Opinion: Section 89 and the challenges of on-reserve business financing
By Alain Bartleman and James C. Hopkins
Section 89 is a barrier to aboriginal financing. But, like many walls, it’s easier to sidestep it than climb over.
Take someone who wants to open a gas station on their reserve. They will need fuel tanks, pumps, cash registers, fuel, and, of course, the money to pay for it all. Yet our entrepreneur, like many First Nations entrepreneurs, will find themself hard-pressed to find lenders willing or able to work with them, mostly due to section 89 of the Indian Act.
Section 89 prohibits, with three exceptions, the “charge, pledge, mortgage, attachment, levy, seizure, distress or execution” of the personal property of a First Nations person on a reserve. Like its more famous cousin, section 87, which prevents the taxation of “personal property of an Indian or a band situated on a reserve”, section 89 was created as a way to preserve the land of First Nations from seizure by preventing the ability for third parties to take interests on the land. Unlike section 87; however, section 89 has been a major barrier to on-reserve economic development, and has blocked much-needed access to capital.
To understand why section 89 is such a problem for on-reserve businesses, it is helpful to look at the perspective of the lender. Lenders will often ask for two things to cover the risk of not getting their loan back: payment on the money they lend (an interest rate), and the right that if the borrower cannot repay their loan, the lender can seize goods their money bought. By blocking the ability to seize assets on a reserve; however, section 89 removes one of the main tools on which business lenders rely to get security.
Yet despite the prohibition, there are a few tools to sidestep section 89 and obtain access to capital.
The first and easiest way to avoid section 89 is to purchase equipment directly through a vendor using a conditional sale agreement. So doing means that any assets will be covered through the exemption of section 89(2), which allows for conditional sale contracts to be enforced, even on a reserve.
The second is to use a corporation to obtain the loan and to have the equipment registered in the name of the corporation. While many First Nations entrepreneurs shun using corporations since corporations are not exempt from taxation under section 87 of the Indian Act, the very factor that negates the tax exemption also works to allow for various on-reserve equipment and other loan assets to be financed in a conventional manner. Concerns about tax planning can likewise be met by the payment of a tax-exempt salary to the employee in question.
The third option is to “situate” the loan off-reserve as much as possible. So doing might include using bank accounts registered to off-reserve branches, storing physical assets off-reserve, and generally having as much of the business situated off the reserve as is feasible or realistic. However, this is a risky strategy for vendors; however, since in many cases, wily entrepreneurs can rely on the “liberal and generous” reading of the Indian Act to have the court uphold the validity of the anti-seizure provisions of section 89.
What doesn’t work? Structuring the loan under notional, or bogus, transactions. In Ohwistha, the lender, a corporation, lent funds to a borrower, Lloyd Benedict who was a member of Akwesasne. As part of the deal, Ohwistha wanted to obtain security over some old farm equipment. To avoid section 89, Ohwistha used one of its employees, a member of Akwesasne, to purchase the farm goods from Benedict, and then had the employee sell the goods back to Benedict under a conditional sale agreement. So doing would have allowed the employee to seize the goods and pass them along to Ohwistha should Benedict not have honoured his obligations to Ohwistha. The deal fell apart when Benedict declared bankruptcy and, citing section 89, refused to give up the old farm equipment to Oakes. The court agreed with Benedict, and, in a rather biting judgement, blasted the series of deals and transactions the parties set up to try to avoid the restrictions of section 89 as being fictitious. Despite falling within the letter of the law, the court found that the transaction as a whole was improper.
Like most of the Indian Act, section 89 reflects an obsolete, paternalistic, and colonial attitude to First Nations. Unlike many other provisions of that law; however, there are many ways to sidestep the provisions of section 89. Yet as the case of Ohwistha shows, it is worth speaking to a lawyer prior to engaging in sidestepping it.
The content provided in this post is to be considered as legal information only. It is not legal advice and does not necessarily reflect the opinion of Nahweghabow, Corbiere.