Federal Court Decisions

Date: 20011121

Docket: T-2261-86

Neutral citation: 2001 FCT 1281

BETWEEN:

QU'APPELLE INDIAN RESIDENTIAL SCHOOL COUNCIL,

SPENCER MUSQUA, DORIS BELLEGARDE, PETER BADGER,

ANITA MCLEOD, IRENE POITRAS, and LEILA THOMSON

                                                                                                    Plaintiffs

                                                    - and -

      HER MAJESTY THE QUEEN IN RIGHT OF CANADA

                             DEPARTMENT OF REVENUE

                                                                                                  Defendant

                              REASONS FOR JUDGMENT

SIMPSON J.

Introduction

[1]    The individual plaintiffs are Indians who allege that income they received as employees of the Qu'Appelle Indian Residential School, in the period from May of 1976 to July 7, 1983 (the "Relevant Period"), is exempt from income tax pursuant to section 87(1)(b) of the Indian Act, R.S.C. 1970, c. I-6. Consequently, for themselves and as representatives of all the Indian employees at the school, they seek a refund of taxes paid by deductions taken at source in the amount of $1,000,638.41 with interest calculated under Regulation 4301(b) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp).

[2]    The Qu'Appelle Indian Residential School Council (the "Council") is a non-profit Saskatchewan Corporation. During the Relevant Period, it administered the Qu'Appelle Indian Residential School in the town of Lebret in southeastern Saskatchewan (the "School") and employed the individual plaintiffs and those they represent. The Council seeks relief identical to that sought by the individual plaintiffs.

The Factual Background

[3]    The Council was incorporated on August 23, 1972. It was composed of 13 members and was initially given responsibility for managing only the student residence at the School. Later, on April 1, 1976, the Council took over the administration of the entire School.

[4]                 Each of the 25 Indian Bands who signed Treaty #4 in 1874 was entitled to name a representative to sit on the Council. If more than 13 representatives were named, an election was held and the 13 candidates with the most votes became members of the Council.

[5]                 In 1972, when the Council was established, the School was not a new institution.    It had been constructed in 1884, and twice rebuilt after fires in 1905 and 1936. The School was funded and maintained by the federal crown pursuant to its obligation under Treaty 4 to provide the signatories with an education.

[6]                 The School was located on federal crown land (the "School Property"). The School Property was the site of the School, the student residence, and several staff residences. In the Relevant Period, the School Property was not reserve land, although it was located next to the Starblanket Band's reserve. By a band council resolution of October 26, 1981, the Starblanket Band asked that the School Property be made part of its reserve and this request was eventually granted. However, the plaintiffs acknowledge that the School Property was not reserve land during the Relevant Period^[1].

[7]                 Although the evidence indicated that some non-Indian students may have attended the School and that some staff members may have been non-Indian, the School was predominantly a facility which was operated and staffed by Indian people and attended by students from the reserves of the 25 Treaty #4 bands. Of the 150 staff members employed by Council who were Indian people, approximately 50 resided off-reserve and outside the town of Lebret. They are represented by the plaintiff Doris Bellegarde^[2]. Another 50 staff members (approximately) resided off-reserve, but lived either in the staff residences on the School Property or in the Town of Lebret. They are represented by the plaintiffs Peter Badger and Anita McLeod. The remaining 50 employees (approximately) lived on their respective reserves while they worked at the School. They are represented by the plaintiffs Spencer Musqua and Leila Thomson.

The Legal Background

[8]                 Section 87(1)(b) of the Indian Act reads as follows:

Notwithstanding any other Act of the Parliament of Canada or any Act of the legislature of a province, but subject to subsection (2) and to section 83, the following property is exempt from taxation, namely:

             (b)          the personal property of an Indian or band situated on a reserve, and no Indian or band is subject to taxation in respect of the ownership, occupation, possession or use of any property mentioned in paragraph (a) or (b) or is otherwise subject to taxation in respect of any such property; and no succession duty, inheritance tax or estate duty is payable on the death of any Indian in respect of any such property or the succession thereto if the property passes to an Indian, nor shall any such property be taken into account in determining the duty payable under the Dominion Succession Duty Act, being chapter 89 of the Revised Statutes of Canada, 1952, or the tax payable under the Estate Tax Act, on or in respect of other property passing to an Indian.

