https://decisia.lexum.com/fca-caf/decisions/en/item/309951/index.do
Bell v. Canada (May 10, 2018 – 2018 FCA 91, Webb (author), Near, Laskin JJ.A.).
Précis: Ms. Bell was a status Indian but did not live on a reserve. She owned 51% of the shares of Reed Steel Ltd.; her husband, Mike Bell, owned the other 49% of the shares. Mr. Bell was not a status Indian. Reed Steel’s office was located on the Capilano Indian Reservation #5, a reserve as defined by the Indian Act. Reed Steel carried on most of its business activities outside of the reserve. During the taxation years under appeal, 2005 to 2008, Reed Steel paid its net profits (after salaries and other operating expenses) to Ms. Bell by way of bonuses:
|
2005
|
$79,000
|
$351,000
|
$75,150
|
0
|
|
2006
|
$105,600
|
$257,500
|
$101,282
|
0
|
|
2007
|
$101,760
|
$715,000
|
$103,760
|
0
|
|
2008
|
$232,150
|
$2,037,000
|
$137,800
|
0
|
Ms. Bell claimed that the bonuses were exempt under section 87 of the Indian Act. CRA denied the exemption and she appealed unsuccessfully to the Tax Court which found that the bonuses were unreasonable and not effectively connected with the reserve. Ms. Bell appealed to the Federal Court of Appeal which dismissed her appeal, with costs. The Court of Appeal found that the reasonableness of the bonuses was not an appropriate factor for determining their connection with the reserve but concluded that the other salient factors led to the conclusion that the bonuses were not effectively connected with the reserve.
Decision: The Court of Appeal accepted Ms. Bell’s argument that the Tax Court Judge erred by basing her analysis, at least in part, on the “reasonableness” of the bonuses paid:
[19] I agree with Helen Bell that the reasonableness of the bonuses should not have been used as a basis to consider the business that was being carried on by Reel Steel in determining the relevant connecting factors in this case. The only issue in this appeal is whether the full amount of the bonuses should be taxable in the hands of Helen Bell under the ITA or exempt from taxation under section 87 of the Indian Act. The connecting factors should not be determined based on the reasonableness of the amount of remuneration but rather should be determined based on the circumstances related to the payment of the remuneration.
However the Court of Appeal went on to conclude that an analysis of the relevant connecting factors did not further Ms. Bell’s remaining arguments:
[22] In my view, in determining whether employment income that is paid by a corporation that is controlled by the employee is exempt under section 87 of the Indian Act, it would be appropriate to look at the particular business that is being carried on by that company to determine the relevant connecting factors. An example will illustrate why it would be relevant to examine the business that the company is carrying on when the employee controls his or her employer.
[23] Assume that there are two individuals who are each status Indians. One individual is carrying on business as a sole proprietorship. The other individual is the sole shareholder of a company that is carrying on the business and the net income for each year is paid as a bonus to that individual. Assume that the facts related to the residence of the individuals and the location and operation of the businesses are identical. The individuals will be taxed under different sections of the ITA – the first individual will be taxed based on the profit generated by the business (section 9 of the ITA), and the second individual will be taxed on the employment income paid by the company (section 5 of the ITA). It would not, however, seem appropriate to me to apply different connecting factors to determine whether the income of each individual would be exempt under section 87 of the Indian Act.
[24] If different connecting factors are applied to the two individuals, this could result in the business income earned by the sole proprietor not being exempt from taxation under section 87 of the Indian Act, and the employment income earned by the second individual being exempt from taxation under section 87 of the Indian Act, even though the only difference between the two is the legal form that was chosen to conduct the business. The exemption under the Indian Act should not be dependent on the legal form or structure that the particular person choses to carry on his or her business, but rather on the substance of the activities and transactions that gives rise to the income in question.
[25] In this case, in substance, the business that gave rise to the bonuses was Helen and Mike Bell’s business, as they were the only shareholders of Reel Steel. Helen Bell was also the majority shareholder and the sole director of the company. Therefore, in my view it was more appropriate in this case to consider the connecting factors that would be relevant in relation to the business of Reel Steel rather than the connecting factors that would be relevant in relation to employment income.
[26] As a result, the Tax Court Judge did not err in considering the operation of the business carried on by Reel Steel in determining the relevant connecting factors in relation to the location of the bonuses paid to Helen Bell.
[27] Helen Bell only challenged the right of the Tax Court Judge to examine the business of Reel Steel in determining the relevant connecting factors. She did not challenge any of the factual findings made by the Tax Court Judge in relation to the operation of the business or the relative weight that was given to these factors by the Tax Court Judge. In my view, it was appropriate in the circumstances of this case for the Tax Court Judge to consider the business of Reel Steel in determining the relevant connecting factors to connect the bonuses to a reserve for the purpose of the exemption from taxation found in section 87 of the Indian Act. As a result, there is no basis to interfere with the decision of the Tax Court Judge that the bonus income of Helen Bell did not qualify for the exemption under section 87 of the Indian Act.
As a result the appeal was dismissed with costs.