Judgments

[1997] 3 F.C. 269

A-595-94

F. Marianne Folster (Appellant)

v.

Her Majesty the Queen (Respondent)

Indexed as: Canada v. Folster (C.A.)

Court of Appeal, Isaac C.J., Pratte and Linden JJ.A.—Winnipeg, April 10; Ottawa, May 22, 1997.

Native peoples — Taxation — Exemptions — Personal property of Indian situated on reserve — Appellant employed at Government-funded hospital located adjacent to reserve (formerly on reserve), serving mostly status Indians on reserve — Difficulty in formulating rule governing situs of intangible property (such as wages) — Purpose of legislative provision must be considered in selecting criteria for determining situs — Policy to prevent erosion of Indians’ property held qua Indians — Purpose not to remedy Indians’ economic disadvantage — Indians’ employment income not tax exempt if earned in “commercial mainstream” — Connecting factors test — Weight to be assigned each factor varies from case to case — Necessity for purposive interpretation to preserve substance of tax exemption, economic climate of reservations having changed — Trial Judge accorded excessive weight to geographical location of employment, employer’s place of residence — More weight to be placed on: circumstances of taxpayer’s employment, place of residence, hospital’s history — Tax exemption necessary herein to avoid erosion of Indian entitlement — Income not earned in commercial mainstream.

Income tax — Exemptions — Indians — Personal property of Indian situated on reserve — Employment income — Employee of Federally-funded hospital not on but adjacent to reserve, patients mostly Indians — Reliance on test for situs unconnected to purpose of tax exemption arbitrary in application — Purpose of exemption neither to afford Indians unlimited protection from taxation nor to remedy economic disadvantage — Indian not tax exempt if entering “commercial mainstream” — Ultimate question: whether taxing particular property causing erosion of entitlement of Indian qua Indian — Trial Judge’s “slippery slope” worries, that allowing exemption herein meaning all Indians resident on reserves escaping income tax, unjustified as ignoring factors connecting employment income to reserve — Revenue Canada guidelines useful in routine cases but Court having to conduct relative weighting of connecting factors in each case.

Construction of statutes — Indian Act, s. 87 exempting from taxation Indians’ personal property situated on reserve — Situs of employment income — Situs principle firmly entrenched in language of section — Reliance on test for situs unconnected to purpose of tax exemption arbitrary in application — Policy of legislation: shield Indians from being dispossessed of property by non-natives — Purpose neither to afford Indians unlimited protection from taxation nor to remedy economic disadvantage — Court not to stretch tax exemption beyond what supportable by purposive reading of legislation — Purposive interpretation necessary to preserve substance of tax exemption, economic situation on reserves having changed since enactment — Statutes express will of Parliament and, unlike treaties, ambiguities not necessarily resolved in Indians’ favour — Revenue Canada’s interpretation guidelines useful in routine cases but Court decides each case by relative weighting of connecting factors.

This was an appeal from the decision of Cullen J. of the Trial Division (reported at [1995] 1 F.C. 561 allowing the Minister’s appeal from a decision of the Tax Court of Canada in taxpayer’s favour.

The facts were that taxpayer, Folster, was an Indian who resided on a reserve but was employed outside the boundaries of the reserve at the Norway House Indian Hospital. Some 80% of the patients were status Indians and their care was funded by Health and Welfare Canada.

Under Indian Act, section 87 the personal property of an Indian situated on a reserve is tax exempt. Paragraph 90(1)(a) provides that, for the purposes of sections 87 and 89, personal property purchased by Her Majesty with Indian moneys or moneys appropriated by Parliament for the use and benefit of Indians or bands are deemed to be situated on a reserve.

The Trial Division Judge held that taxpayer’s employment income was not situated on a reserve and accordingly taxable.

Held, the appeal should be allowed.

For years, courts have attempted to come up with a rule for determining whether an Indian’s property is “situated on a reserve”. Formulating a rule covering intangible property such as wages and other income was difficult because application of the situs rule to property lacking physical existence was bound to be notional and risked being arbitrary. Yet the situs principle was firmly entrenched in the language of section 87.

At one time, situs was taken as the residence of the debtor: the location where the debt could be enforced. That rule made sense for conflict or laws purposes but was unsatisfactory in achieving Parliament’s purpose in enacting section 87. Courts finally recognized that a more sophisticated approach was needed. Reliance on a test for situs which is unconnected to the purpose for the tax exemption provision inevitably becomes arbitrary in its application. Unless the purpose of the legislative provision which imposes the situs requirement governs the selection of the criteria used to determine the situs of the property, there is no principled basis for selecting one criterion over another.

The policy of the legislation was to shield Indians from any efforts by non-natives to dispossess them of property which they hold qua Indians: their land base and the chattels thereon. The purpose of section 87 was neither to afford the Indians unlimited protection from taxation nor to remedy their economic disadvantage. It was not for the courts to attempt to achieve the latter purpose by stretching the tax exemption beyond what can be supported by a purposive reading of the legislation. Thus, if an aboriginal person should enter Canada’s “commercial mainstream”, he would not be exempted from taxation on his employment income.

The “connecting factors” test had been adopted to overcome the problems inherent in attributing a situs to intangible property on the basis of a single criterion such as the location of the debtor or the location where payment was made. The relevance of the “connecting factors” has to be assessed with a view to promoting the purpose of section 87. It had to be added that the weight to be assigned each factor may vary from one case to another. The ultimate question to be answered is as to whether to tax that form of property in that manner would bring about the erosion of the entitlement of the Indian, qua Indian, on a reserve and thus jeopardize his traditional way of life.

