Tax Court of Canada Judgments

Docket: 2001-3163(IT)G

BETWEEN:

GILLES CLEARY,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent. [OFFICIAL ENGLISH TRANSLATION]

____________________________________________________________________

Appeals heard on common evidence with the appeals of Danny Cleary (2001-3164(IT)G) on September 29 and 30 and on October 1, 2004,

at Montréal, Quebec.

Before: The Honourable Justice Pierre Archambault
Appearances:
Counsel for the Appellant:	Serge Fournier
Counsel for the Respondent:	Nathalie Lessard

____________________________________________________________________

JUDGMENT

          The appeals from the assessments made under the Income Tax Act (Act) for the 1992 and 1993 taxation years are allowed and are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that no amount is to be included in the Appellant's income as a benefit resulting from the personal use of the home on Migneault Street.

          The appeals from the assessments made under the Act for the 1994 and 1995 taxation years are dismissed.

          The Respondent is entitled to one set of costs, in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 26^th day of November 2004.

"Pierre Archambault"

Archambault J.

Translation certified true

on this 18^th day of January 2005.

Sophie Debbané, revisor

Citation: 2004TCC711

Date: 20041126

Dockets: 2001-3163(IT)G 2001-3164(IT)G

BETWEEN:

GILLES CLEARY, DANNY CLEARY,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

[OFFICIAL ENGLISH TRANSLATION]

REASONS FOR JUDGMENT

Archambault J.

[1]      Gilles and Danny Cleary are Aboriginals living in Longueuil who are claiming the tax exemption enacted under section 87 of the Indian Act (IA) with respect to business income they say is situated on an Aboriginal reserve in the Lac Saint-Jean region. Under the Income Tax Act (Act), the Minister of National Revenue (Minister) assessed that income earned through a partnership, Atuhk. Atuhk's net income for the financial year ending December 31, 1992, was $1,262,602 and was divided equally between both Appellants. In addition to the taxation issue regarding that business income, which is at issue, there is also the issue of a taxable benefit with regard to Gilles Cleary resulting from the personal use of a home on Migneault Street in Longueuil. The home belongs to the company Constructions Cleary (1992) Inc. (CCI). The Minister added to Gilles Cleary's income taxable benefits of $9,113 for the 1992 taxation year and $5,164 for the 1993 taxation year. At the start of the hearing, counsel for the Respondent acknowledged that the amount of $5,164 should be reduced to $608.

[2]      Lastly, for the 1994 taxation year, the Minister included $5,866 in Danny Cleary's income as a taxable capital gain from the disposition of a vacant lot on Guillet Street in Longueuil. At the start of the hearing, counsel for the respondent acknowledged that the capital gain on that lot should be reduced from $7,821 to $4,321 because of taxes in the amount of $3,500 added to the cost of the lot. Therefore, taxable capital gain should be reduced from $5,866 to $3,241.[1]

Facts

[3]      Gilles Cleary and his son, Danny Cleary, were both "Indians" within the meaning of the IA. Gilles Cleary was born on the Pointe-Bleue reserve, now known as the Aboriginal community of Mashteuiatsh, located near Roberval, in the Lac Saint-Jean region. He left Mashteuiatsh at approximately 12 or 13 years of age. Danny Cleary never lived on that reserve. He was born in Kénogami and, like his father, has been living in Longueuil for many years.

[4]      Both men held all of CCI's voting shares equally. As of 1993, that company held all of the shares of 2431-8107 Québec Inc. (2431). That company, which was formerly known as Les Constructions Cleary Inc. (CCI), operated a construction business for residential homes on the South Shore of Montréal, as did CCI. CCI's headquarters are also located in Longueuil. Not only is this company not running its business on an Aboriginal reserve, its clients are not residents of a reserve.

[5]      The Appellants provided the following explanation with regard to the establishment of Atuhk. Gilles Cleary's brother, a resident of Mashteuiatsh, supposedly informed him of some economic and social problems faced by that Aboriginal community. They included a high unemployment rate, that is, one in two Aboriginals, according to Ralph Cleary, Gilles Cleary's nephew. There was also the problem of idleness among some youth, who were becoming addicted to inhaling gas fumes.

