Aboriginal Taxation: Reasonableness Of Bonuses

Bell v. The Queen 2016 TCC 175 is a Tax Court of Canada decision regarding whether employment bonuses paid to a status Indian by a corporation situated on a reserve were exempt from tax. The Court held that the bonuses were not sufficiently connected to the reserve because they were unreasonable in relation to the employment duties performed.

The case is particularly interesting because it appears to have been quite narrowly decided, and while the specific decision was unfavourable to the taxpayer, it provides insight into how status Indians in similar situations might structure their affairs.

Background

The taxpayer, a status Indian, owned 51% of a corporation ("Reel Steel") that maintained its office and storage facilities on a reserve in British Columbia, but completed all of its work off the reserve. Reel Steel was a construction company that specialized in placing rebar. The taxpayer was the sole director, the President, and an employee of Reel Steel who worked out of the Reel Steel office. As an employee, the taxpayer's responsibilities included the supervision and management of the business and the financial activities of Reel Steel.

The other 49% of Reel Steel was owned by the taxpayer's spouse (the "Spouse"), who was also an employee of Reel Steel, working primarily on projects outside of the office. As an employee, the Spouse's responsibilities included planning, scheduling and placing rebar. The Spouse was not a status Indian.

The location of the Reel Steel office on a reserve was deliberately chosen so that the remuneration of the taxpayer would be exempt from tax by virtue of the Indian Act. Both the taxpayer and the Spouse were remunerated equally by salary, but the taxpayer also received bonuses equal to 100 percent of the estimated income of Reel Steel. The Spouse received no bonuses.

The Court found that the taxpayer and the Spouse both held central and important positions in Reel Steel, but that the taxpayer did not hold a greater role than her Spouse.

Law at issue

Paragraph 87(1)(b) of the Indian Act exempts from taxation the personal property of a status Indian situated on a reserve. The issue in Bell was whether the bonuses received by the taxpayer were situated on the reserve.

Ratio

The Court determined that the bonuses were employment income, and that, to qualify as tax-exempt, there must be "significant substantive connections between the bonuses and the [reserve]". The taxpayer's position was that the bonuses, like...