It had to be kept in mind that statutes are an expression of the will or Parliament so that, unlike treaties, every ambiguity did not have to be resolved in a manner favourable to the Indians. Furthermore, a purposive interpretation of the section was required to preserve the substance of the tax exemption, the economic climate of the reservations having greatly changed since its enactment.

In the case at bar, the Trial Division Judge, upon weighing the connecting factors, held against taxpayer although remarking that the result was anomalous. His reasoning was that to permit a tax exemption herein would exceed section 87 by redressing economic disadvantage. The Judge below erred in according excessive weight to the geographical location of the employment and the employer’s place of residence, the employer herein being the Government of Canada. Inadequate weight was assigned to the actual circumstances of taxpayer’s employment, her place of residence (the reservation) and the history of the hospital (place of employment).

The Supreme Court of Canada not as yet having dealt with employment income in a case such as this, it was up to this Court to decide what factors were relevant herein and the relative weight to be accorded them.

While the Norway House Indian Hospital is no longer located on reserve land—having been relocated by Government to its current site after the original building burned down—it is in a remote area where the difference between reserve and non-reserve land is not readily apparent and a substantial majority of patients continue to be Indians. It was of interest to know that, although the hospital was relocated so long ago as 1952, it was not until 1968 that Indian Affairs and Northern Development Minister Chrétien wrote a letter advising that the policy had been unilaterally changed such that income earned from employment at institutions on Crown—owned land and not on a reserve was taxable.

Just as the exact location of the place of employment should not play a decisive role herein, so also the employer’s place of residence was here not a major factor. It is problematic to establish the situs of a Crown agency as at any particular place within Canada. The Crown can be sued anywhere in Canada. In the instant case, taxpayer was paid by cheque issued by a Government office at Winnipeg but that did not speak meaningfully to the question whether her employment income was situated on a reserve. More important was the fact that funds were advanced in discharge of the Crown’s responsibility for the Indians’ health care and, in particular, that of Indians at the Norway House Indian Reserve.

Upon an assessment of all of the circumstances of taxpayer’s employment, the tax exemption had to be accorded to avoid the erosion of an Indian entitlement. The personal property at issue was income earned by an Indian who is resident on a reserve and who works at a hospital once located on, but now adjacent to, the Reserve, the needs of which it services.

The Trial Judge’s “slippery slope” worries—that to accord the tax exemption herein could mean that all Indians resident on reserves, regardless of where or for whom they worked, would escape the income tax” ignored the factors connecting appellant’s employment income to the reserve. His Lordship’s reasoning overlooked the fact that her work was, for the most part, in aid of people from the Reserve. Taxpayer was not earning her income in the general commercial mainstream.

The Court was aware that Revenue Canada had issued guidelines for the application of section 87. But while they may be useful in routine cases, when it comes right down to it, the Court must in each case conduct a relative weighting of connecting factors.

STATUTES AND REGULATIONS JUDICIALLY CONSIDERED

An Act for the protection of the Indians in Upper Canada from imposition, and the property occupied or enjoyed by them from trespass and injury, S.C. 1850, c. 74, s. IV.

Income Tax Act, S.C. 1970-71-72, c. 63, s. 81(1)(a) (as am. by S.C. 1980-81-82-83, ch. 140, s. 46).

Indian Act, R.S.C. 1970, c. I-6, ss. 2(1) “Indian”, 87 (as am. by S.C. 1980-81-82-83, c. 47, s. 25), 90(1).

Indian Act, R.S.C., 1985, c. I-5, s. 87(1)(b).

Indian Act (The), 1876, S.C. 1876, c. 18, s. 64.

CASES JUDICIALLY CONSIDERED

APPLIED:

Nowegijick v. The Queen, [1983] 1 S.C.R. 29; (1983), 144 D.L.R. (3d) 193; [1983] 2 C.N.L.R. 89; [1983] CTC 20; 83 DTC 5041; 46 N.R. 41; Williams v. Canada, [1992] 1 S.C.R. 877; (1992), 90 D.L.R. (4th) 129; 41 C.C.E.L. 1; [1992] 3 C.N.L.R. 181; [1992] 1 C.T.C. 225; 92 DTC 6320; 136 N.R. 161; McNab v. Canada, [1992] 4 C.N.L.R. 52 (T.C.C.).

DISTINGUISHED:

Brant (H.W.) v. M.N.R., [1992] 2 C.T.C. 2635; (1992), 92 DTC 2274 (T.C.C.).

CONSIDERED:

R. v. National Indian Brotherhood, [1979] 1 F.C. 103 (1978), 92 D.L.R. (3d) 333; [1978] CTC 680; 78 DTC 6488 (T.D.); Kirkness (M.F.) v. M.N.R., [1991] 2 C.T.C. 2028; (1991), 91 DTC 905 (T.C.C.); Mitchell v. Peguis Indian Band, [1990] 2 S.C.R. 85; (1990), 71 D.L.R. (4th) 193; [1990] 5 W.W.R. 97; 67 Man. R. (2d) 81; [1990] 3 C.N.L.R. 46; 110 N.R. 241; 3 T.C.T. 5219;

REFERRED TO:

Horn v. M.N.R., [1989] 3 C.N.L.R. 59; [1989] 1 C.T.C. 2208; (1989), 89 DTC 147 (T.C.C.).

