Tax Court of Canada Rules on Location of Business Income For Tax Exemption Under Indian Act

November 26, 2012

On July 10, 2012, the Tax Court of Canada
(the “TCC”) released its judgment in Dickie
v. The Queen
(2012 TCC 242) wherein Miller Thomson was successful in having
a reassessment under the Income Tax Act
(Canada) (the “Act”) vacated.  This case
will be of particular interest to aboriginals who carry on business operations
and to non-aboriginals who do business with aboriginals.


The Appellant in this case is a status
Indian who carries on a business of clearing and slashing timber and brush for
oil and gas companies based off reserve as a sole proprietor on the Fort Nelson
Indian Reserve. While almost all of the slashing work was performed
off-reserve, the administrative centre for the business was the Appellant’s
home address on the reserve.  The
Appellant’s business property included the office of the business as well as a
shop building where the equipment was maintained and stored. 

From his business office on reserve, the
Appellant recruited workers, conducted orientation and safety meetings for
project work crews, negotiated contracts and received requests to tender for
work, completed tender packages and bids, received payments and paid bills, and
conducted various other administrative duties. The TCC characterized the
Appellant’s business as a “nomadic business”; where it is expected that
services will be provided from different sites outside the office or
headquarter of the business on a project-by-project basis, without having any
physical or permanent base at any of those sites, but with the administrative
employees of the business located almost exclusively on the reserve. 

Analysis and Decision on Location of Business Income

The TCC held that a proper analysis of the
location of business income requires a consideration of all the components of
the business, including both the physical location of the business activities
and the business activities themselves. Applying the “connecting factors test”
enunciated by the Supreme Court of Canada in Williams v. Canada ([1992] 1 S.C.R. 877) and recently confirmed in Bastien Estate v. Canada (2011 SCC 38)
and Dubé v. Canada (2011 SCC 39), the
TCC found that there was a sufficient connection between the Appellant’s
business income and the reserve such that it was personal property situated on
a reserve within the meaning of paragraph 87(1)(b) of the Indian Act (Canada) and was therefore exempt from taxation under
paragraph 81(1)(a) of the Act. 

The TCC found that the Appellant performed
his contractual business obligations from a labour perspective off reserve
because that is where the work was. The TCC noted that this is the case for
both Indian and non-Indian owned businesses competing for this type of work and
accordingly, by its very nature, the location of these activities was not by
itself determinative of the location of the business income.

The TCC also noted that, despite the fact
that the customers were all located off reserve, the parties corresponded
mainly by electronic means. The TCC expressed the view that in the modern
world, where parties conduct their transactions by electronic means, such
factors are of little assistance in assisting the TCC in determining the
location of the business income. 

Instead, the TCC found that on the facts of
this case, there was strong evidence that the managerial activities of the
business were much more than merely incidental to the business.  When the nature of the business is performing
contracts obtained on a competitive bid process, the TCC acknowledged that a
great deal of effort is expended in bringing in the work through this process
and most, if not all, of those efforts by the Appellant occurred on reserve.
This was in addition to the other administrative duties and the management of
the workforce which took place on reserve. The Court held that the management
component of the business was highly indicative that the location of the
business activities was on reserve. 

With regards to the Minister’s arguments
that the Appellant was operating his business in the “commercial mainstream”
and that the business was not integral to the life on reserve, the TCC was of
the view that the approach to paragraph 87(1)(b) of the Indian Act (Canada) cannot be to make the “commercial mainstream”
factor the determinative test as such approach would in fact result in
substituting this factor for the issue that must be determined, which is the
location of the business income. The TCC went on to consider that the treatment
of the commercial mainstream as a factor involves as a corollary a
consideration of whether the activity is “Indian enough”.

The TCC held that a categorization as to
whether the activity is “Indian enough” is inappropriate since Indians are not
limited to activities that are considered to be traditionally Indian.  Instead, the TCC found that the term “commercial
mainstream” is now a misnomer and that competition with non-aboriginals is the
more accurate category that would describe the real reason for the existence of
this factor.  The TCC concluded that
regardless of whether an aboriginal competes with non-aboriginals or not, the
question of competition per se or the “commercial mainstream” factor is

Finally, the TCC emphasized that even if
there is a finding that a property situated on a reserve may lead to a
competitive advantage given to an Indian over a non-Indian, this is not a valid
reason to negate the finding that it is situated on a reserve. 

This decision could have positive
implications for other large aboriginal run businesses of a nomadic nature
whose business centre and contract bidding activities take place on a reserve.  In addition, the TCC’s discussion went
further than recent Supreme Court of Canada jurisprudence in considering the
relevance of the “commercial mainstream” factor and therefore, it may become
the leading case for assessing the location of business income. 

TCC Analysis
and Decision on Legal Costs

In his reasons for judgment, Judge
Pizzitelli invited either party to make submissions as to costs if any party
considered that the tariff amounts for the legal costs were inappropriate.
Miller Thomson made a submission for increased costs and on September 19, 2012,
the TCC issued judgment in Dickie v. The
(2012 TCC 327) for a lump sum award of costs in the amount of
$90,000, representing 60% of solicitor and client costs plus $10,000 in
disbursements, an award much higher than the $13,000 the Appellant would have
generally been entitled to under the tariff. 

The Judge held that there clearly existed
special circumstances in this case to justify awarding the Appellant costs in
excess of the tariff including the clear victory of the Appellant, the sizeable
amount of taxes in dispute, the importance and complexity of the commercial
mainstream issue, the amount of additional legal costs the Appellant had to
incur to address the Minister’s position on the mainstream issue, and the
importance the Minister continued to give throughout the trial to the
commercial mainstream factor when such issue should have been conceded before
trial to shorten the trial and narrow the issues in light of the Supreme Court
of Canada’s findings in the Bastien
and Dubé cases.

The Minister is appealing both decisions.

The authors would like to acknowledge the contribution
of Robert Janes of Janes Freedman Kyle Law Corporation as co-counsel for the
Appellant on the Dickie case.


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