Fred Kelly v. The Queen – FCA Remands Section 87 Reserve Exemption Case Back to Tax Court for Rehearing

Bill Innes on Current Tax Cases New Window

Fred Kelly v. The Queen[1] (June 26, 2013) is another decision of the Federal Court of Appeal dealing with the Reserve exemption under section 87 of the Indian Act[2] in the aftermath of the Supreme Court’s decision in Bastien.[3]  This was discussed recently on this blog in the context of the Pilford Estate decision: New Window

The Tax Court decision in Kelly preceded the Supreme Court’s Bastien decision by slightly more than two years and one assumes that the delay in setting down this appeal resulted from the parties’ anticipation of the Supreme Court’s decision.[4]

Mr. Kelly’s work as a consultant appears to have been uniquely appropriate for dealing with aboriginal clients:

[11]           On the other hand, Mr. Kelly has contended he is far removed from an ordinary advisor or consultant. In his view, his services are quite special and have a poignant and intimate relationship to reserves’ spirituality, culture, language, history, community pride, self-respect and mode of life. In Mr. Kelly’s view, in light of this, his business income is located on reserves and so it was exempt under section 87.

[12]           The Tax Court concluded that the income earned by Mr. Kelly from his services was not exempt under section 87.

[13]           However, at least insofar as its factual findings were concerned, the Tax Court agreed with some of Mr. Kelly’s submissions. The Tax Court found that Mr. Kelly has “unique qualifications, skills and experience” in the area of “traditional strategic planning and traditional governance.” He renders services aimed at addressing “in a holistic manner the social, cultural, economic and political spheres and issues of traditional life on the reserves,” to First Nations’ “leadership, institutions and organizations that are based on reserves.” See the Tax Court’s Reasons, paragraphs 2, 4 and 6.

[14]           As a member of Medewe’in, the Sacred Law and Medicine Society of the Anishinaabe, and employing his knowledge of language, history, ceremonies and spiritual matters, Mr. Kelly renders services almost exclusively to reserves through “conceptualizing, drafting, analysing, explaining, translating, consecrating and teaching…traditional concepts, including orders of Anishinaabe law.” This work includes a variety of unique spiritual and cultural activities, ranging from teaching the Anishinaabe language to healing ceremonies for the survivors of residential schools. See the Tax Court’s Reasons, paragraphs 4, and 11-13.

[15]           The Tax Court found Mr. Kelly’s services, performed personally by him, to be “invaluable.” They are “entrenched in the traditional, social and cultural integrity of life on reserves,” and “promote the preservation and furtherance of the traditional way of life on reserves,” benefiting “Native communities as a whole.” In this one way, the connection between Mr. Kelly’s services and the reserves “cannot be overemphasized.” See the Tax Court’s Reasons, paragraphs 18, 47(f) and 51.

[16]           The Tax Court noted Mr. Kelly does provide some services to off-reserve clients. However, he is not seeking the section 87 exemption for business income received from off-reserve clients. He seeks it only for the business income from his clients located on reserves. The Tax Court found that although Mr. Kelly had some off-reserve clients, this did not “detract from the overall nature of the business,” which was aimed at the reserves. See the Tax Court’s Reasons, paragraph 17.

It appears that the decision weighed heavily on the Tax Court judge as it was under reserve for more than a year.  Nevertheless in the end he ruled against Mr. Kelly largely on the basis that his consultancy work did not differ from the “commercial mainstream”.  It was largely the influence of that concept on the trial judge which caused the Federal Court of Appeal to reverse the trial decision:

[58]           Finally, at the end of paragraph 57, the Tax Court adds:

While I have given some weight to the fact that his debtors were reserves or persons residing on reserves and significant weight to the services he provided to these persons, I cannot identify the location of Mr. Kelly’s income as being on a reserve. Once the property, i.e., the amount of money invoiced and paid to Mr. Kelly, left a reserve it entered the economy off the reserve. The money, when received by Mr. Kelly, ceased to have anything to do with a reserve. The factors in favour of the income not being on a reserve have more weight than any factors that may arguably be connected to a reserve.

[59]           It is fair to say from this passage that “commercial mainstream,” construed in the way the Tax Court did, loomed large in its analysis and overall conclusion.

[60]           In my view, the Supreme Court has changed the meaning and significance of the commercial mainstream factor such that the Tax Court’s analysis in paragraph 57 can no longer be said to be correct.

In the result the Federal Court of Appeal ordered a rehearing by the Tax Court:

[66]           The judgment of the Tax Court cannot stand. Under paragraph 52(c) of the Federal Courts Act, R.S.C. 1985 c. F-7, this Court may give the decision that should have been given by the Tax Court or refer the matter back to the Tax Court for redetermination. I opt for the latter.

[67]           In Robertson, supra, this Court found that although Bastien and Dubé “in some respects modified the previous law” and “reset the previous analytical framework in some significant respects,” this did not matter because the Tax Court reached the correct result. The evidentiary record showed that the property under examination was exempt under section 87 and Bastien and Dubé did not affect that result.

[68]           This case is different. Based on the record before us, especially a review of the transcript of the proceedings before the Tax Court, I am not confident that the parties appreciated the concept of “commercial mainstream,” as defined in Bastien, and adduced evidence relevant to it. Nor am I confident upon a reading of that transcript that the parties appreciated the need, highlighted in Bastien, to examine thoroughly the nature of the type of property, here business income, a matter involving a number of nuances discussed at paragraph 42, above. Nor am I confident that the record contains sufficient information concerning what Mr. Kelly was doing at various times and the connection of those activities to the reserves, a matter also emphasized in Bastien; the parties seemed to fasten more on the physical location of Mr. Kelly when he was performing his activities.

[70]           I am also mindful of the practical litigation context. Parties construct their cases carefully to elicit evidence that prompts factual findings that trigger the applicable legal tests.  Here, the parties no doubt constructed their cases around the jurisprudence of this Court and the Tax Court over the last nineteen years, jurisprudence that has now been altered.

In light of the Supreme Court’s holding in Bastien the result in this appeal was probably not unexpected however the Federal Court of Appeal’s understanding of the practical litigation process and possible need for Mr. Kelly to call additional evidence more responsive to the Bastien criteria is welcome.

[1] 2013 FCA 171.

[2] R.S.C. 1985, c. I-5.

[3] Bastien Estate v. Canada, 2011 SCC 38, [2011] 2 S.C.R. 710;  also Dubé v. Canada, 2011 SCC 39, [2011] 2 S.C.R. 764.

[4] 2009 TCC 189 (April 7, 2009).