AUTHORS CITED

Canada. Royal Commission on Aboriginal Peoples. Report of the Royal Commission on Aboriginal Peoples. Ottawa: Minister of Supply and Services Canada, 1996.

Cheshire, G. C. Private International Law, 11th ed. by P. M. North and J. J. Fawatt. London: Butterworths, 1987.

Revenue Canada. Indian Act Exemption for Employment Income: Guidelines. Ottawa: Revenue Canada, June 1994.

Appeal from a Trial Division decision (sub nom. Canada v. Poker, [1995] 1 F.C. 561 [1995] 1 C.N.L.R. 561; [1995] 1 C.T.C. 84; (1994), 94 DTC 6658; 84 F.T.R. 84 (T.D.); revg sub nom. Clarke (W.) v. M.N.R., [1992] 2 C.T.C. 2743; (1992), 92 DTC 2267 (T.C.C.)) that the native taxpayer’s employment income was not situated on a reserve and therefore taxable. Appeal allowed.

COUNSEL:

Sidney Green, Q.C. for appellant.

Barbara M. Shields for respondent.

SOLICITORS:

Sidney Green, Winnipeg, for appellant.

Deputy Attorney General of Canada for respondent.

The following are the reasons for judgment rendered in English by

Linden J.A.: This case involves the income taxation of a status Indian[1] who resided on the Norway House Indian Reserve and was employed as an administrator in the Norway House Indian Hospital. Although the hospital is no longer located on the reserve, as it once was, it is near the reserve and continues to serve primarily the reserve community. The specific issue to be decided in this appeal is whether the appellant’s employment income for 1984 and 1985 should be exempt from income taxation pursuant to section 87 of the Indian Act.[2] More particularly, the appellant relies on paragraph 87(b) in claiming a deduction of $26,173.23 from her income for the 1984 taxation year and $22,528.27 from her income for the 1985 taxation year.

Paragraph 87(b) of the Indian Act provides:[3]

87. Notwithstanding any other Act of the Parliament of Canada or any Act of the legislature of a province, but subject to section 83, the following property is exempt from taxation, namely:

…

(b) the personal property of an Indian or a band situated on a reserve;

The legal effect of section 87 is recognized in the Income Tax Act by paragraph 81(1)(a), which states:[4]

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 of Canada, 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.

At the outset, it should be explained that paragraph 87(1)(b) does not exempt all Indians from income tax liability. Rather, there are a number of conditions built into this provision which were identified by the Supreme Court of Canada in Nowegijick v. The Queen.[5] First, the property at issue must be “personal property”. Second, it must be owned by an Indian within the meaning of the Act. Third, the Indian must be taxable in respect of the property. Fourth, and finally, the property must be situated on a reserve.

The Supreme Court of Canada held, in Nowegijick, that employment income is personal property. It further declared that the exemption from taxation on “property” provided in section 87 applies to a tax on persons.[6] In support of the latter, Dickson J. (as he then was) wrote:[7]

As I read it, s. 87 creates an exemption for both persons and property. It does not matter then that the taxation of employment income may be characterized as a tax on persons, as opposed to a tax on property.

These findings were prompted, in part, by the principle expressed in that case that legislation which affects Indian persons, such as the tax exemption provisions, ought to be liberally rather than technically interpreted where there is ambiguity in the wording of the provision. Specifically, Dickson J. stated that “[i]f the statute contains language which can reasonably be construed to confer tax exemption that construction, in my view, is to be favoured over a more technical construction which might be available to deny exemption”.[8] Notwithstanding the importance of liberal construction of such legislation, however, Dickson J. made specific reference to the fact that section 87 does not operate as a blanket exemption. He stated:[9]

Indians are citizens and, in affairs of life not governed by treaties or the Indian Act, they are subject to all of the responsibilities, including payment of taxes of other Canadian citizens.

Having regard for the interpretive principles laid out by the Supreme Court in Nowegijick, it is clear that the first three preconditions for the tax exemption in paragraph 87(b) have been met in this case. The Trial Judge quite properly found that the appellant’s income from her employment at the Norway House Indian Hospital fits within the scope of paragraph 87(b) to the extent that it is personal property which is subject to tax. There is no dispute that the appellant, who has since passed away, was an “Indian” within the meaning of subsection 2(1) of the Act.[10] As with most cases which have addressed section 87, the sole legal issue in this appeal is whether the appellant’s property is “situated on a reserve”, the fourth condition set out in the statute.

Following an appeal by the Minister from the decision of the Tax Court Judge, the Trial Judge held that the appellant’s employment income was not situated on a reserve and, thus, could not be exempted from taxation.[11] As will be seen, I disagree with the Trial Judge’s result. In my view, he failed to fully appreciate the legislative purpose that the section 87 tax exemption is designed to achieve and, consequently, he erred in applying the prevailing test for determining whether the appellant’s employment income is situated on the reserve.

Over the years, Courts have tried to fashion a simple, bright-line rule for determining whether an Indian’s personal property is “situated on a reserve”. These efforts have proved less than satisfactory. Although this condition appears simple enough to apply, it is a difficult one to apply in the context of intangible property such as wages and other forms of income. The reason for the difficulty is that the application of a situs rule to an aspect of property which has no physical or local existence is bound to be notional and risks being arbitrary. When considering the situs principle in the context of conflict of laws, the authors of the text Private International Law observed:

Since the situs principle has furnished a simple and effective rule for questions relating to a physical thing, the natural inclination is to extend it to all questions and to regard it as the general determinant of rules for the choice of law concerning choses in action. This is a false analogy. Moreover, it frequently leads to forcing a rule, eminently adapted to one set of circumstances, to fit circumstances for which it is entirely inappropriate.[12]

The situs principle, however, is firmly entrenched in the language of section 87.

