Canada: First Nations And The Taxation Of Interest Investment Income

Last Updated: July 28 2011
Article by Eric Koh

On July 22, 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")1 and Dube v. Canada ("Dube")2 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 section 87 of the Indian Act (the "Exemption"). More importantly, the respective decisions set new precedents in a couple of important areas.


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 SCC used the two-step analysis, first proposed by the SCC in Williams v. Canada3 ("Williams"), to determine the location of intangible property such as the interest income at issue. The first step involves identifying relevant factors that connect the property at issue to a location. These include "residence of the payor and the payee, the place of payment, and where the employment giving rise to qualification for the benefit was performed".4 General legal rules governing the location of property are also applicable to the Indian Act. The majority rejected the use of a single criterion test.

Nevertheless, the relevant connecting factors "have different relevance depending on the categories of property and the types of taxation in issue".5 Therefore, the second step is to determine the relative importance or weight of each identified factor guided by three considerations: the purpose of the exemption, the type of property and the nature of the taxation of that property.

In general, the majority held that the purpose of the Exemption is to protect the property of Indians on reserve against erosion. The Exemption will always apply to property situated on a reserve. More importantly, the majority effectively overturned prior court decisions, and held that the Exemption is not contingent on whether the property is "integral to life on the reserve" or preserving the traditional Indian way of life.

Based on the facts, and guided by the aforementioned three considerations, 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 facts that the source of the capital used to purchase the term deposits was Mr. Bastien's business acitivity on reserve and the fact that he resided on reserve.

The entire Court held that the fact that the Caisse generated the revenue to pay the interest in the "commercial mainstream" was irrelevant to the determination of the location of the interest income in this case. Given that the object of section 87 is the exemption from tax of an Indian's personal property on reserve, the focus should be on the Mr. Bastien's property, and not the Caisse's sources of revenue. Nevertheless, the majority also stated that a distinction may apply where the investment income stems from other types of investments. Moreover, the general law of the privity of contracts dictate that the "Caisse's income-producing actions and contracts after Mr. Bastien invested in term deposits cannot be deemed his own and do not diminish the many and clear connections between his interest income and the reserve".6


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.

As in Bastien, the trial judge in the TCC placed much weight on the fact that the revenue used by Caisse Pointe-Bleue to pay the interest income was generated from the "economic mainstream" which was not closely connected to the reserve. However, unlike in Bastien, the trial judge found that Mr. Dube did not reside on the reserve in which Caisse Pointe-Bleue was located. In fact, the trial judge was not convinced that Mr. Dube's principal residence was on any reserve, and that the money invested in the term deposits by Mr. Dube had been earned on a reserve. Finally, the trial judge found that the interest income earned by Mr. Dube was not spent on the reserve.

The majority in the SCC pointed to the various similarities between Dube and Bastien, and held that the analysis in the latter case is equally applicable to the former. More particularly, 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.

However, the majority identified three factual differences between Dube and Bastien, and examined whether these differences will lead to a conclusion different from that in Bastien.

The first difference pertained to the fact that the financial institution used by Mr. Dube is not located on Mr. Dube's reserve. According to the majority, it is irrelevant that the Caisse Pointe-Bleue is not located on Mr. Dube's reserve, so long as it is located on a reserve. The Exemption and jurisprudence only requires that the relevant personal property be located on "a" reserve. Mr. Dube does not need to reside on the reserve where the income was paid. Nevertheless, the majority went on to state that Mr. Dube's place of residence is a potentially relevant connecting factor. However, after applying the analytical approach from Bastien, the majority concluded that this factor should be given little weight.

The second difference concerned the origin of the money used to invest in the term deposits. Unlike Bastien, there was some uncertainty surrounding the source of the money used by Mr. Dube to invest in the term deposits, and the money's connection to an Indian reserve. The majority considered "whether the absence of a connection between the bulk of the invested capital and a reserve should be given significant weight"7, and decided that, given the importance of the primary connecting factors mentioned above, this factor should not be given significant weight

Finally, the majority ruled that the fact that Mr. Dube spent the interest income off a reserve is irrelevant. This effectively overturned earlier rulings by other courts which identified the location where the income is spent as a potentially relevant connecting factor.

Having concluded that the three differences between Dube and Bastien should be given little to no weight, the majority ruled in favor of Mr. Dube and allowed the appeal.

Concluding Remarks

The majority decisions in Bastien and Dube are a strong affirmation of the tax exemption under section 87 of the Indian Act and of the rights of First Nations. They 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.

Gowlings represented the interveners Assembly of First Nations, the Grand Council of the Crees (Eeyou Istchee) and the Union of Nova Scotia Indians before the Supreme Court of Canada in both matters.


1 2011 SCC 38.

2. 2011 SCC 39.

3. [1992] 1 S.C.R. 877.

4. Supra note 1 at para 18.

5. Ibid.

6. Supra note 1 at para 51.

7. Supra note 2 at para 24.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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