[6]      In order to promote economic development in Mashteuiatsh, the Appellants apparently established Wigwam, a 32-unit construction project divided into eight townhomes. This project used a [translation] "new architectural design that resembles the habitats of our ancestors."[2] The project prospectus refers to a funding plan and selling prices for those homes as well as a description of all partners involved in carrying out the project. Under the heading, [translation] "Funding Plan," it states that the Conseil des Montagnais would save approximately $27,250 based on interest rates in effect in May 1992, which would confirm that the prospectus was prepared at that time. Unfortunately, the testimony of Gilles and Danny Cleary did not further clarify the date of this document.

[7]      In order to carry out the Wigwam project, in the spring of 1992, the Clearys established a new business corporation, Les Constructions Amishk Inc. (Amishk). This corporation was to form a "joint venture" with two construction companies operating out of Mashteuiatsh, that is, B.C. Construction and Les Constructions Paul. A draft agreement between those three companies appears at Exhibit A-1, Tab 23, and sets out the business relationships among the three partners. This document is not signed.

[8]      In addition to the grouping of those three construction companies, the draft agreement stipulated that the materials required to carry out the Wigwam project would be acquired through Atuhk. Thus, on March 25, 1992, Gilles and Danny Cleary filed a declaration at the Protonotary's Office, Firm Names, Superior Court of Québec, that they wanted to do business under the name of Société Atuhk as of March 25, 1992, and that the place of business of this partnership was located at 9 Atuhk Street, in Mashteuiatsh. Gilles Cleary did not personally sign that declaration; instead, he gave his son a power of attorney signed on March 25, 1992, in Longueuil, for the registration of the firm name. Atuhk was to act as construction materials broker and as intermediary for subcontracting agreements. According to Ralph Cleary, the market targeted by Atuhk was not only Mashteuiatsh, but all Aboriginal communities in Quebec.

[9]      According to the Minister's audit report dated December 16, 1998, the prospectus prepared by the Clearys was never submitted to the band council; it was only submitted to its economic development committee. The Wigwam project was apparently never completed. When asked about the reasons for its failure, Danny Cleary stated that he did not know. While he was the one who conceived of the project, he did not negotiate with the band council. He left that responsibility to Ralph Cleary who, in his opinion, was better known on the reserve. At page 15 of his report, the Minister's auditor provided the following as the reason for the failure:

[TRANSLATION]

. . . It would seem that the other partners referred to in the project did not want to get involved in this project because they would have assumed a lot of risk and did not have confidence in either "Atuhk" or in Construction Amishk, directed by Tony Connolly and Ralph Cleary, respectively, because neither had proven itself in the construction field. As for "Gilles" and "Danny," they were not known or not well known within the community; thus, no one could give an opinion about them.

[10]     Since the Wigwam project was never completed, Atuhk's only business activity in 1992 was to act as intermediary between CCI and its suppliers. An agreement dated March 26, 1992, the date after Atuhk's declaration of firm name was filed, was apparently signed between CCI and Atuhk.[3] Page 1 of that agreement sets out that CCI wants to retain the services of Atuhk in order to centralize the purchase of materials and the awarding of sub-contracts. This is an exclusive agreement relating to the purchase of new materials. All construction materials had to be purchased through Atuhk and all sub-contractors had to be hired through Atuhk, with the exception of electricians and fireplace-installation professionals.

[11]     In its Reply to the Notice of Appeal, the Minister said that most of Atuhk's suppliers were off-reserve, on the South Shore of Montréal, and that suppliers' materials ordered by Atuhk were delivered directly to CCI's construction sites, off-reserve. The Appellants admitted this fact. Yet, evidence did not reveal, with regard to the 1992 taxation year, the existence of any supplier on the Mashteuiatsh reserve. The only supplier not located on the South Shore of Montréal was a door and window manufacturer from the Québec region, found by Ralph Cleary. Ralph Cleary also confirmed that nothing had been purchased from the sawmill on the Mashteuiatsh reserve.

[12]     An agreement with Amishk similar to the one entered into between Atuhk and CCI was apparently signed on March 26, 1992. Yet, evidence revealed no transactions between Atuhk and Amishk. Danny Cleary acknowledged that no financial statement had been prepared for Amishk because few transactions had been carried out in its name. In fact, apart for approximately $75, all deposits made in 1992 by Atuhk into its account at the Caisse populaire de Pointe-Bleue were amounts paid by CCI. The auditor's report states the following with respect to those deposits:

[TRANSLATION]

We received from the Caisse Populaire de Pointe Bleue account statements as well as the deposit slips for 1992, 1993 and 1994 regarding "Atuhk" bank account # 4218.