One bright-line rule that was used to determine situs for a time was the residence of the debtor. In R. v. National Indian Brotherhood, the Associate Chief Justice of this Court, as he then was, held that, for the purposes of section 87 of the Act, the situs of employment income should be determined by reference to the residence of the debtor. He imported this test from conflict of laws principles; it was thought that the situs of a chose in action would best be determined by the residence of the debtor. The rationale behind this principle was to align the situs of the intangible property with the location where the debt could be enforced. It is worthy of note that, in deciding to adopt this test in the context of section 87 of the Indian Act, Thurlow A.C.J. acknowledged the fiction of attributing a situs to an intangible property. He stated, “[a] chose in actions such as the right to a salary in fact has no situs. But where for some purpose the law has found it necessary to attribute a situs, in the absence of anything in the contract or elsewhere to indicate the contrary, the situs of a simple contract debt has been held to be the residence or place where the debtor is found.”[13] As will be seen, however, although this rule made sense in conflict of laws, it proved less than satisfactory in achieving the legislative purpose enshrined in section 87.

Nevertheless, the residence of the debtor test was endorsed by the Supreme Court in Nowegijick, wherein Dickson J. held that the Crown was correct to concede that the situs of a status Indian’s salary ought to be determined according to the residence of the debtor (i.e., for salary, the employer). He stated:[14]

The Crown conceded in argument, correctly in my view, that the situs of the salary which Mr. Nowegijick received was sited on the reserve because it was there that the residence or place of the debtor, the Gull Bay Development Corporation, was to be found and it was there the wages were payable.

A second bright-line test was tried in Kirkness (M.F.) v. M.N.R., where the Tax Court focused on the place where payment originated as the situs of the employment income for the purpose of paragraph 87(1)(b) [R.S.C., 1985, c. I-5].[15] On this basis, the tax exemption was denied to Indian employees of a nursing station which was located just off the reserve on which the employees lived. Two of the appellants in that case received their cheques at the nursing station, while the third received his salary by way of direct deposit to an off-reserve bank. Beaubier T.C.J. drew on Dickson J.’s comments in Nowegijick regarding the significance, for income tax purposes, of the “point of receipt of income”.[16] He reasoned that “[t]he cheques which are paid to the appellants in this case are not paid to the appellants on the Split Lake Indian reserve …. Since the cheque, being personal property, is received by the Indian off of the reserve, no exemption exists pursuant to paragraph 87(1)(b)”.[17]

Despite the initial attraction of these bright-line rules, courts have since recognized that these seemingly simple tests were less than satisfactory in achieving the legislative purpose behind the section 87 tax exemption. It became apparent that a more sophisticated approach was needed under section 87, at least in the absence of further Parliamentary action. In Williams v. Canada, Gonthier J. observed that “[t]he only justification given in these cases for locating the situs of a debt at the residence of the debtor is that this is the rule applied in the conflict of laws”.[18] Recognizing that the rationale for such a rule was to ensure the enforcement of a debt, Gonthier J. commented that, while such a rule might be “reasonable for the general purposes of conflicts of laws … one must inquire as to its utility for the purposes underlying the exemption from taxation in the Indian Act”.[19] He concluded with the following critique of wholesale reliance on the residence of the debtor test:[20]

… 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.

Underlying Gonthier J.’s criticism of the residence of the debtor test is the recognition that attributing a situs to a chose in action such as the right to employment income is, by definition, a notional exercise. It is a legal fiction which, in the context of section 87, is designed to limit the breadth of the tax exemption provision. To recognize it as a legal fiction is not to criticize it; legal fictions often serve useful purposes in our law. However, once the fictional nature of the exercise is rendered explicit, it can be seen that reliance on a test for situs which is unconnected to the purpose for the tax exemption provision—whether it be the residence of the debtor or the place where the wages are received” inevitably becomes arbitrary in its application. The solution, as will be seen, lies in an approach to the interpretation and application of the phrase “situated on a reserve” which is founded on the purpose of the exemption provision in the Indian Act. Unless the purpose of the legislative provision which imposes the situs requirement drives the selection of the criteria used to determine the situs of the property, there is simply no principled basis for selecting one criterion over another. The analysis must therefore begin by examining Parliament’s intention in enacting section 87 of the Indian Act.

The history and purpose of section 87 were fully explored in Mitchell v. Peguis Indian Band.[21] In that case, La Forest J. traced the history of section 87 back to an 1850 statute which provided, essentially, that no taxes were to be levied upon an Indian residing on unceded or reserve lands.[22] The exemption did not take the shape of the present-day provision, however, until The Indian Act 1876.[23] Section 64 of that Act provided:

64. No Indian or non-treaty Indian shall be liable to be taxed for any real or personal property, unless he holds real estate under lease or in fee simple, or personal property, outside of the reserve or special reserve, in which case he shall be liable to be taxed for such real or personal property at the same rate as other persons in the locality in which it is situate.

