Indigenous Self-Government And Taxation: Indigenous Nations No Longer Required To Phase Out Tax Exemption Under New Federal Policy

• Law Firm: Gowling WLG
• Subject Matter: Government, Public Sector, Tax, Government Contracts, Procurement & PPP, Tax Authorities, Property Taxes
• Author: Mr Maxime Faille, Aaron Christoff and Lauren Mar (Articling Student)
• Published date: 31 March 2023

Change opens the door to withdrawal from the Indian Act in favour of a negotiated nation-to-nation self-government agreement

On July 22, 2022, Canada announced the repeal of its longstanding policy requiring Indigenous Nations to phase out the s. 87 Indian Act tax exemption as a condition for entering into a modern treaty or self-government agreement.

This policy reversal means that Nations have a much clearer and more viable path forward to extract themselves from the Indian Act, in favour of a negotiated nation-to-nation self-government agreement. Nations can now embark on this path without having to relinquish one of the few beneficial aspects of the Indian Act: the exemption from tax for the Nation and its members in regard to on-reserve property - an exemption that has been a cornerstone of the Crown-Indigenous relationship since before Confederation.

Under the new policy, Nations will be entitled to maintain the tax exemption upon attaining self-government, even upon conversion of former reserve lands into lands held in fee simple.

In this article, we briefly outline i) the history of the s. 87 exemption and its role in the Crown-Indigenous relationship, ii) the federal policy change, and iii) the implications of the change for Indigenous Nations interested in pursuing self-government or treaty.

The role of tax exemption in the Crown-Indigenous relationship

Section 87 of the Indian Act provides that "personal property" owned by "an Indian or Band" and "situated on a reserve" is exempt from taxation.¹Among other things, s. 87 can apply to employment or business income of a status Indian earned on reserve.

Though it is codified in s. 87 of the Indian Act, this tax exemption flows from, and has always been a part of, the historical Crown-Indigenous relationship.

Indigenous exemption from Canadian tax pre-dates Confederation and reflects the principles that underpinned the original basis of the relationship: cooperation and respect for Indigenous autonomy. As stated by the Supreme Court of Canada, "The exemption was rooted in the promises made to Indians that they would not be interfered with in their mode of life."² It is part of the legislative and constitutional "package" at the heart of the Crown-Indigenous relationship,³by which Canadian law seeks to reconcile the assertion of Crown sovereignty and de facto control with pre-existing Indigenous sovereignty and self-determination.

From the outset of the relationship, the Crown (and the courts) recognized that Indigenous people were autonomous and constituted Nations in their own right. Although over time the Crown sought to erode Indigenous sovereignty, it continued to recognize a basic sphere of Indigenous autonomy (at least in regard to certain important aspects of governance) in which Indigenous Nations could not be subject to certain aspects of Crown intrusion. Indigenous people were not subject to military service, and were not subject to taxation. Nor could Indigenous people vote until 1960 - a policy that was, ironically, rooted in both racist attitudes as well as an understanding that Indigenous people were autonomous and maintained their own distinct governance institutions.⁴ Respect for that underlying autonomy was critical to the basic but often fraught compact between Indigenous Nations and the Crown.

Thus, when municipalities first emerged and tried to impose municipal taxes on Indigenous inhabitants, Indigenous leaders reminded colonial authorities of their underlying autonomy, who agreed: Indigenous people were not subject to municipal tax ordinances.⁵ This exemption from tax was first codified in 1850, pursuant to An Act for the protection of the Indians in Upper Canada from imposition, and the property occupied or enjoyed by them from trespass and injury.⁶ Tellingly, although this legislation only applied in Upper Canada (now Ontario), Indians in Lower Canada (now Quebec) were not taxed either - a further indication that the exemption formed part of an accepted, basic sphere of Indigenous autonomy and was not simply an act of charity or benevolent policy intended to "help" Indigenous people.

Following Confederation in 1867, Parliament consolidated various pieces of legislation pertaining to Indigenous people in the form of the first Indian Act in 1876. By this time, federal policy had undeniably shifted away from a relationship of mutuality to one focused on assimilation, federal control, and so-called "enfranchisement," by which...