For 1992, we find that the deposits total $6,660,091.94, 99.996% of which came from "CCI", or $6,660,016.94.

...

We can conclude that for 1992 and 1993 "CCI" was "Atuhk's" client.

(Page 17 of the auditor's report)

[13]     It is important to note that apparently some transactions also occurred in 1993 and 1994 between Atuhk and CCI and perhaps with other clients. However, no financial statements were prepared for those two taxation years and the Minister did not see fit to assess any income earned throughout those years. No explanation was provided regarding that rather surprising situation.

[14]     In 1992, 1993 and 1994, Atuhk had perhaps up to four employees. However, evidence is rather vague with regard to the periods during which those employees apparently held their employment. The following information regarding Atuhk's employees appears in the auditor's report (page 16):

[TRANSLATION]

Information to that effect is not unanimous. According to some, Ralph Cleary and Dominic Gill worked for "Atuhk." According to others, "Atuhk" and the other companies owned by "Gilles" and "Dany" [sic] had two (2) employees: Tony Connolly and Ralph Cleary. According to yet another person, the only known "Atuhk" employee was Tony Connolly.

[15]     One of the four persons, Dominic Gill, apparently held employment for only a few days. It appears that at the start of Atuhk's operations, Tony Connolly was in charge of operations. His name moreover appears in the aforementioned agreements entered into with CCI and Amishk. Amishk's representative regarding the agreement with Atuhk is Ralph Cleary, who apparently then became an Atuhk employee. It even appears that he ended up replacing Mr. Connolly. Ralph Cleary had earned a bachelor's degree in administration, human resources management, two years prior to starting to work for Atuhk and Amishk. During those two years, he worked for the Conseil des Montagnais in the human resources department.

[16]     According to Ralph Cleary, it was mostly Mr. Connolly who looked after receiving orders for the provision of construction materials for CCI. He would apparently contact Estelle, the clerk hired by CCI in Longueuil. It is Ralph Cleary who apparently dealt with the suppliers. However, he acknowledged that some requests for credit made to suppliers in the Montréal region had been faxed directly to CCI. In addition, Ralph Cleary said that Danny Cleary established the price list for products sold by Atuhk to CCI. According to Ralph, Atuhk's profit margin was between 5% and 10%. According to Danny Cleary, Atuhk calculated a profit margin of 10% or 11% and there was no detailed selling price list for the various materials. As we will see later, Atuhk's gross profit margin for 1992 was almost two times greater.

[17]     Ralph Cleary indicated that two signatures were needed on Atuhk's cheques, including one from Gilles or Danny Cleary. As both of them lived in Longueuil, cheques had to wait until they were on site or had to be sent by mail or by courier, even though Ralph Cleary stated that he had to sign cheques on a daily basis. He confirmed that Atuhk's major decisions were made by the owners. According to Ralph, it was Danny Cleary himself who tried to develop new markets in Quebec's other Aboriginal communities. However, Danny confirmed in his testimony that he did not take specific steps in that regard. He limited himself to mentioning his project only if the opportunity to do so presented itself. Even though he personally negotiated with the Montagnais of Mashteuiatsh with respect to the Wigwam project, Ralph Cleary was incapable of explaining why that project did not get off the ground.

[18]     Despite the fact that Danny and Gilles Cleary stated a number of times that they went to Mashteuiatsh regularly, it is rather surprising that during his audit, the auditor was unable to find travel expenses indicated by Atuhk for the partners regarding their commuting between Longueuil and Mashteuiatsh. Furthermore, Gilles Cleary was unaware of what was done regarding the Wigwam project. He also did not know where 9 Atuhk Street or 131-B Ouiatchouan Street were located. He had no knowledge of Amishk's activities or of its earnings. Lastly, Gilles Cleary had no recollection and no knowledge of whether he had invested $25,000 in Atuhk or whether he had received $1.2 million, or half that amount worth of CCI shares. Danny Cleary gave the auditor the wrong information regarding where 9 Atuhk Street was located. Yet, Danny Cleary had said that he was more actively involved on the Mashteuiatsh reserve at the start of Atuhk's operations. Consequently, it is difficult to understand that he was unable to correctly inform the Minister's auditor regarding Atuhk's location at the start of operations. Lastly, neither Danny Cleary nor Gilles Cleary knew Dominic Gill.