La Forest J. highlighted the fact that, in this section, “Indians holding lands or personal property in their own right outside the reserve hold that property on the same basis as all other similarly situated property holders”.[24] This specific condition, although not included in section 87, provides some historical insight into what the tax exemption was originally designed to achieve, and, consequently, into the contours of its current application, as will be more fully developed below.

La Forest J. justified the historical evolution of this legislative policy on the basis that it was a protective device designed to respond to the negative effects on our First Nation peoples of the assertion of British sovereignty over what is now Canada. He developed this idea further:[25]

In summary, the historical record makes it clear that ss. 87 and 89 of the Indian Act … 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.

In summary, the purpose of section 87 and its predecessor provisions, according to La Forest J., is to protect property held by Indians qua Indians. La Forest J. recognized, as did Dickson J. before him in Nowegijick, that the purpose of section 87 is not to provide status Indians with unlimited protection from taxation:[26]

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.

La Forest J. characterized the purpose of the tax exemption provision as, in essence, an effort to preserve the traditional way of life in Indian communities by protecting property held by Indians qua Indians on a reserve. Section 87, however, was not intended as a means of remedying the economic disadvantage of Indians. Although a laudable goal, it is not for the courts to attempt to achieve it by stretching the boundaries of the tax exemption further than they can be supported on a purposive reading of the legislation. Where, therefore, an Aboriginal person chooses to enter Canada’s so-called “commercial mainstream”,[27] there is no legislative basis for exempting that person from income tax on his or her employment income.[28] Hence, the requirement that the personal property be “situated on a reserve”. The situs principle provides an internal limit to the scope of the tax exemption provision by tying eligibility for the exemption to Indian property connected with reserve land. Thus, as will be seen, where an Indian person’s employment duties are an integral part of a reserve, there is a legitimate basis for application of the tax exemption provision to the income derived from performance of those duties.

Following La Forest J.’s explanation of the purpose of section 87, the Supreme Court in Williams developed what is now referred to as the “connecting factors” test. This test was designed to overcome the problems inherent in attributing a situs to intangible property on the basis of a single criterion such as the location of the debtor or the location where payment was made. In Williams, Gonthier J. explained the paradox of identifying the situs of unemployment insurance benefits, as were at issue in that case, by pointing to the fact that “[b]ecause the transaction by which a taxpayer receives unemployment insurance benefits is not a physical object, the method by which one might fix its situs is not immediately apparent. In one sense, the difficulty is that the transaction has no situs. However, in another sense, the problem is that it has too many”.[29] The situs of the debtor, the situs of the creditor, the situs where the payment is made, the situs of the employment which created the qualification for the receipt of income, and the situs where the payment will be spent, among others, are all conceivably relevant factors. None of these factors, on its own, however, is likely to produce a satisfactory result in all cases.

In order to resolve this conundrum, Gonthier J. crafted a new test based on the foundation of La Forest J.’s purposive analysis in Mitchell. He recognized that, although there are necessarily many factors which may be of assistance in determining the situs of intangible property such as unemployment insurance or employment income, the relevance of these “connecting factors” must be assessed on the basis of their ability to further the purpose of section 87. Further, the weight to be given to each factor may change from case to case.[30]

A connecting factor is only relevant in so much as it identifies the location of the property in question for the purposes of the Indian Act. In particular categories of cases, therefore, one connecting factor may have much more weight than another. It would be easy in balancing connecting factors on a case by case basis to lose sight of this.

The methodology fashioned by Gonthier J. to achieve this result was described by him as follows:[31]

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.

This new test was not designed to extend the tax exemption benefit to all Indians. Nor was it aimed at exempting all Indians living on reserves. Rather, in suggesting reliance on a range of factors which may be relevant to determining the situs of the property, Gonthier J. sought to ensure that any tax exemption would serve the purpose it was meant to achieve, namely, the preservation of property held by Indians qua Indians on reserves so that their traditional way of life would not be jeopardized.

The connecting factors test is consistent with La Forest J.’s more general comments in Mitchell on the interpretation of legislation relating to Indians. As noted by the Trial Judge [at page 582], “La Forest J. somewhat tempered the liberal interpretation rule” as affirmed in Nowegijick by cautioning that, unlike treaties, “statutes relating to Indians are an expression of the will of Parliament”.[32] In light of this fact, La Forest J. warned against always resolving statutory ambiguities in favour of the Indians “simply because it may be expected that the Indians would favour it over any other competing interpretation”.[33] Instead, he reasoned, “[i]t is also necessary to reconcile any given interpretation with the policies the Act seeks to promote”.[34] Moreover, a purposive interpretation of section 87 is required in order to preserve the substance of the tax exemption, even though much of the economic climate on Indian reserves has changed since it was enacted.

The specific issue in Williams was whether a status Indian, residing on a reserve and receiving unemployment insurance benefits for which he qualified as a result of his former job with an on-reserve logging company, should be entitled to the tax exemption. In light of the purpose of the exemption, the nature of the unemployment insurance benefits and the manner in which those benefits are taxed, the connecting factors to which Gonthier J. chose to attribute the most weight were the residence of the recipient of the benefits and the location of the employment income which allowed the recipient to qualify for the benefits.[35] The latter was justified on the basis that, without an exemption for “an Indian whose qualifying employment income was on the reserve, the symmetry in the tax implications of premiums and benefits breaks down. For such an Indian, the original employment income was tax-exempt. The taxation paid on the subsequent benefits, therefore, does more than merely offset the tax saved by virtue of the premiums”.[36] Instead, Gonthier J. concluded, “it is an erosion of the entitlements created by the Indian’s employment on the reserve”.[37] In light of this, Gonthier J. found that the other potentially relevant factor, the residence of the recipient of the benefits, would only affect the analysis “if it points to a location different from that of the qualifying employment”.[38] The result, in Williams, was to extend tax exempt status to the unemployment insurance benefits on the facts of that case.

