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First Nations and Taxation of Interest Investment Income

26 Jul 2011

On 22 July 2011, the Supreme Court of Canada ("SCC") concurrently released two decisions relating to the taxation of interest income of an Indian from a financial institution located on an Indian reserve. The majority decisions in Bastien Estate v. Canada ("Bastien") and Dube v. Canada ("Dube") establish and develop an analytical framework for determining whether personal property, both tangible and intangible, is situated on a reserve and exempt from taxation by virtue of the Indian Act. Taxand Canada looks at the respective decisions that set new important precedents.

The Appellant is the estate of the late Rolland Bastien. Mr. Bastien was a status Indian of the Huron-Wendat Nation, who resided on the Wendake Reserve his whole life and operated a moccasin manufacturing business on the Reserve between 1970 and 1997. A portion of the business' income and proceeds of sale of the business was invested in term deposits with Caisse populaire Desjardins du Village Huron (the "Caisse"), which was solely located on the Wendake Reserve. Mr. Bastien considered the interest income from the deposits to be personal property situated on a reserve, and thus covered by the Exemption. The Minister of National Revenue ("Minister") took a contrary position, and included the interest income in Mr. Bastien's income for 2001. The Appellant was unsuccessful in both the Tax Court of Canada ("TCC") and the Federal Court of Appeal ("FCA",) but prevailed in the SCC. The sole issue to be decided was whether the interest income was personal property situated on a reserve.

The majority of the SCC overturned the decisions of both the TCC and FCA, which held that the Exemption was inapplicable to the interest income because the Caisse generated the revenue to pay the interest outside of the reserve in the "economic mainstream". Thus, in the view of the TCC and FCA, the interest income was not situated on the reserve.

The majority held that all the relevant factors that connect the interest income to the reserve should be given considerable weight. Of principal importance were the factors that debtor of the obligation, the Caisse, was located only on reserve, the loan transaction giving rise to the interest income was concluded on reserve and the interest income was payable on reserve. Moreover, the majority also appeared to place some weight on the fact that the source of the capital used to purchase the term deposits was Mr. Bastien's business activity on reserve and the fact that he resided on reserve.

The appeal in Dube was heard at the same time as Bastien. The Appellant in Dube, Mr. Dube, lived part time, and owned real property, off-reserve. Mr. Dube is an Attikamek Indian, and a member of the Obedjiwan Reserve since birth. He used the services of the Caisse populaire Desjardins de Pointe-Bleue (the "Caisse Pointe-Bleue"), situated on another reserve, since there were no financial institutions on the Obedjiwan Reserve. Mr. Dube operated a passenger transport business between the Obedjiwan Reserve and Roberval. As in Bastien, Mr. Dube earned interest income from term deposits with Caisse Pointe-Bleue, which he considered exempt from tax pursuant to the Exemption. The Minister disagreed and included the interest income to Mr. Dube's income for the tax years 1997 to 2002. Mr. Dube unsuccessfully appealed to the TCC and FCA. However, he prevailed in the SCC.

Taxand's Take

The majority decisions in Bastien and Dube are a strong affirmation of the tax exemption under the Indian Act and of the rights of First Nations. They recognise the evolving circumstances of life on reserves, and permit the tax exemption to take account of this evolution. In so doing, these decisions reverse the trend of court decisions in recent years toward narrowing the scope of the Indian Act tax exemption.

Read the full article from Taxand Canada here

Your Taxand contact for further details is:
Eric Koh
T. +1 613 786 0121

Taxand's Take Author