale of shares listed on a stock exchange.

13.            Generally, when a client acquires a term investment (having entered into a Term Deposit Account Agreement (see Tab 1 of Volume I of the Joint Book of Documents for Cyril Frazer)), the client will receive a document described as a "Term Deposit Receipt" confirming the terms of the term investment, and subsequently will also receive a confirmation of the terms and conditions of the term investment.

14.            Ms. Sero and her spouse jointly received a "Term Deposit Receipt" for the term investment account number 7014335-03 (Tab 3) and a confirmation of the terms and conditions of this term investment (Tab 4).

15.            In the 1995 taxation year (the year under appeal), Ms. Sero earned interest income in the total amount of $13,499.86 from the term investments as set out in the T5s and T5 slips issued to Ms. Sero for her 1995 taxation year (copies attached at Tabs 7-12) as follows:

Account NumberDescription                                                            Interest

702 790 7-01                            term deposit                                                           $ 725.00

702 790 7-02                            term deposit                                                           1,755.00

702 790 7-03                            term deposit                                                           1,238.84

702 790 7-04                            term deposit                                                           251.51

702 790 7-05                            term deposit                                                           314.18

702 790 7-09                            term deposit                                                           628.47

702 790 7-12                            term deposit                                                           1,162.68

933 021 2-01                            term deposit                                                           299.18

701 433 5-03                            term deposit (joint with spouse)         7,125.00

Total Interest                                                                                                        $13,499.86

16.            Ms. Sero had no knowledge of what the Royal Bank did with any funds she invested with it, but she assumed that the bank would use the funds in its business, for such things as lending money for mortgages (as stated in her examination for discovery).

17.            While Ms. Sero held the various term investments, the interest earned on the term investments was paid to her according to the payment instructions she had given at the Ohsweken Branch.

18.            Ms. Sero filed her income tax return for the 1995 taxation year on the basis that this interest income was exempt from taxation because it was "the personal property of an Indian ... situated on a reserve" within the meaning of section 87 of the Indian Act.

19.            The interest income of $13,499.86, detailed in paragraph 14 above, is "personal property" of Ms. Sero within the meaning of the Indian Act.

20.            In addition to the interest income in dispute, Ms. Sero reported for tax purposes in the 1995 taxation year, pension income from employment of $4,062.12, Canada Pension Plan benefits of $4,294.08 and registered retirement savings plan income of $8,878.90 (see T1 at Tab 13). The income from these sources was not earned on a Reserve.

21.            Three weeks prior to the maturity of a term investment, the Royal Bank would send a notice to a client advising what the amounts of the principal and accrued interest would be at maturity and confirming the prior instructions, if any, given by a client regarding repayment of the principal, together with unpaid interest earned on it during the term. Such notices were sent to Ms. Sero.

22.            Ms. Sero withdrew two amounts from her term investments prior to maturity. These funds were paid to her in accordance with instructions given by her at the Ohsweken Branch.

23.            Ms. Sero held some of the term investments to maturity and did not renew them (e.g. $100,000 term investment held jointly with her spouse). For such term investments, the principal and any unpaid interest on these term investments was paid to her. Ms. Sero held other term investments to maturity and renewed them. She either was repaid the principal and any unpaid interest on these term investments, or renewed these term investments, together with any unpaid interest.

The Royal Bank - Term Investments

24.            The Ohsweken Branch was opened on December 2, 1991.

25.            First Nations Term Investments were first sold at the Ohsweken Branch in 1991 or 1992.

26.            The First Nations Term Investments had rates of interest comparable to those of guaranteed investment certificates and were redeemable prior to maturity.

27.            Personnel at the head office of the Royal Bank structured the terms and conditions, including the interest rates to be paid by the bank, on all term investments issued by the bank, drafted the promotional material and relevant bank documents and authorized the sale of the investments to customers. Head office did not approve each individual sale of term investments.

28.            Any customer, Indian or not, could purchase a First Nations Term Investment at the Ohsweken Branch. Further, a term investment, with exactly the same terms and conditions, was available at all branches of the Royal Bank although it would not have been called a First Nations Term Investment.

29.            Some of Ms. Sero's term investments may have been First Nations Term Investments. Neither Ms. Sero nor the Royal Bank can identify which of her term investments were First Nations Term Investments.

30.            However, some of Ms. Sero's term investments were subject to the terms and conditions as set out in the document referred to in paragraph 11. However, some of Ms. Sero's term investments were subject to the terms and conditions as set out in the "Client Agreement -Term Investments" (Exhibit A-4).