[9]                 In 1983, in the case of Gene A. Nowegijick v. The Queen [1983] 1 S.C.R. 29, the Supreme Court of Canada considered the question of whether employment income is personal property. In that case, the appellant was a status Indian who lived on a reserve and worked in the employ of an Indian corporation which paid him at its head office on the reserve. The Crown conceded that the situs of the wages was the reserve, but argued that employment income was taxable because it was not personal property under section 87 of the Indian Act. However, this position was not accepted and the Supreme Court of Canada held that income from employment was personal property, and, therefore, tax exempt if situated on a reserve.

[10]            It then fell to the courts to consider when employment income was "situated" on a reserve. Although the issue may be less settled today^[3], it is clear that during the Relevant Period, it was the prevailing view that the situs of employment income was governed by conflict of law principles which provided that employment income was "situated" where an employer paid an employee.

[11]            However, during the Relevant Period this view was challenged in a case called The Queen v. The National Indian Brotherhood [1979] 1 F.C. 103 (the "N.I.B. Case"). It concerned Indians who worked, not on a reserve, but in a downtown Ottawa office and who provided counselling services to Indians across Canada. The Federal Court, Trial Division, affirmed the traditional approach and held that the Indian employees' income was taxable on the basis that it was paid off-reserve. The Federal Court of Appeal upheld the trial decision and, in 1986, the Supreme Court of Canada finally disposed of the matter when it dismissed an application for leave to appeal. Accordingly, in 1986, the law was clear that Indians' employment income was taxable except when it was paid on a reserve.

The Agreement

[12]            In May of 1976, in response to the ongoing N.I.B. case, which was questioning whether employment income paid off-reserve was taxable, the Council entered into a written agreement (the "Agreement") with the Minister of National Revenue Taxation (the "Minister"). Under the Agreement, the Council undertook to take deductions at source for the payment of income tax (the "Deductions") on the income from employment earned by the Indian employees at the School who resided on reserves. However, because of the N.I.B. Case, it was agreed that, for those Indian employees at the School who resided on a reserve, the money the Council deducted at source for the payment of income tax would not be remitted to the Minister. Rather, it would be paid by the Council into a bank account which was called the Qu'Appelle Indian Residential School Tax Account (the "Account"), which was opened at the Canadian Imperial Bank of Commerce ("CIBC") in Fort Qu'Appelle.

[13]            The Agreement provided that, if the final decision in the N.I.B. Case favoured the Minister, the funds in the Account would be paid to the Minister. On the other hand, if the Minister was unsuccessful, the funds would be returned to the Council. The Agreement included as Schedule "A" a written declaration of trust in connection with the Account. It was signed by both the Minister and the Council.

[14]            On February 28, 1986, the N.I.B. Case was finally decided in favour of the Minister when the Supreme Court of Canada refused leave to appeal. Thereafter, the Minister served the CIBC with a requirement to pay and the bank paid the money in the Account into Court and commenced interpleader proceedings. Ultimately, on August 21, 1986, with the Council's consent, the money was paid out of Court to the Minister.

The Plaintiffs' Evidence

[15]            The plaintiffs' evidence at trial took the form of oral evidence given by two witnesses. One was Henry Musqua, who was Chairman of the Council in 1976 when the Agreement was made. He testified on the Council's behalf. The Plaintiff, Irene Poitras, was the other witness. She lived at the School and for many years was employed as both a childcare worker and a seamstress. In addition to the oral evidence, affidavit evidence was filed on consent. It provided answers to written interrogatories which had been submitted by counsel for the Defendant. James Poitras, who is not a plaintiff, and the plaintiffs Spencer Musqua, Doris Bellegarde, Peter Badger, Anita McLeod and Leila Thomson made the affidavits. In addition to her oral evidence, Irene Poitras gave evidence in affidavit form.