The Trial Judge in this case applied the connecting factors test to conclude that the appellant’s employment earnings were not situated on a reserve. He found [at page 583] that the factors to be given the greatest weight were “the residence of the employer and the location where the duties of employment were performed”. The Trial Judge conceded that the residence of the appellant was “also important”, although he found it to be “less important than the previous factors”. On the basis of this weighing exercise, the Trial Judge concluded [at page 586] that, “despite the circumstances surrounding the defendant’s employment, neither the defendant’s employer nor the location of her employment were on the reserve. It is not sufficient, in my view, to find that the defendant’s employment was for the benefit of Indians on the reserve.” He denied the exemption, in spite of his recognition that, in this case [at page 587], denial of the tax exemption “leads to an intuitively anomalous result”.

In my respectful view, if the Trial Judge’s result is, as he described it, “intuitively anomalous”, this is a signal that the connecting factors test has not been applied properly. It must be recalled that the connecting factors test is simply a way for courts to apply the situs principle in a principled way, by bringing some structure to the inquiry. It is an inquiry which has, as its basic question: having regard for the legislative purpose for which the section 87 tax exemption was enacted, where does it make the most sense to locate the situs of the personal property at issue? The test is no more magic than that.

The Trial Judge [at page 587], however, reasons that denial of the tax exemption was necessary in order to avoid overstepping the bounds of section 87 by improperly applying it as a general “means to redress economic disadvantage”. I do not find the Trial Judge’s reasoning persuasive. This is not a case where, to apply the tax exemption, would be to attempt to redress the economic disadvantage of Indians. Rather, I am of the view that to deny the exemption in this case would amount to an erosion of property held by an Indian qua Indian on a reserve. In light of the purpose of this provision, the appellant’s employment income is personal property which ought to be accorded the full protection of section 87. In my view, too much weight was accorded by the Trial Judge to the exact geographical location of the employment and the residence of the employer; in this case, the federal government. Conversely, insufficient weight was accorded to the actual circumstances surrounding the appellant’s employment, her residence on the reserve and the history of the hospital in which she worked.

Following Williams, we now have the benefit of a comprehensive method for identifying and selecting the connecting factors to be used in assessing whether personal property is situated on a reserve. The Supreme Court has not yet ruled specifically on the issue of employment income in a case such as this. As a result, this Court must determine, initially at least, what factors ought to be relevant to the assessment of employment income in circumstances such as these as well as the relative weight to be accorded to them.

To begin, I emphasize that the ability to tailor the assessment of location to the particular circumstances of each case was acknowledged by the Supreme Court as an important virtue of the connecting factors test. Gonthier J. stated:[39]

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. Of course, the weight to be given to various connecting factors cannot be determined precisely. However, this approach has the advantage that it preserves the ability to deal appropriately with future cases which present considerations not previously apparent.

As I have stated, the Trial Judge in this case relied primarily on the location of the appellant’s employer and her place of employment in order to determine the location of her employment income. While these factors are certainly relevant, the analysis of them and the weight accorded them present certain difficulties on the facts of this case. First, the Trial Judge found [at page 585] that the appellant “performed her duties of employment at the hospital which is in the vicinity of, but not within, the geographical boundaries of the reserve”. While that is quite true, the hospital in which the appellant worked, the Norway House Indian Hospital, was originally situated within the boundaries of the Norway House Indian Reserve. The hospital was relocated by the Government to its current site adjacent to, but not on, the reserve because the original building had been destroyed by fire.[40] The site selected by the Government was purchased in 1949.[41] The appellant has submitted that, in selecting this new site, no attention was given to the legal consequences of moving the hospital off the reserve. Indeed, it is submitted that, due to the remote nature of the Norway House community, the difference between reserve land and non-reserve land is not immediately or obviously apparent. According to the Trial Judge [at page 570], the hospital was and continues to be a “general acute care facility … [which] provides services to the people of the reserve”. The large majority of its clients, approximately 80 per cent, are status Indians.

It has been submitted on behalf of the appellant that, as a result of a “technical relocation” of the hospital in which she worked, the appellant has been denied tax exempt status in a manner which is contrary to the spirit of Williams. It is interesting to note that, following the 1952 relocation, the federal government continued to recognize the tax exemption to registered Indians who worked in the hospital until 1968, when the policy was unilaterally changed. The change was explained in a letter written by Mr. Jean Chrétien, then Minister of Indian Affairs and Northern Development.[42] The letter stated that, “effective January 1, 1968, a new interpretation was given to the word ‘reserve’ in relation to Indians and any income earned from employment at institutions on Crown-owned lands which were not reserves, was subjected to taxation”. The effect of this policy change, after 16 years in which the exemption had been granted, was suddenly to deny the exemption to Indian employees of the Norway House Indian Hospital, despite the fact that absolutely nothing about the actual place or the manner in which the income was earned had changed. In addition, it has been pointed out by the appellant that the federal government is currently engaged in preparing a proposal to designate the land upon which the hospital is built as reserve land.[43] While such a future possibility cannot, as the respondent points out, affect the current status of the land on which the hospital is located, it further demonstrates that the circumstances surrounding the location of the Norway House Indian Hospital are such that its utility in determining the situs of the appellant’s employment income is substantially diminished. For this reason, I agree with the submission of the appellant that the exact location of the metes and bounds of the hospital cannot play a decisive role in determining whether a tax exemption in this case would merely combat economic disadvantage or whether it would help to prevent the erosion of property held by an Indian qua Indian on a reserve.