31.            It is impossible for either the Royal Bank or the Ohsweken Branch to track the use of any specific funds the Royal Bank received from Ms. Sero for the term investments. Such funds became part of, and were mingled with, the general pool of the Royal Bank's funds to be used by the Royal Bank at its discretion in earning its income.

32.            A very minor percentage of the Royal Bank's business (its income earning activities) is carried out on a Reserve.

33.            A very minor percentage of assets of the Royal Bank are located on a Reserve.

34.            At all material times, the Royal Bank operated a large number of branches and other units (such as kiosks in stores) and bank machines in Canada.

35.            Specifically, in the year 2000, the Royal Bank operated about 1,300 branches and other units (such as kiosks in stores) as well as about 4,500 bank machines in Canada. In 1999, the number of branches and other units was 1,400.

36.            Currently, the Royal Bank operates six branches situated on a Reserve, including the Ohsweken Branch.

37.            The Royal Bank group of companies includes its investment dealer, RBC Dominion Securities Limited and its discount broker, Royal Bank Action Direct Inc. These two companies offer all types of securities and investments including stocks, bonds and GICs of the chartered banks.

38.            Outside of Canada, the Royal Bank has 300 offices in more than 30 countries. It earns about 30% of its net income outside of Canada.

39.            Neither the directors nor the head offices of the Royal Bank are located on a Reserve.

40.            The meetings of the directors are not held on a Reserve and the control and management of the Royal Bank is not situated on a Reserve.

41.            The Royal Bank is not located on a Reserve, although the Ohsweken Branch is.

PARTIAL AGREED STATEMENT OF FACTS

CYRIL FRAZER

1.              The appellant, Cyril Frazer, is an Indian as defined in the Indian Act, R.S.C., 1985, c. I-5 (the "Indian Act"). Mr. Frazer is registered to the Walker Mohawk Band No. 68, Six Nations of the Grand River Indian Reserve No. 40 ("Six Nations Reserve").

2.              The Six Nations reserve is a "reserve" for the purposes of the Indian Act.

3.              Mr. Frazer was born in 1932 on the Six Nations Reserve and resided on the Six Nations Reserve until he was 17 years old. Mr. Frazer was employed as a construction supervisor in Simcoe, Ontario, not on a reserve, prior to his retirement in 1985. He did not reside for any continuous (or lengthy period of time) on a reserve from 1949 until 1985. From 1985, his residence has been, and is, on the Six Nations Reserve.

4.              Since 1985, Mr. Frazer has operated a laundry business on the Six Nations Reserve from which he earned about $80,000 per annum, after expenses. This income is exempt from tax.

5.              The Royal Bank of Canada (the "Royal Bank") is a "Schedule I bank" within the meaning of the Bank Act, S.C. 1991, c. 46.

6.              The Royal Bank operates a branch that is situated on the Six Nations Reserve. This branch is physically located in the Iroquois Village Plaza in Ohsweken, Ontario on land commercially leased from the Crown pursuant to a surrender for leasing by the Six Nations of the Grand River (the "Ohsweken Branch").

7.              Mr. Frazer, with his spouse, opened a joint account known as a 60 Plus Royal Money Maker Plus account. At this time, both Mr. Frazer and his spouse signed a signature card for this joint account (copy attached at Tab 8 of Volume I of the Joint Book of Documents for Cyril Frazer[2]). A 60 Plus Royal Money Maker Plus account is a personal savings deposit account with chequing privileges offered to clients over 60 years of age. Clients have access to these accounts through automated bank machines or point of sale terminals (i.e. Interact Direct Payment). Service fees are waived for clients who are 60 years of age or older.

8.              For the 60 Plus Royal Money Maker Plus account, the following documents are relevant - the signature card (Tab 8) and the "Personal Deposit Account" brochure (Tab 9).

9.              On August 27, 1993, Mr. Frazer entered into what is described as a "Term Deposit Account Agreement" (Tab 1). The "Conditions" to this agreement were set out on the back of the Term Deposit Account Agreement. A re-typed version of the Conditions is attached at Tab 1. Pursuant to this Term Deposit Account Agreement, Mr. Frazer acquired various term investments ("term investments"). The source of the funds for these term investments was the laundry business described in paragraph 4.

10.            When a client acquires a term investment at a Royal Bank branch (having entered into a Term Deposit Account Agreement (see Tab 1 and Tab 1 (sic) of Volume I of the Joint Book of Documents for Audrey Sero), the client will subsequently receive a document confirming the terms and conditions of the term investment.

