Tax court confirms “connecting factors test” for on-Reserve income tax exemption

July 30th, 2012 by Iler Campbell LLP

On July 7th 2012, the Tax Court of Canada (the Court) handed down its decision in Dickie v The Queen regarding a reassessment of a status Indian operating a proprietorship from Fort Nelson Indian Reserve (the Reserve).  Mr. Dickie operated a business clearing and slashing timber on contract for oil and gas companies to conduct seismic surveys of the land. While he accepted some contract work that took place on the Reserve, an overwhelming majority of his business came from work conducted off Reserve.

By 2003, Mr. Dickie had over 140 workers engaged for his business and had revenue of approximately $3.4 million. He ran the affairs of the business from his house and stored equipment in his home yard. The evidence overwhelmingly disclosed that his home on the Reserve was the head office and administrative centre of the business and served as the location for assembling contract bids, providing orientation to job crews, and receiving payment. Once on-site, the job crews were managed by a foreman who regularly liaised with the home office.

Mr. Dickie’s income was reassessed to include his business income as taxable income for 2003. Mr. Dickie argued that his business fell within a statutory exemption from income tax pursuant to paragraph 81(1)(a) of the Income Tax Act as “personal property situated on a reserve” within the meaning of paragraph 87(1)(b) of the Indian Act. In the Appeal the parties disagreed about whether Mr. Dickie’s business income was sufficiently connected to the Reserve.

In its reasoning, the Court affirmed the test to be applied was the “Connecting Factors Test”, as enunciated by the Supreme Court of Canada in Williams v Canada, [1992] 1 SCR 877.   The Court held that all facets of the business need be considered including both its physical labour activities and administrative functions when determining the sufficiency of connection. Despite the fact the vast majority of physical work carried out by the proprietorship was conducted off Reserve (99%), the Court found that the managerial and administrative functions conducted on Reserve were “far more than merely incidental to the labour component and.. in fact an essential and significant part of its business operations”. It was through this finding that the Court was able to determine the situs of the business income was on Reserve and thus falling within the disputed tax exemption.

Notably, the Court rejected the Crown’s argument that Mr. Dickie conducted business in the “commercial mainstream” as a strong factor weighing against the application of the tax exemption. The Court in Dickie provided strong commentary that whether or not an aboriginal business competed with non-aboriginal businesses or was otherwise “commercial mainstream” was irrelevant to whether the property of the business was situated on Reserve. The court also rejected giving significant weight to factors such as “benefits to Reserve” that required demonstration of clear benefits to the Reserve community in order to claim the exemption.

The decision has the potential to allow more generous exemptions to be claimed by First Nations businesses where significant managerial functions are situated on Reserve.  It also has the potential to relieve Aboriginal business people of some of the unfair competitive limitations embodied in the commercial mainstream and benefits to reserve aspects of the connecting factors test.

Filed in: Commercial Law, Indigenous Law

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