[19]     While the Respondent did not contest the existence of Atuhk before the court, evidence submitted by the Appellants clearly reveals that this partnership filed the documentation required to establish its existence, including the declaration of firm name, the permit it acquired from the band council and the registration numbers from the taxation authorities.

[20]     In Atuhk's only financial statements-which were prepared by Samson Bélair Deloitte & Touche (also CCI's accountants)-that is, those of December 31, 1992, dated January 29, 1993, Atuhk paid wages of $30,680 and benefits of $2,713. Atuhk's sales were $7,062,829[4] and the cost of sales was $5,749,275. Net earnings were $1,262,602. These net earnings represent a net profit margin of 17.9% while the gross profit margin is 18.6%.[5]

[21]     Among Atuhk's assets, there was office equipment and furniture that cost $9,774. According to Ralph Cleary's testimony, this furniture included desks, chairs, a computer, a fax machine and a photocopier. Rent for the financial year ending December 31, 1992, was $1,900. According to Danny Cleary's testimony, Atuhk did business at 9 Atuhk Streetfor only a few weeks before it was transferred to 131-B Ouiatchan Street. Assuming that the $1,900 rent covers an eight-month period, it would represent monthly rent of $237. Although Danny Cleary described Atuhk's activities as purchase and resale, there was no warehouse on the reserve.

[22]     Ralph Cleary said that he had never seen the financial statements prepared by Samson Bélair. He also did not recall how the business' records were kept. He did not know why Atuhk had not grown more or why more effort was not made in relation to the two construction companies on the reserve, that is, B.C. Construction and Les Constructions Paul.

[23]     CCI's gross profit margin was 10% in 1992 and 17% in 1993. Yet the gross profit margin for 2431 was 20.2% for the 1991 financial year and 25.7% in 1990 (see auditor's report, at pages 10 and 11, Exhibit I-9). It should be recalled that 2431 was formerly known as Les Constructions Cleary Inc. and that its name was changed on February 8, 1993. This company was incorporated on April 6, 1987. CCI was incorporated on February 7, 1992. It appears that it was incorporated as a result of the separation of Gilles Cleary from his wife, Mariette Gagnon. She was not from the Mashteuiatsh reserve.

[24]     At page 20 of its report, the auditor stated the following as information gathered when he investigated further.

[TRANSLATION]

11. - Despite our requests, "CCI's" invoices for purchases made at "Atuhk" were never submitted to us;

. . .

13. - That the manager of the C.P. de Pointe Bleue never advised the Clearys to set up on the reserve. The only justification he saw for the action taken was the reduced tax burden for "CCI";

14. - That a good share of "CCI's" profits were transferred to "Atuhk".

[25]     When asked whether tax considerations led them to set up Atuhk on the Mashteuiatsh reserve, Danny Cleary did not provide a direct answer to the question. He limited his comments to saying that all partnerships that involve Aboriginals are either general partnerships or limited partnerships. However, he acknowledged that he had used the services of a tax expert.

Analysis

Tax exemption under section 81 of the ITA

[26]     The relevant provision to resolve the issue of the exemption of Atuhk's profits is found at paragraph 81(1)(a) of the Act, which provides:

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

(a)         Statutory exemptions - 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;

[Emphasis added]

[27]     The relevant provision from the other act is section 87 of the IA, which sets out the following:

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.

(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 of 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.

[Emphasis added]

[28]     Since the decision rendered by the Supreme Court of Canada in Nowegijick v. The Queen, [1983] 1 S.C.R. 29, the income earned by an Aboriginal may be deemed the personal property of an Indian for the purposes of section 87 of the IA. What must be determined in this case is whether the income was situated on the reserve within the meaning of the IA. The leading case on the matter is another Supreme Court of Canada case: Williams v. Canada, [1992] 1 S.C.R. 877. In this case, the Supreme Court developed the approach the courts must follow in determining the situs of Indian property. Gonthier J. in particular relied on the in-depth analysis of La Forest J. in Mitchell v. Peguis Indian Band, [1990] 2 S.C.R. 85. In that decision, La Forest J. described the purpose of sections 87 and 89 of the IA, as noted by Gonthier J. at paragraph 16 in Williams:

. . . the purpose of these sections was to preserve the entitlements of Indians to their reserve lands and to ensure that the use of their property on their reserve lands was not eroded by the ability of governments to tax, or creditors to seize. The corollary of this conclusion was that the purpose of the sections was not to confer a general economic benefit upon the Indians (at pp. 130-131) . . .