11.            With respect to the term investments referred to in paragraph 9 above, Mr. Frazer received confirmations entitled "Term Investment Certificates" (copies attached at Tabs 2 to 7). On the back of this certificate was the "Client Agreement - Term Investments". A re-typed version of the Client Agreement - Term Investments is attached (Tab 10).

12.            In the 1996 taxation year (the year under appeal), Mr. Frazer earned interest income in the total amount of $10,749 from the Sixty Plus Money Maker Plus account and the term investments as set out in the T5 issued to Mr. Frazer for his 1996 taxation year (Tab 11) as follows:

Account Number Description                                                            Interest

702 035 7                                 Sixty-Plus deposit account                  $ 239.46

702 035 7-01                            term deposit                                                           429.50

702 035 7-02                            term deposit                                                           1,532.66

702 035 7-03                            term deposit                                                           283.25

702 035 7-05                            term deposit                                                           167.96

702 035 7-06                            term deposit                                                           1,040.14

702 035 7-07                            term deposit                                                           359.18

790 007 4-02                            term deposit                                                           6,456.05

933 056 6-01                            term deposit                                                           122.44

933 056 6-02                            term deposit                                                           118.36

Total interest                                                                                                        $10,749.00

13.            The term investments giving rise to the interest income, set out in paragraph 12 above, were acquired by Mr. Frazer at various times during the years 1995 and 1996. One was acquired before 1995.

14.            Mr. Frazer filed his income tax return for the 1996 taxation year on the basis that this interest income was exempt from taxation because it was "the personal property of an Indian ... situated on a reserve" within the meaning of section 87 of the Indian Act.

15.            The interest income of $10,749 detailed in paragraph 12 above, is "personal property" of Mr. Frazer within the meaning of the Indian Act.

16.            In addition to the interest income in dispute and the $80,000 tax-exempt business income referred to in paragraph 4 above, in the 1996 taxation year Mr. Frazer reported for tax purposes pension income from employment of $18,065.40, Canada Pension Plan benefits of $4,864.08, registered retirement savings plan income of $2,400 and interest income of $306.64 (see T1 at Tab 12).

17.            Mr. Frazer also had a guaranteed investment certificate ("GIC") in the amount of $40,000 at a Canadian Imperial Bank of Commerce branch located on the New Credit Reserve. Mr. Frazer is uncertain whether this GIC was acquired in 1996 or in a subsequent year.

18.            When Mr. Frazer acquired the term investments, he understood them to be similar to, or the same as, GICs (as stated in his examination for discovery).

19.            Three weeks prior to the maturity of a term investment, the Royal Bank would send a notice to the client advising what the amounts of the principal and accrued interest would be at maturity and confirming the prior instructions, if any, given by the client regarding repayment of the principal, together with unpaid interest earned on it during the term. Such notices were sent to Mr. Frazer.

20.            Mr. Frazer did not make any early withdrawals. At maturity, the term investments were renewed, together with any unpaid interest, according to Mr. Frazer's prior instructions.

21.            Mr. Frazer received T5 statements and slips from the Royal Bank reporting the interest income earned on both the Sixty-Plus Royal Money Maker Plus account and the term investments during 1996 (see Tab 11).

The Royal Bank - Term Investments

22.            The Ohsweken Branch was opened on December 2, 1991.

23.            First Nations Term Investments were first sold at the Ohsweken Branch in 1991 or 1992.

24.            The First Nations Term Investments had rates of interest comparable to those of GICs and were redeemable prior to maturity.

25.            Personnel at the head office of the Royal Bank structured the terms and conditions, including the interest rates to be paid by the bank, on all term investments issued by the bank, drafted the promotional material and relevant bank documents and authorized the sale of the investments to customers. Head office did not approve each individual sale of term investments.

26.            Any customer, Indian or not, could purchase a First Nations Term Investment at the Ohsweken Branch. Further, a term investment, with exactly the same terms and conditions, was available at all branches of the Royal Bank although it would not have been called a First Nations Term Investment.

27.            Some of Mr. Frazer's term investments with the account numbers 702 035 7-01 to 07 and 790 007 4-02, as set out in paragraph 12 above, may have been First Nations Term Investments. Neither Mr. Frazer nor the Royal Bank can identify which of his term investments were First Nations Term Investments.

28.            However, Mr. Frazer's term investments were subject to the terms and conditions as set out in the documents referred to in paragraphs 9 and 11, above.