[16]            The plaintiffs' evidence indicated that neither the Council nor the Minister distributed a copy of the Agreement to the employees at the School. However, a meeting was held at the School in 1976 at which the Council's accountant explained the Agreement to the employees. Those who were not employed in 1976 or who missed the meeting appear to have been told by senior School staff that the money deducted from their pay cheques was being held in a separate bank account, but the evidence showed that they were not sure why this was being done. One or two witnesses thought the Account was a retirement fund, and another thought he would get his share back when the School Property became a reserve. None of them understood that the money in the trust account was to be distributed in accordance with the outcome of the N.I.B. Case.

[17]            The majority of the witnesses recalled receiving pay slips which showed that deductions for income tax had been taken at source and most also recalled receiving T4 slips. Irene Poitras testified that she had filed income tax returns and she was able to produce some copies. However, the returns were prepared for her by staff at the School and she had no appreciation of the procedure for filing an objection following receipt of a notice of assessment. Some of the other witnesses also filed income tax returns in some years, but none had copies and none gave evidence indicating whether or not they understood the income tax assessment and objection procedures. In any event, the Defendant admitted that it no longer had records which would show which plaintiffs had filed income tax returns in the Relevant Period.

The Issues

[18]            The individual Plaintiffs say that they were not parties to the Agreement and are therefore now entitled to challenge the treatment of their employment income from the School as taxable income. They further allege that the Defendant breached its fiduciary duty to them and that they should therefore be entitled to assert their claims. The Council also alleges breach of fiduciary duty and says that the Defendant should not have selected the N.I.B. Case as the applicable precedent.

[19]            These issues raise the following questions:

-        At the time the Agreement was made, was it reasonable for Revenue Canada to suggest that the N.I.B. Case should serve as a binding authority?

- What was the impact of the Agreement on the individual plaintiffs?

- Was a fiduciary duty owed and was it breached?

Discussion and Conclusions

[20]            In my view, when considered from the perspective of the Relevant Period, the Agreement represented a bona fide and sensible method of dealing with the fact that, in 1976, the appropriateness of the tax treatment of the income earned by the Indian employees at the School had been called into question in the N.I.B. Case. The Agreement accommodated both Council's obligation to make the Deductions and its desire to ensure that the money could be quickly and easily refunded if it was not owed. The Agreement also accommodated Revenue Canada's requirement, as the tax collector, to ensure that the Deductions were available if income tax was found to be owing.

[21]            The plaintiffs say that the Agreement should be treated as void because Canada breached a fiduciary duty to the Indian employees at the School and to the Council. The duty is described as a broad general fiduciary duty to Indians which is recognized in statements made by the Supreme Court of Canada in its decisions in Guerin v. The Queen [1984] 2 S.C.R. 335 at 384 and R. v. Sparrow [1990] 1 S.C.R. 1075 at 1107-1108.    However, it is my view that these statements describe a fiduciary duty which applies only to the disposition of surrendered Indian land^[4].

[22]            The plaintiffs suggest that the broad fiduciary duty they identify required the Defendant to advise the Council that the N.I.B Case was not a suitable precedent because the facts in that case were different from the situation at the School (the "School Situation").

[23]            In both the N.I.B. Case and the School Situation, the plaintiffs were Indians who received their income off the reserve because they worked for Indian undertakings which were not located on reserves. In the N.I.B. Case, the undertaking was an Ottawa counselling service which provided advice to Indian people across Canada. In the School Situation, the off-reserve undertaking was a school for Indian children. I have concluded that, at the time the Agreement was made, the issue raised by each case was the same: whether income paid to Indians off-reserve was taxable.

[24]            In recent cases, the analysis underlying the application of section 87(1)(b) of the Indian Act has become more refined. The courts now consider the strength of the links between the off-reserve employment and the reserve. Such links did exist in the School Situation because the School was operating on land adjacent to a reserve and was providing educational services pursuant to Treaty 4 to children who were normally resident on reserves. In the N.I.B. Case the links between the employment and reserves were not as clear. However, in the Relevant Period, the courts had not yet begun to consider the connecting factors or links between the employment and the reserve. This approach was not developed until 1992, in the decision of the Supreme Court of Canada in Williams v. The Queen, [1992] 1 S.C.R. 877.

