Canada: Limits To The Commercial Mainstream Test? Supreme Court Of Canada Releases Judgments Recognizing Exemption From Tax

Last Updated: August 30 2011
Article by Michael R. Coburn

On July 22nd, the Supreme Court of Canada ("SCC") released two decisions that confirmed that certain investment income earned by an Indian (as that term is defined in the Indian Act) was exempt from income tax. In reaching this conclusion, the SCC took issue with the use of the "commercial mainstream" test by Canadian courts in denying a claim for tax exempt status.

In both Bastien Estate v. Canada, 2011 SCC 38 ("Bastien") and Dubé v. Canada, 2011 SCC 39 ("Dubé"), the income in dispute was interest income earned on term deposits issued by a credit union from a branch located on a reserve.

In reaching its decisions, the SCC considered whether the income qualified for the exemption from taxation contained in section 87 of the Indian Act on the basis that it was "personal property of an Indian or a band situated on a reserve".

In both Bastien and Dubé, the Tax Court and Federal Court of Appeal had ruled that the interest income did not qualify for the section 87 exemption. In reaching this conclusion, the courts relied on the SCC's previous decision in Williams v. Canada, [1992] 1 S.C.R. 877 ("Williams"). In Williams, the SCC set out a two-step test for determining whether property was "situated on a reserve".

The first step of this test requires a identification of the potentially relevant factors connecting the property to a particular location. Second, once these "connecting factors" are identified, they must be analyzed in order to determine what weight should be given to them.

In allowing the appeals in Bastien and Dubé, the SCC also relied on the two-step test in Williams. In doing so, however, the SCC provided clarification on how the Williams test should be applied and suggested that it had been incorrectly used by the lower courts in Bastien and Dubé as well as in other post-Williams cases.

In particular, the SCC expressed concern about the use of what has been called the "commercial mainstream" principle in the application of the Williams test. The "commercial mainstream" principle generally provides that if income is earned from an activity or property that is tied to general non-reserve economic activity (the so-called "commercial mainstream"), such income would not be connected to the reserve for the purposes of the Williams test.

The "commercial mainstream" principle has been cited in numerous court decisions to deny a claim for an exemption under section 87 of the Indian Act. Indeed, in both Bastien and Dubé the Tax Court and Federal Court of Appeal cited the "commercial mainstream" principle as a reason to deny the claim for exemption. In particular, the courts found that the use of the funds deposited by the Appellants Bastien and Dubé by the credit unions for a variety of non-reserve commercial activities was compelling evidence that the interest paid on such funds arose from the commercial mainstream and therefore was not sufficiently connected to a reserve to be considered "situated on a reserve".

The SCC, however, found that the "commercial mainstream" principle as applied by the lower courts placed too much emphasis on the activities of the credit unions. Rather than focus on activities that did not directly involve the Appellants, the SCC instead concentrated on the actual contractual relationship that generated the interest income. In looking at this contractual relationship, the SCC decided that most, if not all, of the relevant connecting factors supported the conclusion that the interest income was created on the reserve.

It is interesting to note that not only did the SCC attribute little significance to the use of the deposited funds by the credit unions, it also found the following connecting factors to be of little or no relevance in determining whether the interest income was situated on a reserve:

  • in Dubé, the fact that the Appellant did not live on the reserve on which he entered into the term deposit agreement with the credit union;
  • that the income generated to purchase the term deposits may have been earned off-reserve;
  • that the income generated by the term deposits may have been spent off reserve.


In its decisions in Bastien and Dubé, the SCC has reversed the trend established post-Williams by courts that have employed a broad application of the "commercial mainstream" principle to justify a finding that income earned on a reserve was not situated on a reserve and therefore not entitled to the exemption set out in section 87 of the Indian Act.

While it is difficult to predict whether the Canada Revenue Agency or the Canadian courts will view the decisions in Bastien and Dubé as being relevant for determining whether sources of income other than interest earned on a term deposit should be exempt from taxation under section 87, by emphasizing a narrower use of the "commercial mainstream" principle, the SCC may have significantly expanded the application of the section 87 exemption to income earned on a reserve.

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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