29.            It is impossible for either the Royal Bank or the Ohsweken Branch to track the use of any specific funds the Royal Bank received from Mr. Frazer for the term investments. Such funds became part of, and were mingled with, the general pool of the Royal Bank's funds to be used by the Royal Bank at its discretion in earning its income.

30.            A very minor percentage of the Royal Bank's business (its income earning activities) is carried out on a Reserve.

31.            A very minor percentage of assets of the Royal Bank are located on a Reserve.

32.            At all material times, the Royal Bank operated a large number of branches and other units (such as kiosks in stores) and bank machines in Canada.

33.            Specifically, in the year 2000, the Royal Bank operated about 1,300 branches and other units (such as kiosks in stores) as well as about 4,500 bank machines in Canada. In 1999, the number of branches and other units was 1,400.

34.            Currently, the Royal Bank operates six branches situated on a "reserve", as defined in the Indian Act ("Reserve"), including the Ohsweken Branch.

35.            The Royal Bank group of companies includes its investment dealer, RBC Dominion Securities Limited and its discount broker, Royal Bank Action Direct Inc. These two companies offer all types of securities and investments including stocks, bonds and GICs of the chartered banks.

36.            Outside of Canada, the Royal Bank has 300 offices in more than 30 countries. It earns about 30% of its net income outside of Canada.

37.            Neither the directors nor the head offices of the Royal Bank are located on a Reserve.

38.            The meetings of the directors are not held on a Reserve and the control and management of the Royal Bank is not situated on a Reserve.

39.            The Royal Bank is not located on a Reserve, although the Ohsweken Branch is.

ISSUES

[5]            With respect to the Audrey Sero and Cyril Frazer appeals, are the interests derived from the term deposits at the Ohsweken branch "personal property of an Indian situated on a reserve" and therefore exempt from income tax by virtue of section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act? With respect to the Cyril Frazer appeal, is the interest derived from the savings account, term deposits and GICs at the Ohsweken branch "personal property of an Indian situated on a reserve" and therefore exempt from income tax by virtue of section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act?

STATUTORY FRAMEWORK

3. The income of a taxpayer for a taxation year for the purposes of this Part is the taxpayer's income for the year determined by the following rules:

(a) determine the total of all amounts each of which is the taxpayer's income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, the taxpayer's income for the year from each office, employment, business and property,

(b) determine the amount, if any, by which

(i) the total of

(A) all of the taxpayer's taxable capital gains for the year from dispositions of property other than listed personal property, and

(B) the taxpayer's taxable net gain for the year from dispositions of listed personal property,

exceeds

(ii) the amount, if any, by which the taxpayer's allowable capital losses for the year from dispositions of property other than listed personal property exceed the taxpayer's allowable business investment losses for the year,

(c) determine the amount, if any, by which the total determined under paragraph (a) plus the amount determined under paragraph (b) exceeds the total of the deductions permitted by subdivision e in computing the taxpayer's income for the year (except to the extent that those deductions, if any, have been taken into account in determining the total referred to in paragraph (a)), and

(d) determine the amount, if any, by which the amount determined under paragraph (c) exceeds the total of all amounts each of which is the taxpayer's loss for the year from an office, employment, business or property or the taxpayer's allowable business investment loss for the year,

and for the purposes of this Part,

(e) where an amount is determined under paragraph (d) for the year in respect of the taxpayer, the taxpayer's income for the year is the amount so determined, and

(f) in any other case, the taxpayer shall be deemed to have income for the year in an amount equal to zero.

9. (1) Subject to this Part, a taxpayer's income for a taxation year from a business or property is the taxpayer's profit from that business or property for the year.

(2) Subject to section 31, a taxpayer's loss for a taxation year from a business or property is the amount of the taxpayer's loss, if any, for the taxation year from that source computed by applying the provisions of this Act respecting computation of income from that source with such modifications as the circumstances require.

(3) In this Act, "income from a property" does not include any capital gain from the disposition of that property and "loss from a property" does not include any capital loss from the disposition of that property.

12. (1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:

. . .

(c) any amount received or receivable by the taxpayer in the year (depending on the method regularly followed by the taxpayer in computing the taxpayer's income) as, on account of, in lieu of payment of or in satisfaction of, interest to the extent that the interest was not included in computing the taxpayer's income for a preceding taxation year;

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, 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. (1) Notwithstanding any other Act of Parliament or any Act of the legislation 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.