[Emphasis added]

[29]     At paragraphs 18 and 19 of the Williams decision, Gonthier J. went on to add:

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.

[Emphasis added]

[30]     Gonthier J., at paragraph 32, concluded the following with regard to the method that had to be applied in determining the situs of unemployment insurance benefits:

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 reexamined in light of the purposes of the Indian Act. It may be that the residence of the debtor remains an important factor, or even the exclusive one. However, this conclusion cannot be directly drawn from an analysis of how the conflict of laws deals with such an issue.

[Emphasis added]

[31]     Lastly, Gonthier J. established the following approach at paragraph 37:

. . . 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 added]

[32]     It should also be noted that the Federal Court of Appeal had, on numerous occasions, the opportunity to analyze the situs of business income, notably in Southwind v. Canada, [1998] F.C.J. No. 15 (Q.L.); 98 DTC 6084, and in Bell v. Canada, [2000] F.C.J. No. 680 (Q.L.). In Southwind, Crown counsel had suggested the following factors in deciding whether business income was situated on the reserve: (1) the location of the business activities, (2) the location of the customers (debtors) of the business, (3) where decisions affecting the business are made, (4) the type of business and the nature of the work, (5) the place where the payment is made, (6) the degree to which the business is in the commercial mainstream, (7) the location of a fixed place of business and the location of the books and records, and (8) the residence of the business' owner.

[33]     At paragraph 14 of that decision, Linden J. expressed the following opinion:

14         According to the Supreme Court in Mitchell, where an Indian enters into the "commercial mainstream", he must do so on the same terms as other Canadians with whom he competes. Although the precise meaning of this phrase is far from clear, it is clear that it seeks to differentiate those Aboriginal business activities that deal with people mainly off the Reserve, not on it. It seeks to isolate those business activities that benefit the individual Aboriginal rather than his community as a whole, recognizing, of course, as Mr. Nadjiwan says, that a person benefits his or her community by earning a living for his family.

[Emphasis added]

[34]     In my opinion, the factors set out in Southwind are perfectly relevant for the purposes of this appeal. I will therefore analyze them individually and add others that also appear relevant to me here.

(1) The location of the business activities

[35]     It is clear that Atuhk performed part of its commercial activities on the Mashteuiatsh reserve. Atuhk in fact had a place of business there, which it leased and where furniture that cost over $9,000 was located. There were desks, chairs, a computer, a fax machine, a photocopier, etc. This equipment might have been enough. There was also at least one employee-perhaps two or even three-who took orders from CCI and who, if the evidence is to be relied on, took the necessary steps to deliver the construction materials to the South Shore. If the location of the business activities test had to be strictly applied, it would be clear that the business income could be situated on the reserve. However, two comments need to be made. First, this test is not the determinative one, since its importance must be weighed in light of the purpose of the Act, that is, it must be determined whether the Aboriginal holds the property in question as part of the entitlement of an Indian qua Indian on a reserve. Secondly, even if it can be considered that part of Atuhk's place of business was situated on a reserve, few components show the permanence and significance of that place of business. There was also no evidence of accounting books and records kept on the reserve.

(2) The location of the customers of the business

[36]     While counsel for the Appellants argued strenuously that it was important to consider the business plan followed by the Appellants in establishing Atuhk, whose plan was to serve a clientele on reserves, the reality of the matter is that Atuhk's only client during 1992 was CCI, which ran its business hundreds of kilometres from the reserve. No client on the reserve was named.

(3) The location of the business' suppliers

[37]     In addition to the factors set out in Southwind, we must also add the location of the business' suppliers, given the intermediary nature of Atuhk's business. In this case, the evidence reveals that not only were Atuhk's suppliers located off the reserve, they were situated over 400 kilometres (i.e. a drive of over 5 hours[6]) from the reserve. Moreover, not only were products sold by Atuhk to CCI located over 400 kilometres from the reserve, but they were also very close to CCI, its only client in 1992. In fact, almost all suppliers were located on the South Shore of Montréal, where CCI operated its business.

