Confusion over tax exemptions to escalate with new policy

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There is nothing as certain as death, taxes and, come Jan. 1 confusion over income tax exemptions for status Indians.

About 150 delegates gathered for a conference on Indians and taxation at a downtown hotel this month to sort out the rules governing Indians' rights not to pay taxes on income in light of a new policy.

The confusion stems from different interpretations - by some Native tax experts on one hand and Revenue Canada on the other - of the effect the 1992 Supreme Court of Canada ruling in the Williams case has on the Nowegijick case of 1983.

"Under (the Williams) decision, a decade of tax planning following Nowegijick is thrown out the window," Jack Woodward, a Victoria tax lawyer, told the conference. "There is more uncertainty in the field of Indian tax law now than there has ever been."

Problems predicted

He predicts "horrendous problems" when new federal tax policy resulting from the Williams decision takes effect Jan. 1, when Revenue Canada's grace period to allow Indians to prepare for last year's change expires.

In general, status Indians and band businesses are exempt from income tax under Section 87 of the Indian Act. For example, a reserve resident who works for an Indian company on a reserve doesn't pay tax on wages.

In 1983, the Supreme Court of Canada in the Nowegijick case ruled that an Indian could also work off-reserve tax-free, as long as the employer was based on a reserve.

This is important for reserve-based companies that want to expand their businesses in the future.

But the Williams case changed that.

Case changed exemptions

The test case was intended to determine if unemployment benefits, in this instance paid to Glen Williams of the Penticton reserve in B.C., were exempt from income tax under Section 87 based on the usual criterion, including that the residence of the employer, or payer of the income, be located on the reserve.

But because the payer of income in this case was the federal government, residency rules didn't apply as they would for an individual or company. And the court used "sufficient connecting factors" to the reserve to determine the income was tax-free.

It concluded for the Williams case there were enough factors connecting the income to the reserve, including what it considered the most important one - where Williams worked - on-reserve, to qualify for UI.

Judges not specific

But the judges did no specify the factors to be used in future situations.

Vancouver tax lawyer Les Little says that the connecting factors used in Williams were simply intended to give Indians more leeway than the Nowegijick precedent did in qualifying for tax exemption.

"The import of the Williams decision is...that status Indians who do not fall squarely within the fact pattern in Nowegijick may nevertheless be entitled to the Section 87 exemption if it can be established on balance the connecting factors identified by the court favor the application of the exemption," he said.

But Revenue Canada looked at it differently. It interpreted the most important connecting factor - where William worked - to mean that the "principal factor connecting income to a reserve will now be where the duties are carried out."

In the tax man's view, this overrides the Nowegijick decision, and is the reason for the Jan. 1 change.

Effect uncertain

But each case must be determined separately because of the lack of hard-and-fast rules on connecting factors, and it's uncertain what effect the new rule will have.

In most cases, as when both employee and employer reside on a reserve, the change isn't expected to make much difference.

Nonetheless, tax experts agree that the uncertainty surrounding the new policy is troubling, and point to how out-of-touch the tax man is with Native tax affairs.

Little recommends that Revenue Canada allow input on the interpretation of the Williams decision and how connecting factors are determined.

Moreover, the tax department should ignore Willims - and interpret the law on Nowegijick alone - until that consultation is complete, he says.

Separate department

He is also calling for Revenue Canada to create a department to deal with Native tax issues to prevent a repeat of inappropriate interpretations and to offer more consistent information.

Woodward calls Williams a backward step and predicts it will lead to 'horrendous problems' because of the unknown connecting factors.

"Will we become alchemists of the connecting factors test, always trying to cook up just the right brew, combining a dash of residence on a reserve with a measure of cultural connection, avoiding too strong a flavor of commercial mainstream....?"

He says the Williams decision needs to be appealed to the Supreme Court on the basis of sovereignty, the idea that one nation can't tax another, because that has never been tested with respect to taxation. He also suggested Parliament needs to strengthen Section 87.