(3) No succession duty, inheritance tax or estate duty is payable on the death of any Indian in respect of any property mentioned in paragraphs (1)(a) or (b) 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, Chapter 89 or the Revised Statutes of Canada, 1952, or the tax payable under the Estate Tax Act, chapter E-9 of the Revised Statutes of Canada, 1970, on or in respect of other property passing to an Indian.

Bank Act

461. (1) For the purposes of this Act, the branch of account with respect to a deposit account is

(a) the branch the address or name of which appears on the specimen signature card or other signing authority signed by a depositor with respect to the deposit account or that is designated by agreement between the bank and the depositor at the time of opening of the deposit account; or

(b) if no branch has been identified or agreed on as provided in paragraph (a), the branch that is designated as the branch of account with respect thereto by the bank by notice in writing to the depositor.

(2) The amount of any debt owing by a bank by reason of a deposit in a deposit account in the bank is payable to the person entitled thereto only at the branch of account and the person entitled thereto is not entitled to demand payment or to be paid at any other branch of the bank.

(3) Notwithstanding subsection (2), a bank may permit either occasionally or as a regular practice, the person to whom the bank is indebted by reason of a deposit in a deposit account in the bank to withdraw moneys owing by reason of that deposit at a branch of the bank other than the branch of account or to draw cheques or other orders for the payment of such moneys at a branch other than the branch of account.

(4) The indebtedness of a bank by reason of a deposit in a deposit account in the bank shall be deemed for all purposes to be situated at the place where the branch of account is situated.

THE APPELLANTS' POSITION

[6]            In order to fulfill the requirements of section 87 of the Indian Act, the three following conditions must be satisfied:

(i)             the taxpayer in question must be an Indian as defined in the Indian Act;

(ii)            the property at issue must be a personal property; and

(iii)                 the situs of the personal property at issue must be on a reserve.

(iv)               

Both parties agreed that the first two items were present; however, the issue of the situs of the term deposits remains. With respect to the issue of situs, the Appellant first submitted that when interpreting section 87 of the Indian Act, the courts should only refer to the connecting factors test when the language of the statute is ambiguous. The Appellant then submitted that in the case at bar, subsections 461(1) and (4) of the Bank Act clearly deem the situs of the term deposits to be on a reserve for the purposes of section 87 of the Indian Act. Consequently, as there is no ambiguity in interpreting section 87 of the Indian Act, this Court does not need to apply the connecting factors test in the present case.

[7]            Subsection 461(1) of the Bank Act contains the words "[f]or all purposes of this Act [...] ". The Appellant submitted that the words " [f]or all purposes ", at the very least, make this provision a deeming provision. With respect to the restrictive words " [...] of this Act [...] ", the Appellant referred to the text of Crawford and Falconbridge Banking and Bills of Exchange, which dismisses the restrictive implications of these words. Rather, the text emphasizes that the practical effect of this provision will almost certainly be broader than the Bank Act. The next provision referred to by the Appellant is subsection 461(4) of the Bank Act. The Appellant stressed that subsection 461(4) deems the situs of the term deposits in question to be on the Ohsweken reserve.

[8]            The Appellant also recognized that in the absence of subsections 461(1) and (4) of the Bank Act, the connecting factors test should be used to determine the situs of the term deposits. However, the Appellant submitted that in the case at bar, the operation of the two deeming provisions of subsections 461(1) and (4) of the Bank Act renders the application of the connecting factors test unnecessary in determining the situs of the term deposits.

THE RESPONDENT'S POSITION

[9]            The Minister submitted that the Bank Act should not be applied in determining the situs of the bank deposits. The Respondent presented three arguments in support of his position. First, section 461 of the Bank Act codified the use of a conflict of laws approach, which was specifically rejected by the Supreme Court of Canada in Williams v. The Queen.[3] Therefore, it cannot be used to determine the situs of a term deposit. Second, the purpose behind section 461 is to deem the location at which a customer can demand payment and is only applicable for banking purposes. Section 461 does not purport to determine the location of the funds in the customer's account. Third, section 461 does not apply to the term investments in question, as term investments are not deposit accounts within the meaning of that section.

[10]          However, as an alternative argument, the Respondent submitted that if the Court finds that section 461 is applicable in its entirety or in part to the investment income at issue, then this section merely serves to lend more weight to one of the connecting factors. Furthermore, in applying the connecting factors test, the Respondent contended that the Court should adopt a similar approach as in Recalma. Following the Court's approach in Recalma v. Her Majesty the Queen[4], the investment income—whether it is earned by purchasing mutual funds or depositing money in a bank account—is earned by the efforts of others and as such is a passive income to the investor.

