Supreme Court upholds tax exemption on investment income

Recent decisions by the Supreme Court of Canada could have far reaching implications for investments made on First Nations reserves.

“After relentless efforts over many years by the Canada Revenue Agency to erode the First Nations tax exemption, the Supreme Court has upheld the exemption and affirmed its ongoing relevance,” said Assembly of First Nations National Chief Shawn A-in-chut Atleo.

On July 22, Canada’s top court made a joint ruling in the Bastien and Dubé cases that term deposits situated on reserves are property income under the Income Tax Act and are therefore exempt from taxation in accordance with Sect. 87 of the Indian Act.

“The wider implication is it’s an entire area of income-generating activity that can potentially be exempt from taxation,” said Jeff Pniowsky, a tax dispute resolution lawyer.

Pniowsky’s Winnipeg-based law firm Thompson Dorfman Sweatman represented the Assembly of Manitoba Chiefs, which had intervener status in the joint case.

Pniowsky said the two cases, although separate, were heard together and ruled on together because of their similarities. Both dealt with the taxation of interest income of an Indian from a financial institution located on an Indian reserve. Both Bastien’s estate and Dubé lost earlier decisions in the Tax Court of Canada and the Federal Court of Appeal. The decision to overturn the lower courts’ rulings was not unanimous on the part of the Supreme Court.

“The majority. . . (said) significant weight must be given to the most important factors, that is, that the contractual obligation or loan giving rise to the interest income was concluded on reserve, the debtor financial institution was located on reserve and the obligation was performed, in the form of payment of interest, on reserve,” wrote Eric Koh, of Gowling Lafleur Henderson, which represented the AFN, the Grand Council of the Crees (Eeyou Istchee) and the Union of Nova Scotia Indians, which received intervener status in both cases.

“We attacked the commercial mainstream aspect of previous court decisions where they were focusing on the commercial-like nature of the income almost to the point where if it’s of a commercial-like nature it loses its quote-unquote Indian-ness, which is not only offensive, our argument is that it was wrong,” said Pniowsky.

The Supreme Court agreed with that argument and rejected Revenue Canada’s claim that the tax exemption did not apply to income in the commercial mainstream and that it only applied to income connected to a “traditional Indian way of life.”

Much of the arguments presented were technical, said Pniowsky, who noted that his client was the only representation west of Ontario.

The Supreme Court’s ruling could result in a new form of income for First Nations, said Pniowsky.

“It can open the door to banking on-reserve. It certainly opens the door to First Nations having the ability to lend money out on a commercial basis on reserve to individuals who aren’t necessarily from the reserve,” he said.

“(The Supreme Court’s majority decisions) recognize 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,” said Koh.

Also granted intervener status was the Chiefs of Ontario.