Opinion: Some thoughts on section 87 of the Indian Act

By Alain Bartleman and James C. Hopkins 

Arguably, the most famous section of the Indian Act, section 87 is a source of constant confusion to Indigenous and non-Indigenous Canadians alike. For most people, section 87 can be boiled down to subsection b, which exempts the “personal property of an Indian or Band situated on a reserve” from taxation. As you can imagine, most of the debate centers around what is “personal property,” and what is meant by the term “situated on a reserve.”

Personal property is the easier concept of the two. The term “personal property” includes income from a variety of sources, including employment income, business income, and interest income. Treaty and settlement monies are also included in the definition of “personal property.” That means that if an “Indian” gets an annuity payment, or a per capita distribution based on a land claim or other settlement related to their First Nation, section 87 exempt will exempt that income from taxation. The same is true for scholarship funds and settlement trust distributions, like funds paid out of an Impact and Benefits Agreement.

Where things get complicated is when a taxpayer needs to determine if property is “situated” on a reserve. Some payments, such as the treaty and settlement monies described above, are inherently “situated” on a reserve by virtue of what they are. Other sources of income such as employment and self-employment income are more complicated. It is worth noting at this point that nothing requires that the income be connected to the reserve of the individual “Indian.” It is open for an “Indian” to organize their business and employment affairs on a reserve that is not their own.

While decisions from the courts rely on a multi-factored test for determining whether income is “situated” on a reserve, the easiest way to determine this is to ensure that income has an obvious connection to a reserve. In other words, the more an income is linked to a reserve, whether through the performance of duties or the clients served, the more likely it is that the income will be found to be exempt from taxation. For employees or contractors who live and work on a reserve, this is relatively simple: their income will normally be found to be totally exempt. For those who live off a reserve, but work on a reserve, a good rule of thumb is to exempt as much of the income as can be proven to be earned on a reserve.

While the Canada Revenue Agency (CRA) will not reveal what evidence its auditors will rely on to determine whether income is on the reserve or not, here are some things to keep in mind:

First, it is easier to prove that income is “situated” on a reserve when there are business or employment activities taking place on the reserve. This means that on-reserve employee-leasing arrangements for off-reserve businesses are unlikely to pass muster. It also means that the CRA is unlikely to find that your income is exempt from taxation if your on-reserve business address is a postal box on an empty lot.  On the flip side, if you can show that your business’ books, records, and employees are on a reserve and that you actually perform work on a reserve, you will be more likely to successfully argue that your income is properly “situated” on a reserve— even if you do not spend all of your time there.

Second, it is always better to have physical proof to back up your arguments. For section 87 purposes, keep records attesting to your presence on a reserve. That could be anything from holding up (Iran-Contra style) a newspaper with a date on it in front of a band office, or more prosaically, keeping fuel and food receipts from on-reserve businesses. Date-stamped photographs work just as well. I myself keep an agenda with on-reserve days marked off with a red pen, as well as the fuel receipts for when I fuel up near my office. For ease of use, organize your photos and receipts before tax time.

What about the novel Coronavirus Disease 2019 (COVID-19)? 

COVID-19 has sparked an explosion in working-from-home, potentially complicating matters for people who live off the reserve but who have on-reserve business or employment addresses. A few things however, are helpful to keep in mind. First, section 87 requires that the “personal property” of an “Indian” be situated on the reserve. It does not require living on a reserve. Second, for situations of physical impossibility (e.g., because of quarantining or lockdown), it would be clearly unreasonable for the CRA to require an on-reserve residency requirement. With that said, it is unclear how the CRA will react to claims that an income is exempt from taxation when work is done off-reserve, especially if the taxpayer in question was not working on the reserve prior to the COVID-19 pandemic. Consulting with a tax professional versed in the Indian Act may be helpful.

Section 87 of the Indian Act is without a doubt the most publicly known section of the Indian Act for non-Indigenous Canadians and has been a constant boon for accountants and tax lawyers, and a constant headache for tax courts and the CRA.

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.