[11]          The Respondent also acknowledged that in applying the connecting factors test, there are significant factors connecting Mr. Frazer, unlike Ms. Sero, to the reserve. However, the Minister contended that despite the factors connecting Mr. Frazer to the reserve, only clear on-reserve factors relating to the interest income in either appeal are at issue. In the present case, the earning of the interest income was not connected to the land base or any chattels on the land base reserve. Therefore, the interest income should not be exempt from tax merely because an account was opened or a term investment purchased at a bank branch on reserve land.

APPLICATION OF THE BANK ACT

[12]          Before the enactment of section 461 of the Bank Act, identifying the location of bank deposits for various purposes did involve an intricate and complex inquiry. The inquiry depended upon the form of any receipt or certificate issued by the bank, the location of its head office, the domicile of the depositor and other factors that might vary with the purpose of the inquiry. Basically, the conflict of laws approach was used to determine the location of bank deposits. To simplify this approach, section 461 of the Bank Act was enacted, which codified the conflict of laws. Subsection 461(4) of the Bank Act specifically deems the location of the bank deposit to be situated at the branch where the individual has placed his/her monies.

[13]          I find that the Appellants' investments are deposits. I refer to the passage in Saskatchewan Co-operative Credit Society Ltd. v. Canada[5] where Collier J., dealt with the definition of "deposit". He stated:

...To properly define the term in the context of banking business, it is necessary to consider the contractual nature of the banking relationship, which has been characterized in the jurisprudence as one of debtor and creditor. In R. v Davenport, [1954] 1 W.L.R. 569 (C.A.) at p. 571, Lord Goddard C.J. described the relationship in the following terms:

But although one talks about people having money in a bank, it should be understood that the only person who has money in a bank is a banker. If I pay money into my bank either by paying cash or a cheque, that money at once becomes the money of the banker. The relationship between banker and customer is that of debtor and creditor. He does not hold my money as an agent or trustee; the leading case of Foley v. Hill [(1848), 2 H.L. Cas. 28] exploded that idea. Directly the money is paid into the bank it becomes the banker's money, and the contract between the banker and the customer is that the banker receives a loan of money from the customer against his promise to honour the customer's cheques on demand. When the banker is paying out, whether he pays in cash over the counter or whether he is crediting the bank account of somebody else, he is paying out his own money, not the customer's money; he is debiting the customer's account. The customer has a chose in action, that is to say, a right to expect that the banker will honour his cheque. Therefore, in the present case, the money paid on these cheques was the banker's money, but it lead to the customer's account being debited.

                As I see it, a deposit is a contract by which a customer lends money to a bank. The terms of the loan may vary as agreed upon by the banker and the customer.[6]

Obviously, the Appellants have loaned money to the Royal Bank. This is evidenced by the Appellants' acquisition of term investments, a savings account and GICs. Therefore, the Appellants have several deposits at the Royal Bank, specifically at the Ohsweken branch. However, I cannot accept the Appellants' position that section 461 of the Bank Act is the end of the inquiry with respect to the determination of the issue in the present case.

[14]          In Williams, Mr. Justice Gonthier specifically dealt with the conflict of laws approach. He stated that with respect to the conflict of laws approach:

...This may be reasonable for the general purposes of conflicts of laws. However, one must inquire as to its utility for the purposes underlying the exemption from taxation in the Indian Act.[7]

Later on, he said:

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 entitlements 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 re-examined 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.[8]

Clearly, the conflict of laws approach or rather section 461 of the Bank Act cannot be used exclusively in the determination of the issue at hand; however, I conclude it is a factor in the connecting factors test.

CONNECTING FACTORS TEST

Legislative History:

[15]          First, the Supreme Court of Canada in Williams,[9] reiterated the general legislative purpose of sections 87 and 90 of the Indian Act. Gonthier J., in referring to La Forest J.'s decision in Mitchell v. Peguis Indian Band[10], stated:

. . . 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 untrammeled 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.[11]

[16]          Paragraph 87(1)(b) of the Indian Act exempts from taxation "the personal property of an Indian or a band situated on a reserve". With respect to the legislative purpose of the exemption under the Indian Act, La Forest J. in Mitchell stated that its purpose is "to shield Indians from any efforts by non-natives to dispossess Indians of the property which they hold qua Indians [emphasis added]".[12] In his judgment, La Forest J. stressed the point that the exemption's purpose is not to give an economic advantage to Indians and any property held in the economic mainstream should be held on the same terms as other Canadians. He clarified this principle by referring to an example:

