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Case Commentary: Williams V. Canada S-87 Indian Act; Indian Tax Exemption

SASKATCHEWAN INDIAN      FEBRUARY 1993      v22 n02 p06  
Indian Tax exemption has been recognized under the Indian Act for many years. Under this Act, s.87 provides that:

s.87. (1) Not withstanding any other Act of the Parliament of Canada, or any other 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 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 to any such property (underline added).

The first time s.87 was judicially determined by the Supreme Court of Canada was in 1983 in the case of Nowegijick v. Minister of National Revenue. In that case Nowegijick, an Indian , was employed by an Indian owned corporation head quartered on an Indian reserve. The work was performed off the reserve (logging) but the pay cheques were paid to Nowegijick on the reserve where he lived. Generally speaking the Supreme Court of Canada decided, first of all, that wages is "personal property". Therefore, the income or taxable income of an Indian is exempt from taxation if such income is situated on an Indian reserve. The Court concluded that the test in determining whether or not wages is situated on a reserve is where the debtor (employer) is located. Nowegijick was successful in arguing tax exemption because he was paid his wages from his Band's corporate employer on a reserve where it was head quartered. Since that time battles in the Courts are usually fought over where the Indian's income is situated or situs of the debt.

In the Spring of 1992 the Supreme Court of Canada handed down another Indian tax exemption case called Glen Williams v. Canada. In this case Glen Williams, an Indian was employed and paid on the reserve and as such he paid unemployment insurance premiums. After his employment terminated he received unemployment insurance benefits (UIC) by cheque mailed out of the UIC Vancouver office. The issue then became whether or not the cheques received from Vancouver being off reserve, was income "situated on a reserve". The Supreme Court of Canada had to revisit and consider the Nowegijick case. The result of the Williams case was in favour of Glen Williams. The Court determined that the unemployment insurance income was "situated" on an Indian reserve. In making that conclusion, the Supreme Court of Canada introduced a "connecting factors" test. The connecting factors test will be commented on further below.

The Williams case has now caused legal confusion as to which test is appropriate on a case by case basis. It is apparent that the Williams decision has affected Nowegijick's "situs of the debtor" test because the Court said that such a test has "little or nothing in common with the purpose underlying the Indian Act" (the situs of the debtor test is derived from a body of law known as conflict of laws commonly applied in commercial transactions). Although the Court did not, in my opinion, over rule the Nowegijick case itself, it expressed its rejection of the situs of the debtor" test as the sole or primary determining factor in determining whether unemployment insurance income is situated on a reserve. At least when it comes to UIC benefits, the Court favours the "connecting factors" test.

Connecting Factors.

Under the Williams case, the Supreme Court of Canada spoke of a "proper test" and commented as follows:

(1) identify potentially relevant connecting factors such as the residence of the Indian, where the work was carried out, the location of the debtor (employer), etc.
(2) then analyze the various connecting factors and weigh such factors with reference to three considerations:
(i) purpose of the Indian Act exemption;
(ii) the type of property (i.e. physical or tangible property and intangible property) at issue; and
(iii) the nature or incidence of the taxation of that property.

Unfortunately the Court did not comment on the number of relevant connecting factors that may be used in determining the situs or location of income. This is one source of uncertainty in the Williams case and such uncertainty will likely arise in determining the situs of various kinds of income to the Indian or Band such as income from a store or gas station off the reserve, contract income where work is performed off the reserve, investment income (i.e. interest from savings accounts, term deposits, Treaty land entitlement trust account income and other band deposits, dividends from corporate stock, bonds, bills of exchange, pension funds, etc).

So far as unemployment insurance income is concerned, the Williams case only considered four connecting factors as relevant and the are:

(1) the location of the employer that made the Indian eligible for insurable UIC weeks,
(2) the residence of the UIC recipient Indian,
(3) the place where the cheques are issued from (although the Court also noted that since UIC is paid by the Crown, the Crown is present everywhere in Canada including on Indian reserves),
(4) the location where the work was performed.
And out of the above four relevant connecting factors on UIC income, the Court put most of the weight on where the work was performed (on the reserve). The Court also determined that the residence of Mr. Williams was not as relevant when weighed alongside where the work was performed factor.

National Revenue of Canada Directive

On the 29th of December 1982, National Revenue responded to the Williams case by announcing a directive that it is going to change the way it applies the, Indian Act tax exemption for Bands and status Indians. It stated that "as a result of the [Glen Williams] decision, the salary of an Indian will no longer be exempt merely because it is paid by an employer situated on a reserve". In fact National Revenue will now consider, from now on, the location where the work is carried out as the principle connecting factor. This seemingly simplistic position taken by Revenue Canada appears to be contrary, in my opinion, to what the Court in Williams is trying to say. While flexibility is now to be an important concept in assessing tax liability/ exemption and taking that into account, the Court stated as follows:

"... an overly rigid test which identifies one or two factors as having controlling force has its own potential pitfalls. Such a test would be open to manipulation and abuse, and in focusing on too few factors could miss the purpose of the exemption in the Indian Act as easily as a test which indiscriminately focus on too many."

J. Albert Angus
J. Albert Angus

On flexibility, the Court hinted a direction to be followed by stating as follows:

"In particular categories of cases therefore, one connecting factor may have much more weight than another... This approach preserves the flexibility of the case by case approach, but within a framework which properly identifies the weight which is to be placed on various connecting factors... Determining the situs of intangible property requires a Court to evaluate various connecting factors which tie the property to one location..."

Since the Williams case Revenue Canada did not waste time in starting to assess and tax Indians on a spot-check bases. A few cases have since been determined by the Tax Court of Canada (Norway House, Brant and Mcnab cases and possibly others) but it is too early to tell the direction the Tax Courts and the Appellate Courts will take. Meanwhile, National Revenue say that they will fully enforce their December 29, 1992 directive starting January 1, 1994.

Closing Comments.

This commentary is only a general overview of the Nowegijick and Williams cases and it is not intended to be, and it should not be interpreted to be legal advice to any particular Indian, Band or person. Readers should consult with their own lawyers with respect to the legal consequences applicable to them taking into account their own particular circumstances. This commentary was not intended to review specific areas of Indian Tax exemption such as G.S.T., family allowances, child tax credit, business trusts, corporate tax matters, joint ventures, partnerships, etc. This area of tax exemption to Indians has become a wide and specialized area of law and such overall matters is beyond the scope of this commentary. Also this discussion is deliberately restricted to s.87 Indian Act exemption. S.90 exemption is also different from the s.87 discussed above. Treaty tax immunity is also another discussion altogether and that could be another commentary for another time. On Treaty tax immunity, it is important to note that the first known Federal Court case on Treaties (Treaty 8) has been launched in Alberta by three individuals and we will be monitoring that case as it proceeds.

IT IS VERY IMPORTANT TO NOTE that if you (as an Indian or Band) are ever assessed taxable by Revenue Canada on any kind of income, YOU HAVE ONLY 90 DAYS to file a form known as an OBJECTION. Such forms can be found in any Revenue Canada office or call (in Saskatoon, Sask) (306) 975-4577. If you fail to file an objection within the allowable 90 days you can be assured that the tax collectors will proceed with collections against you. Although one can have an"extended" 90 more days if reassessed on the first assessment, one, however, can never count on it. Filing an "objection" within the 90 day period, will give you the opportunity to "negotiate" with the tax assessment office, and failing that, you will have the opportunity to argue your case in tax court. Of course, that in itself can be costly. Your best plan may well be a good tax plan.