I am equally unpersuaded that the location or residence of the employer is a major factor in the context of this case. The residence of the debtor was considered and discarded in Williams as a significant connecting factor on the ground that there were “conceptual difficulties in establishing the situs of a Crown agency in any particular place within Canada”.[44] The multitude of possibilities when the Crown is involved renders the residence of the employer a somewhat arbitrary concept, and certainly not a reliable ground upon which to extend or deny tax exempt status. Furthermore, the traditional conflict of laws justification, the ability to enforce judgment against the debtor, has nothing to add to the analysis in the case of the Crown, which may be sued anywhere in Canada. Responding to this ambiguity, Gonthier J. proposed that “the significance of the Crown being the source of the payments at issue in this case may lie more in the special nature of the public policy behind the payments, rather than the Crown’s situs, assuming it can be fixed”.[45]

A similar argument can be made on the facts of this case. The appellant was an employee of the federal government. She was paid at the Norway House Indian Hospital by cheques which were issued to her by the Department of Supply and Services office in Winnipeg, Manitoba. Although the structure and function of Health and Welfare Canada may not be analogous to that of the Canada Employment and Immigration Commission, as considered by Gonthier J. in Williams, its situs might be similarly fixed at any number of locations. The respondent in this case has suggested, as potential locations of the employer, the Department of Supply & Services office in Winnipeg, the City of Ottawa and the location of the hospital itself.[46] In my view, there is nothing in the location where the cheques were drawn up which speaks meaningfully to the issue of whether or not the employment income was property situated on a reserve at the time that it was earned by the appellant. The more significant feature of the issuance of cheques by the Crown to the appellant is the fact that these funds were advanced as part of the Crown’s responsibility for the health care of Indians and, in particular, the health of Indians on the Norway House Indian Reserve.

Thus, a more in-depth analysis reveals that the connecting factors relied upon by the Trial Judge were inadequate in the context of this case. The inquiry must, therefore, be expanded in order to consider other connecting factors. In my view, having regard for the legislative purpose of the tax exemption and the type of personal property in question, the analysis must focus on the nature of the appellant’s employment and the circumstances surrounding it. The type of personal property at issue, employment income, is such that its character cannot be appreciated without reference to the circumstances in which it was earned. Just as the situs of unemployment insurance benefits must be determined with reference to its qualifying employment, an inquiry into the location of employment income is equally dependent upon an examination of all the circumstances giving rise to that employment. Assessing these factors in the context of this case, I am of the view that the tax exemption must be accorded to the appellant’s income in order to avoid the erosion of an Indian entitlement. The personal property at issue is income earned by an Indian who is resident on a reserve, and who works for a hospital which attends to the needs of the reserve community; a hospital that was once located on, and is now adjacent to, the reserve it services.

As the Trial Judge pointed out in his application of the “connecting factors” test to the employment situation of Elizabeth Ann Poker, “[n]ot to consider the circumstances surrounding the employment does not accord with the purpose of the tax exemption in the Indian Act as stated in Mitchell, supra, and Williams, supra”.[47] Similarly, in McNab v. Canada, a 1992 decision of the Tax Court, Beaubier T.C.J. applied the connecting factors test set out in Williams in the context of employment income. The case involved a status Indian employed by the Saskatchewan Indian Women’s Association. She performed her employment duties both on and off reserves.[48] The Tax Court Judge placed a great deal of emphasis on the circumstances surrounding the claimant’s employment. In finding that the employee’s income ought to be exempted from tax, he noted in particular that “all of her work was on the instructions of an employer whose sole purpose was to benefit Indians on reserves”.[49] The Tax Court Judge also took into account the employer’s location, the locations where the employee worked and the place of payment. Each of these factors, however, was assessed in light of the main purpose and functions of her employment. In my view, when the personal property at issue is employment income, it makes sense to consider the main purpose, duties and functions of the underlying employment; specifically, with a view to determining whether that employment was aimed at providing benefits to Indians on reserves.

In this case, the appellant’s employment was intimately connected with the Norway House Indian Reserve. Added to this is the fact that the appellant, as I have noted, lived on the Norway House Indian Reserve, the community which was served by the hospital in which she worked. This residence factor in itself certainly cannot determine the situs of employment income, just as other single factors cannot. An Indian who resides on a reserve but derives employment income from his or her participation in the commercial mainstream, cannot obtain the exemption. In conjunction with the other circumstances surrounding the appellant’s employment income in this case, however, it does assist the Court in painting a more complete picture of the relationship between the appellant’s property, her salary, and the Indian reserve: the appellant was a resident of the Norway House Indian Reserve who benefited from and contributed to life on the reserve by working in a hospital near the reserve which was dedicated to meeting the health needs of the reserve community. To attribute great significance to the fact that the hospital is now physically situated not on the reserve, but adjacent to it, obscures the true nature of the employment income in this case. In my view, based on all the factors discussed, the purpose of the legislation is best served by holding that her salary was property held by an Indian qua Indian on a reserve.