When Indian bands enter the commercial mainstream, it is to be expected that they will have occasion, from time to time, to enter into purely commercial agreements with the provincial Crowns in the same way as with private interests. The provincial Crowns are, after all, important players in the market-place. If, then, an Indian band enters into a normal business transaction, be it with a provincial Crown, or a private corporation, and acquires personal property, be it in the form of chattels or debt obligations, how is one to characterize the property concerned? To my mind, it makes no sense to compare it with the property that enures to Indians pursuant to treaties and their ancillary agreements. Indians have a plenary entitlement to their treaty property; it is owed to them qua Indians. Personal property acquired by Indians in normal business dealings is clearly different; it is simply property anyone else might have acquired, and I can see no reason why in those circumstances Indians should not be treated in the same way as other people.[13]

[17]          Later, in Brant v. M.N.R.,[14] Sobier J. listed the four requirements, which must be met in order for the property of an Indian to be exempt from taxation:

(1) It must be personal property;

(2) It must be owned by the Indian;

(3) The Indian must be taxed with respect of that property; and

(4) The property must be situated on the reserve.[15] [Emphasis added]

[18]          The first three criteria are clearly met in both appeals at hand. It is undisputed that the interests in question are personal property of the Appellants. Both Appellants are Indians as defined in the Indian Act. The Minister has purported to impose tax liability on the interests in question. Only the fourth criterion is at issue in both files. Since Brant, the situs of the property criterion has generated a great deal of case law and academic debates. Different tests have been developed in the past. In Williams, the Court has opted for a purposive approach in determining the situs of the property. The approach is referred to as the "connecting factors" test. Gonthier J. elaborated on this test in Williams as follows:

. . . 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 consideration:

(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 [Emphasis added].

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.[16]

[19]          In applying the "connecting factors" test, the Court would consider the three aspects cited above. It is to be noted that the legislative purpose behind the exemption is the principle stated by the Court in Mitchell. More recently, in determining the situs of investment income, the Tax Court of Canada in Recalma v. Her Majesty the Queen, stated:

...the following connecting elements are considered for determining the situs of the investment income:

(a) the residence of the Appellants;

(b) the origin or location of the capital used to buy the securities;

(c) the location of the bank branch where the securities were bought;

(d) the location where the investment income is used;

(e) the location of the investment instruments;

(f) the location where the investment income payment is made; and

(g) the nature of the securities and in particular;

(i) the residence of the issuer,

(ii) the location of the issuer's income generating activity from which the investment is made, and

(iii) the location of the issuer's property in the event of a default that could be subject to potential seizure.[Emphasis added]

First, it is important to note the nature of the property in question. The property is an income stream from the securities owned by the Appellants in the form of interest. It is not the securities themselves. Thus, the major element is the income stream. The factors listed which point solely to the location or source of the securities themselves are given a lesser weight. These include the origin of the capital that was used to buy the securities and the location of the bank branch where the underlying securities were bought. Also, with respect to where the investment income is used when received, this factor is of lesser importance but nonetheless is a factor. [17]

[20]          The Federal Court of Appeal[18] in reaffirming the Tax Court of Canada's decision in Recalma, also stated:

In evaluating the various factors the Court must decide where it "makes the most sense" to locate the personal property in issue in order to avoid the "erosion of property held by Indians qua Indians" so as to protect the traditional Native way of life. It is also important in assessing the different factors to consider whether the activity generating the income was "intimately connected to' the Reserve, that is, an ‘integral part' of Reserve life, or whether it was more appropriate to consider it a part of ‘commercial mainstream" activity. (See Folster v. The Queen (1997), 97 DTC 5315 (F.C.A.)). We should indicate that the concept of "commercial mainstream" is not a test for determining whether property is situated on a reserve; it is merely an aid to be used in evaluating the various factors being considered. It is by no means determinative. The primary reasoning exercise is to decide, by looking at all the connecting factors and keeping in mind the purpose of the section, where the property is situated, that is, whether the income earned was "integral to the life of the Reserve", whether it was "intimately connected" to that life, and whether it should be protected to prevent the erosion of the property held by Natives qua Natives.

It is plain that different factors may be given different weights in each case [emphasis added]. Extremely important, particularly in this case, is the type of income being considered as attracting taxation. Where the income is employment or salary income, the residence of the taxpayer, the type of work being performed, the place where the work was done and the nature of the benefit to the Reserve are given great weight. (See Folster, supra) Where the income is unemployment insurance benefits, the most weighy factor is where the qualifying work is performed. (See Williams, supra.) Where business income is involved, greater emphasis was placed on where the work was done and where the source of the income was situated. (See Southwind v. The Queen, January 14, 1998, Docket No. A-760-95 (F.C.A.))[19] [Emphasis added].

