A recent analysis by the Aristotle Foundation for Public Policy argues that the time has come for the federal government to remove its income-tax exemption for First Nations people.
Tom Flanagan, an emeritus professor of political science at the University of Calgary wrote the report, titled, The Section 87 Indian Act taxation exemption: An analysis. The study examines the pros and cons of the income tax exemption for First Nations people
The exemption is relatively new in Canada’s history, explains Flanagan.
It wasn’t until Nowegijick v. The Queen, a 1983 Supreme Court decision that ruled in favour of appellant Gene A. Nowegijick, that he should be exempt from paying federal income tax on income earned while living on a reserve.
The decision to revise s. 87 of The Indian Act extended to include not only income earned but also purchases made by Indians on reserves.
“This special privilege applying to the approximately one million Registered Indians in Canada has no logical foundation and serves no obvious purpose of public policy. Its main outcome has been to generate resentment by the other 39 million Canadians who are required to pay taxes on income and sales,” reads the analysis.
Initially, the federal government applied property tax exemptions to First Nations to prevent provincial governments from being able to seize reserve land on the basis of unpaid taxes.
The more recent exemptions on income earned were a result of court cases and not actual modifications to The Indian Act implemented by Parliament.
While Flanagan agrees with the importance of the original 1876 tax exemption on property “justified by the unique purpose of Indian reserves,” he believes the latter exemptions have led to an exploitation of the system.
Supporters of the income tax exemption argue that it allows for more independence within First Nations people to own and operate businesses, however, Flanagan argues that outside of a small handful of reserves, that is not the reality.
“Every Indian reserve in Canada is a tax-free economic zone, yet most are certainly not hotbeds of economic development. However, a small number, perhaps a few dozen out of the 630-plus First Nations, have achieved prosperity through business success, hosting casinos, hotels, residential and commercial real estate developments, and industrial investment,” writes Flanagan.
He points out that tax exemption alone has not been sufficient enough “to achieve success, as most First Nations are still mired in poverty. The First Nations that have succeeded seem to have aggressively exploited local economic opportunities.”
Even GST, which is collected on reserves by the Canada Revenue Agency is ultimately transferred back to the reserve band government.
“So, the First Nation is taxing its own members to a small extent but taxing Canada to a greater extent. To illustrate the profitability of the scheme, the Cowichan Tribes distribute all the proceeds of what they call the “Tobacco Tax” to members” which was “$3.6 million in 2020 divided among 5,600 members.”
Flanagan’s analysis recommends that it’s time for the federal government to revise s. 87 of The Indian Act so that it returns to its initial framework of applying to land only.
“The main function of the section was always to protect reserve land from taxation and seizure by local or provincial governments, so this protection will continue, even though the wording of the new section 87 should make it clear that “property” means real property only and does not include either personal property or income,” suggests the analysis.
Flanagan noted that while amending s. 87 will come with a great deal of political pushback, he argues that there is no legal obstacle to it as the Nowegijick decision was based on an interpretation of The Indian Act, meaning Parliament is still capable of passing new legislation to change this.
He also believes that the change could be in line with reconciliation, as it would reduce resentment held by some Canadians towards First Nations people.
“Removal of the exemptions for income and sales taxes combined with a public explanation of the rationale for the exemption from property tax would diminish the resentment that other Canadians feel because of privileges for which there was no good reason.”
Only certain band members would be affected by the change, as many who are living in poverty would not have to pay the new income tax.
However, all would have to pay GST and federal sales taxes.
“Hopefully, such payments will engender greater interest by members in how the band government spends its revenues, leading to better, more informed participation by members.”
“The effect might be small at first, but it would be in the right direction,” writes Flanagan, who believes that it would, “help move First Nations in the direction of meaningful self-government.”