In explaining his refusal to extend the benefit of section 87 to the appellant, the Trial Judge [at page 586] worried that finding in favour of the appellant would:

… go beyond preventing the erosion of the entitlement of an Indian qua Indian on a reserve. Conceivably, such an interpretation could mean that all Indians who lived on a reserve would not be subject to income tax, regardless of where or for whom they worked. Although this may be a means to redress economic disadvantage, it does not accord with the purpose of the tax exemption provisions.

I cannot see how finding in favour of the appellant in this case would produce such a result. The Trial Judge’s “slippery slope” argument is only persuasive if you ignore the very factors which connect the appellant’s employment income to the reserve. “Where” and “for whom” the appellant worked are crucial connecting factors in this case. The Trial Judge’s reasoning overlooks the fact that the appellant’s work was largely devoted to, and for the benefit of, the Norway House Indian Reserve. It also ignores the fact that the appellant’s services were provided from a hospital that used to be located on, and now is adjacent to, the reserve. To find the appellant’s income as situated on the reserve is not to venture outside the bounds of section 87. Rather, it is to prevent the unjust disallowance of a tax exemption due entirely to what the appellant’s counsel properly called “a technical relocation” of the hospital to a site just off the reserve. Unlike the plaintiff in Brant (H.W.) v. M.N.R., the appellant in this case was not earning her income “in the general commercial mainstream”.[50] In assessing the situation of a status Indian who, although he lived on a reserve, received employment income for off-reserve work as an auditor for Revenue Canada, Sobier T.C.C.J. correctly reasoned in Brant as follows:

If an Indian chooses to work for an employer off a reserve, then income earned in the general commercial mainstream, in the day-to-day “affairs of life” off the reserve lands, is not personal property exempt from taxation pursuant to section 87 of the Indian Act . To allow the appellant an exemption from taxation of this income would be an attempt to remedy the economically disadvantaged position of Indians who cannot find employment on the reserve. This is not the purpose of the exemption from taxation provided by section 87 of the Indian Act.

This logic illustrates the limits of section 87. It also assists in demonstrating that the employment income of the appellant in this case, by contrast, fits nicely within the scope of section 87. She was not employed in the “commercial mainstream”, but rather, in her capacity as an employee of the hospital, she assisted in the provision of health care services to members of the Norway House Indian Band. As such, her employment was an integral part of community life on the reserve.

In so concluding, I am not unaware of Revenue Canada’s guidelines for the application of section 87. Following the Supreme Court’s decision in Williams, Revenue Canada issued four guidelines intended to assist in the interpretation of section 87 of the Act according to the connecting factors test. These guidelines are as follows:[51]

When at least 90% of the duties of an employment are performed on a reserve, all of the income of an Indian from that employment will usually be exempt from income tax.

…

When less than 90% of the duties of an employment are performed on a reserve and the employment income is not exempted by another guideline, the exemption is prorated. The exemption will apply to the portion of the income related to the duties performed on the reserve.

…

When:

•€€€€€€ the employer is resident on the reserve; and

•€€€€€€ the Indian lives on a reserve;

all of the income of an Indian from an employment will usually be exempt from income tax.

…

When:

•€€€€€€ more than 50% of the duties of an employment are performed on a reserve; and

•€€€€€€ the employer is resident on a reserve, or the Indian lives on a reserve;

all of the income of an Indian from an employment will usually be exempt from income tax.

…

When:

•€€€€€€ the employer is resident on a reserve; and

•€€€€€€ the employer is:

—   an Indian band which has a reserve, or a tribal council representing one or more Indian bands which have reserves, or

—   an Indian organization controlled by one or more such bands or tribal councils, if the organization is dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves; and

•€€€€€€ the duties of the employment are in connection with the employer’s non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on the reserves;

all of the income of an Indian from an employment will usually be exempt from income tax.

As is evident, the guidelines understandably are based largely on the residence of the employer and the location where the duties of the employee are performed. While these factors may be useful for the determination of whether employment income falls within section 87, a central premise of Williams is that, in the final analysis, the relative weighting of connecting factors must proceed on a case by case basis. Consequently, although guidelines may assist in routine cases, it is not possible to establish, in advance, the precise formula by which employment income is to be assessed in all cases.

On the facts of this case, the residence of the taxpayer, the nature of the service performed, the history of the institution in question, and the circumstances surrounding the employment all received great weight in the purposive interpretation of section 87. On the contrary, the residence of the employer, even if that could be determined, and the metes and bounds location where the duties were performed, although certainly relevant, were granted less weight than in other cases.

For these reasons, I am of the view that the taxation of the appellant’s income would erode property held by an Indian qua Indian on a reserve, and that paragraph 87(b) should be applied in order to prevent this erosion of Indian property “situated on a reserve”.

Having concluded that, on the connecting factors test, the actual situs of the appellant’s employment income is located on the reserve, I do not find it necessary to deal with the applicability of the deeming provision in subsection 90(l) of the Indian Act. Since the property can be located on the reserve for the purposes of the tax exemption provision in section 87, there is no need to deem it as such.

I would allow the appeal with costs both here and below, set aside the decision of the Trial Judge and remit the matter to the Minister for reassessment on the basis that the appellant’s income for the years 1984 and 1985 is exempt from tax pursuant to section 87.

Isaac C.J.: I agree.

Pratte J.A.: I agree.

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