In Bell v The Queen (2016 TCC 175), the Tax Court of Canada determined that bonuses earned by a status Indian, who conducted the majority of her employment duties on reserve, did not qualify for a tax exemption under s. 87(1)(b) of the Indian Act (RSC 1985, c I-5). The Court held that the bonuses were not significantly or substantively connected to the reserve, so as to be considered “personal property situated on the reserve” under s. 87(1)(b).
During the taxation years in question, Bell, a status Indian who lived off-reserve, was the majority shareholder (51%) and president of Reel Steel Ltd. (“Reel Steel”). The head office of Reel Steel was located on reserve, and the Court found that Bell conducted the majority of her employment duties at this office. However, the majority of Reel Steel’s business activities were not conducted on reserve lands and they did not have any First Nations customers. As payment for Bell’s services to the company, Bell was paid a bi-weekly salary roughly equivalent to that of her husband’s, the minority shareholder (49%) and former sole director of the company, who played a significant role in the company’s success. In addition to this salary, Bell was also paid large lump sum bonuses equivalent to, or greater than, the corporation’s net income for each of the taxation years in question.
During these taxation years, Bell claimed a tax exemption under s. 87(1)(b) of the Indian Act for both her salary and bonuses. The Canada Revenue Agency (“CRA”) allowed the exemption for the salary; however, the CRA claimed the bonuses were improperly characterized as ‘personal property situate on the reserve’ and consequently, taxable income.
In determining whether the bonuses were sufficiently connected to the reserve so as to be situated on the reserve for purposes of the exemption, the Court considered (1) the type of property; (2) the nature of taxation of property; (3) the purpose of the exemption; and (4) the weight of employment connecting factors. In doing so, the Court determined that the bonuses were considered employment income normally taxable under s. 5(1) of the Income Tax Act (RSC 1985, c 1 (5th Supp)) and that the purpose of the s. 87(1) exemption is to preserve and protect an Indian’s interest in reserve lands and ensure that Indians are not dispossessed of these entitlements.
In light of this purpose, the Court held that there was no evidence to suggest the bonuses were reasonable remuneration for employment services rendered and that the bonuses had no significant connection to the reserve lands. Further, the Court found that the intention of the bonus payments was to circumvent income tax at both the corporate and shareholder level, thereby enhancing the tax shelter available under s. 87(1) of the Indian Act. As a result of this intended circumvention, the Court found Bell’s attempt to structure the bonuses as employment income abusive.