[25]            At the time the Agreement was made, the only arguable issue was whether payments made to Indians off-reserve were taxable. During the Relevant Period the N.I.B. Case was going to decide that issue. It was the only pending case on the point, and it applied to the School Situation because Council paid all its employees at the School and the School was not on reserve land. Accordingly, I am satisfied that, when the issue is viewed from the perspective of the Relevant Period, it was entirely appropriate for Revenue Canada to suggest and Council to agree that the NIB Case could serve as a precedent for the treatment of the Deductions.

[26]            As noted above, paragraph 2 of the Agreement made it clear that it only applied to Deductions taken from the pay of those School employees who resided on a reserve.    Accordingly, the actions of the individual Plaintiffs, Doris Bellegarde, Irene Poitras, Peter Badger and Anita McLeod and those they represent will be dismissed with costs because they all resided off-reserve in the Relevant Period. If their Deductions were paid into the Account, the Council erred in making such payments. Since their Deductions were not subject to the Agreement they should have been paid directly to the Defendant.    However, since the Minister ultimately received the amounts deducted for the off-reserve employees, Council's error was immaterial and did not give rise to a claim by Revenue Canada.

[27]            The remaining Plaintiffs lived on the various Treaty #4 reserves and their Deductions were subject to the Agreement. However, they say (i) that the Defendant had a fiduciary duty to inform them of the existence and meaning of the Agreement and the desirability of filing income tax returns and objections to assessments in order to avoid being bound by the N.I.B. Case and (ii) that the Agreement was not binding on them.    They argue that, had they objected to their assessments, they might have benefited from a positive decision such as the one given by the Federal Court of Appeal in 1997 in Folster v. the Queen, [1997] 3 F.C. 269.

[28]            With regard to the first submission, I have concluded that the Agreement did have the effect of imposing a fiduciary obligation on the Defendant in favour of the individual plaintiffs and the Council. However, this obligation was limited to operating the account in accordance with the Agreement. It did not include a requirement to provide tax advice to the Indian School employees who lived on reserves and whose deductions were paid into the Account pursuant to the Agreement.

[29]            Regarding the second submission, the point of significance is that the Agreement did not prejudice the plaintiffs who lived on reserves because it did not bind them in any way. They all received T4 slips and pay slips which showed that the Deductions had been made. The Agreement did not preclude any plaintiffs who understood the process from filing income tax returns and objecting to their assessments. It only meant that, if the Deductions were not owed because of the N.I.B. Case, the money could be returned in an expeditious manner whether or not the Plaintiffs had filed income tax returns and whether or not they had objected to their assessments. In sum, the Agreement extended the rights of those plaintiffs who lived on reserves; it did not detract from or foreclose their rights.

[30]            In my view, this action has been pursued because the plaintiffs have realized that the law has changed as it relates to the income tax treatment of employment income paid off-reserve and they wish to benefit from the changes by reopening the tax treatment they received in the years from 1976 to 1983. However, in that period, they were taxed in accordance with the law of the day. Since I have not been persuaded that they have any cause of action, the actions of the plaintiffs who lived on reserves and those they represent will also be dismissed with costs.

[31]            For all the reasons given above, I have also concluded that the Council has no cause of action. The Defendant had no fiduciary obligation to the Council in connection with the Agreement other than an obligation to operate the Account as agreed. Further, as discussed above, the Defendant was not mistaken in law or fact when it identified the N.I.B. Case as a relevant precedent.

[32]            In view of these conclusions, it is unnecessary to consider whether the employment income earned by the plaintiffs who resided on reserves in the Relevant Period would today be subject to the payment of income tax.

Decision

[33]            The plaintiffs' actions will be dismissed with costs.

                  "Sandra J. Simpson"                                                                                          JUDGE

Ottawa, Ontario

November 21, 2001

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