First Nations individuals are granted special tax status under section 87 of the Indian Act (the “Act”) which effectively exempts them from taxation in respect of personal property “situated on a reserve” (the “s. 87 exemption”). This unique exemption transcends all taxing legislation in Canada, federal or provincial.

The courts’ interpretation of s. 87 has evolved over the years but, until now, it has only applied in the context of reserve property.

A recent decision of the British Columbia (“BC”) Court of Appeal (“BCCA”) has seemingly expanded the scope of s. 87 to off-reserve property – albeit in the context of a Band that no longer had a reserve.

Background

The purpose of s. 87 is to preserve First Nations’ property on reserve by preventing its erosion through taxation. Although the wording of s. 87 refers to property “situated on a reserve”, the Supreme Court of Canada (“SCC”) had ruled that property “sufficiently connected” to a reserve (e.g., interest income, which is not “situated” in a specific place) may also be exempt: see Bastien Estate v Canada, 2011 SCC 38. However, at least to date, a connection to an existing reserve has always been thought to be necessary.

The problem currently is that not all First Nations individuals have a connection to a reserve. It is well-known that the Crown historically took land from First Nations, including land that was once reserve land (or promised as reserve land) and the Crown today finds itself subject to extensive litigation on this point. This was the issue that the BCCA was recently presented with in British Columbia v New Westminster Indian Band No. 566, 2022 BCCA 368(“NWB”).

BCCA Decision

In NWB, the Band was in the process of litigating against the Crown, alleging that land promised as a reserve was wrongfully taken from it, and sought a bank loan to fund the litigation. To guarantee the loan, the Band purchased an insurance plan that would pay the amount owing if the litigation was unsuccessful.

The central issue in NWB was whether the premiums paid by the Band on that insurance plan were taxable (under BC’s Insurance Premium Tax Act, RSBC 1996, c 232) or exempt of BC tax by virtue of s. 87 of the Indian Act.

In the result, the BCCA overlooked the lack of an existing reserve, and concluded that the insurance premiums were exempt under s. 87, observing that to allow the Crown to collect tax on premiums incurred to reclaim reserve land would be unjust and undermine the very purpose of s. 87 itself. In the Court’s words (at para. 80):

It would be ironic, to say the least, to permit the Crown (here in right of the Province) to benefit from the alleged wrongful taking of the Band’s reserve when the Crown (in right of Canada) was and is bound to protect First Nations’ rights in respect of reserves. The apparent failure of the Crown to do so in the 19th century should not now enable it to compound the wrong by claiming a tax on premiums incurred by the Band for the purpose of seeking compensation years later…

Commentary

While NWB is good news for First Nations in BC, it is unclear if other provincial or federal courts will follow suit.

Although s. 87 transcends all taxes in Canada, the Court’s interpretation is not binding on courts of other provinces or on the Tax Court (which makes federal tax decisions). These courts may arrive at different interpretations, and in our view there seems to be a general trend in tax legislation to narrow rather than broaden the application of section 87.

Another hurdle at the federal level is that the Tax Court lacks equitable jurisdiction, which means it cannot make decisions based on “fairness”! Instead, the Tax Court must follow the wording of the statute: “Where the legislative language of a provision is precise, [the court] cannot use its underlying purpose to ‘supplant’ clear language” (Canada v. Cheema, 2018 FCA 45 at para. 74).

As this area is continually evolving, businesses dealing with First Nations and Bands themselves should seek professional advice – they will often find themselves needing to litigate their rights to properly hold the provincial and federal governments to account!

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