(4) The residence of the business' owners and the place where decisions affecting the business were made

[38]     An important factor to note here is the residence of the two Atuhk partners. Both partners had been residents of Longueuil for many years. Gilles Cleary had left the Mashteuiatsh reserve when he was 12 or 13 years old, and his son Danny had never lived there. While they indicated that they visited the reserve regularly, evidence on this point is far from convincing. In fact, it is rather surprising that Gilles Cleary was not able to say where Atuhk and Ouiatchouan Streets were located, and he was unable to name employees of Atuhk and Amishk. In addition, it should be added that Gilles Cleary was unaware of the activities of Atuhk and Amishk. Lastly, there were no travel expenses indicated by Atuhk regarding both partners' commuting between Montréal and Roberval.

[39]     Signing cheques certainly does not constitute making a major decision, though it does reveal an important degree of control over the activities of a business. Nonetheless, both partners lived on the South Shore of Montréal; this supports the finding of fact that this is where the most important decisions affecting the business were made. Ralph Cleary, at least at some point, appeared to be the person in charge of Atuhk's activities in Mashteuiatsh. However, he does not appear to have played a major role in the operation of Atuhk: specifically, it was Danny Cleary who determined the prices of products sold to CCI. Ralph Cleary did not look after the accounting and did not supervise the preparation of financial statements. Ralph did not even develop new markets in other Aboriginal communities: Danny Cleary was in charge of doing that.

(5) The type of business and the nature of the work

[40]     It is important to note that the very nature of the services provided by Atuhk was very different from that of services provided by a business such as a sawmill. Atuhk required very little investment, few fixed assets and few employees. The only asset used in the operation of its business was the furniture, which originally cost $9,700. There was no need to own a large amount of space, including a warehouse. This business could have been operated from any location. All that was important was a telephone connection with clients and suppliers. It certainly would have been more convenient if the business was located in the same location as the client and all, or almost all, of its many suppliers. Lastly, the minimal role played by Atuhk's employee or employees should also be noted. In 1992, those employees were incapable of generating an activity other than to serve Atuhk's sole client, CCI, which belonged to Atuhk's partners.

(6) The place where the payment is made

[41]     The evidence reveals that a large number of deposits were made at the Caisse populaire de Pointe-Bleue. However, it should be noted that most of the money deposited into that account was moved through that account. A very small amount remained on the Mashteuiatsh reserve. Of the $6.6 million that flowed through the Caisse populaire de Pointe-Bleue accounts, only an amount under $34,000 was used to pay wages and employee benefits for one or more of Atuhk's employees living in Mashteuiatsh. The remaining significant amount was $1,900, which was used to pay the rent. It should be noted that the money was used more to pay the suppliers in the Montréal region or to pay profits to Gilles and Danny Cleary, profits which did not remain on the reserve. A good part of these benefits apparently did not even flow through the Caisse populaire de Pointe-Bleue, if the accounting entries that show a capitalized amount of $1 million on CCI's records are to be relied on. Most of the $1.2 million in profit was apparently not even deposited on the Mashteuiatsh reserve.

(7) Degree to which the business is in the commercial mainstream

[42]     Atuhk acted as intermediary in the provision of construction materials from the South Shore, delivered on the South Shore and used on the South Shore. This is a purely commercial activity run primarily off the Mashteuiatsh reserve.

[43]     An overall analysis of all of these components reveals that $1.2 million in profit made by Atuhk essentially constitutes an artificial extraction of profit made by CCI in the operation of its business in the Montréal region. It can be recalled that 2431, previously run by Gilles and Danny Cleary, had a gross profit margin of approximately 20% to 25% before they introduced an intermediary such as Atuhk between their business-initially operated by 2431 and then by CCI-and their suppliers. Once Atuhk came into the picture, CCI's gross profit margin was reduced to half, falling to approximately 10%.