(ii)            Application of the Connecting Factors Test :

Ms. Audrey Sero

[21]          At issue are interests on the term deposits. In Ms. Sero's case, all of the identified connecting factors support the finding that at all material times, interests earned on the term deposits were not located on a reserve for the purposes of subsection 87(2) of the Indian Act. During the relevant period, neither Ms. Sero nor the Royal Bank was a resident on the reserve. The Royal Bank's assets were located off reserve. The capital that was used to generate the interests in question was earned off reserve. Further, the generating activity from which the investment was made took place off reserve. There are only two factors that tie the interests in question to the reserve. First, the bank branch where the investments were made was located on the reserve. Second, the bank deposits are deemed by the Bank Act to be located on the reserve. Weighing these different factors and in particular considering the nature of the investment income, this Court has reached the conclusion that the interests in question were not situated on a reserve within the meaning of subsection 87(2) of the Indian Act.

Mr. Cyril Frazer

[22]          At issue are interests on the savings account and term deposits, including GICs. With respect to Mr. Frazer, all of the connecting factors, to the exclusion of the income stream of the interests, support the position that the interests in question were situated on a reserve within the meaning of subsection 87(2) of the Indian Act. Mr. Frazer has been a resident on the reserve since his retirement in 1985. The interest-generating capital was earned on the reserve through Mr. Frazer's laundry business which was also located on the reserve. The bank branch where the investments were made was located on a reserve and the Bank Act deems the savings account and term deposits, including the GICs, to be located on the reserve.

[23]          Only one factor remains at issue, namely the nature of the income, and in particular:

(i)             the residence of the issuer;

(ii)            the location of the issuer's income generating activity from which the investment is made; and

(iii)           the location of the issuer's property in the event of a default that could be subjected to potential seizure.

[24]          In the present case, the Royal Bank and its assets were located off reserve. The interests in question were also generated off reserve. As such, an analysis of the nature of the interests in question supports the finding that these interests were not located on a reserve within the meaning of subsection 87(2) of the Indian Act.

[25]          The facts in Recalma are somewhat similar to those in Mr. Frazer's appeal. In Recalma, all of the relevant factors, aside from the nature of the investment income, supported the finding that the income earned in that case was located on a reserve. However, in Recalma, this Court held that with respect to income derived from Bankers Acceptances and mutual funds, greater weight should be placed on the nature of the investment income, in particular the income stream. By placing greater emphasis on the income stream of the interests as well as the location of the bank and its assets, this Court reached the conclusion that income earned from investments in mutual funds and Banker's Acceptances was not situated on a reserve within the meaning of subsection 87(2) of the Indian Act. The Federal Court of Appeal affirmed this Court's findings in Recalma.

[26]          A further reading of the Federal Court of Appeal's reasons in Recalma suggests that the Federal Court of Appeal went further to hold that the same analysis applied by the courts in Recalma is applicable to all cases involving investment income. Since the Federal Court of Appeal's decision in Recalma, this Court, in a line of case law, has applied the Recalma analysis to investment income other than income earned from investments in Banker's Acceptances and mutual funds. In the informal procedure case of Hill v. R..[20], this Court held that interests earned on term deposits at the Royal Bank were not dissimilar from income derived from the Banker's Acceptances described in Recalma. Subsequently, this Court applied the Federal Court of Appeal's analysis in Recalma to the interests earned on term deposits and dismissed the appeal. In the recent case of Lewin v. The Queen, presently under appeal, file number 1999-504 (IT)G (hereinafter "Lewin"), this Court applied the Federal Court of Appeal's analysis in Recalma and held that interests derived from investment certificates with the credit union Caisse Populaire Desjardins were not situated on a reserve within the meaning of subsection 87(2) of the Indian Act.

               

[27]          The facts in this case are indistinguishable from those in Hill and Lewin. As such, when applying the connecting factors test to the investment income in the present case, this Court is bound to apply the Federal Court of Appeal's analysis in Recalma by placing greater emphasis on a single connecting factor, namely the income stream.

[28]          As a consequence, this Court remains bound by the Federal Court's reasoning in Recalma as well as the persuasive value of the line of post-Recalma case law. As such, the appeals are dismissed, with costs.

Signed at Ottawa, Canada, this 25th day of May 2001.

"D. Hamlyn"

J.T.C.C.

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