[44]     Even if Danny Cleary did not want to admit to the existence of tax planning, the evidence points to that. According to the auditor's report, the manager of the Caisse populaire de Pointe-Bleue had this impression. There is also the fact that Danny Cleary retained the services of a tax expert working for a well-known Quebec accounting firm. In any case, whether the project in Mashteuiatsh is a product of humanitarian considerations, as submitted by Ralph and Danny Cleary, or a product of financial-planning opportunism, the reality is this: Atuhk's profits are essentially profits related to the construction company, CCI, which is run on the South Shore of Montréal. There were very few economic benefits for the Aboriginal community of Mashteuiatsh: only wages and employee benefits totalling less than $34,000 and the payment of $1,900 in rent, whereas profits realized by Atuhk were posted at $1.2 million, including one million that never even flowed through the Mashteuiatsh reserve.

[45]     Under the circumstances, it is difficult to find that, for the purposes of the ITA, this business income was situated on a reserve because it constituted property held by an Indian qua Indian. It is also difficult to find that it would be inappropriate to tax such amounts because it would erode the property held by an Indian on a reserve. In this case, the Appellants had decided to live outside their Aboriginal reserve. They carried out activities outside the lands reserved for their use. They were thus subject to the same conditions as other Canadians. As indicated by Gonthier J. in Williams, whether the Indian wishes to remain within the protected reserve system or integrate more fully into "ordinary commercial purposes in society" is a choice left to the Indian. The evidence in this case clearly shows that the Appellants integrated themselves into the business world outside the reserve, and quite successfully, in my view. It is even likely that their lack of connection to the reserve explains, to a large degree, the failure of the Wigwam project. According to the auditor, the Appellants were not well known by the band council and Ralph Cleary had little experience in construction.

[46]     For all these reasons, I find that the Appellants held no property as Indians on a reserve and that the Atuhk business income was subject to the Act.

Calculation of capital gain from the vacant lot

[47]     In his testimony, Danny Cleary indicated that he had purchased the vacant lot on Guillet Street in order to build a residence and that he had then sold it to CCI for what it had cost him to acquire and hold the land. In addition to the purchase price (which included the goods and services tax and transfer taxes), Mr. Cleary had to incur costs for annual property taxes and for landscaping, particularly levelling. In my opinion, even if it were possible to find that a portion of those expenses could be capitalized and therefore included in the cost of the land-I am thinking here of the cost of levelling the lot-the evidence in no way revealed the amount of those expenses. With no evidence, I am unable to find that the amount determined as the adjusted cost base for the vacant lot was incorrect.

Use of the house on Migneault Street

[48]     When Gilles Cleary filed his income tax return for 1992, he indicated that he was living at 388 Migneault Street in Longueuil. Furthermore, when CCI borrowed $98,900 from Fiducie Desjardins Inc. on July 20, 1993 (Exhibit I-1, Tab 14), the notary indicated in the loan contract that Gilles Cleary, who had become a party to the contract, lived at 388 Migneault Street in Longueuil. The Minister thus had factual elements that could support that Mr. Cleary was living at that address. During their testimony, Gilles and Danny Cleary stated that 388 Migneault Streetwas a model home where CCI had its offices and that Gilles Cleary had never lived there. Although I may have some doubts about the probative value of the testimony of Messrs. Cleary, as their testimony was not corroborated by independent witnesses, I am ready to give them the benefit of the doubt and find that the residence in question was not used for personal purposes by Gilles Cleary. As a result, the Minister's assessment is incorrect on this point.

[49]     For all these reasons, the appeals by Gilles Cleary regarding the 1994 and 1995 taxation years are dismissed. Those for 1992 and 1993 are allowed and the assessments are referred back to the Minister for reconsideration and reassessment on the basis that no amount is to be included in Gilles Cleary's income as a benefit from the personal use of the residence on Migneault Street.

[50]     Danny Cleary's appeals regarding the 1992 and 1995 taxation years are dismissed. His appeal regarding 1994 is allowed and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that the amount of taxable capital gain from the sale of the vacant lot on Guillet Streetis $3,240.75 rather than $5,866.

[51]     Given the results obtained and the fact that the Appellants' appeals were heard on common evidence, the Respondent is awarded one set of costs.

Signed at Ottawa, Canada, this 26^th day of November 2004.

"Pierre Archambault"

Archambault J.

Translation certified true

on this 18^th day of January 2005.

Sophie Debbané, revisor

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