2004 FCA 6
A-375-01
Audrey J. Sero (Appellant)
v.
Her Majesty the Queen (Respondent)
A-376-01
Cyril Frazer (Appellant)
v.
Her Majesty the Queen (Respondent)
Indexed as: Sero v. Canada (F.C.A.)
Federal Court of Appeal, Stone, Rothstein and Sharlow JJ.A.--Toronto, November 27, 2003; Ottawa, January 12, 2004.
Native Peoples -- Taxation -- Indians assessed tax on interest income earned in Royal Bank branch located on Indian reserve -- Claimed interest exempt from tax by Indian Act, s. 87(1)(b) -- Interest income in issue personal property of taxpayers -- Whether "situated on a reserve" -- Principles to be applied in determining situs of property for purposes of s. 87 must be rooted in objective of tax exemption --"Connecting factors" test from Williams v. Canada (S.C.C.) applied -- Test requiring consideration of all characteristics of property in issue -- Source of interest income earned by taxpayers found in commercial mainstream -- Interest income not situated on reserve.
Financial Institutions -- Taxpayers arguing interest income earned by them deemed to be located at Royal Bank branch on Indian reserve under Bank Act, s. 461(4) -- Meaning of "deposit", "deposit account" in s. 461(4) -- Latter derived from context in which used in provisions of Bank Act -- Savings account, term investments of taxpayers "deposits", respective accounts "deposit accounts" -- Interpretation of deeming provision in s. 461(4) in accordance with R. v. Verrette -- Connecting factors test replaces principles of conflicts of law for purposes of determinations made under Indian Act, s. 87, must prevail against deeming rule in Bank Act, s. 461(4) -- Interest income not "situated on a reserve" for purposes of s. 87.
These were appeals from a Tax Court of Canada decision that the interest income earned by the appellants at a branch of the Royal Bank of Canada located on the Six Nations Reserve, in Ohsweken, Ontario, was not exempt from tax under paragraph 87(1)(b) of the Indian Act. The appellants are "Indians" as defined in the Indian Act. Audrey J. Sero has lived in Etobicoke since 1977, and has never resided or worked on a reserve. She earned interest income of approximately $13,000, which was paid to her on nine term investments made at the Ohsweken branch of the Royal Bank. None of the funds used by Ms. Sero in the term investments was earned on a reserve. Cyril Frazer was born on the Six Nations Reserve in 1932 and resided there until he was 17 years old. After a long absence, he returned there in 1985 and opened a laundry business. Mr. Frazer and his spouse maintained a joint savings account at the Ohsweken branch of the Royal Bank. Between 1993 and 1996, he also invested in term deposits at the same branch, using funds from his laundry business. He earned approximately $10,000 on his term investments. The only issue was whether the interest income was "situated on a reserve" as provided by paragraph 87(1)(b) of the Indian Act.
Held, the appeals should be dismissed.
The statutory basis of the tax exemption claimed by the appellants, paragraph 87(1)(b) of the Indian Act, is part of a statutory scheme for the protection of certain property owned by an Indian or an Indian Band if it is located on a reserve. Under that provision, the personal property of an Indian or a band situated on a reserve is exempt from taxation. It was undisputed that, for the purposes of section 87 of the Indian Act, the interest income in issue was personal property of the appellants. In Williams v. Canada, the Supreme Court of Canada (S.C.C.) stated that the principles to be applied in determining the situs of property for purposes of section 87 must be rooted in the objective of the tax exemption it provides. After explaining the purpose of the Indian Act exemptions, the S.C.C. set out the "connecting factors" test for determining the situs of intangible personal property. There are three important considerations in the context of the exemption from taxation in the Indian Act: the purpose of the exemption, the character of the property in question, and the incidence of taxation upon that property. In Recalma v. Canada, the Federal Court of Appeal applied the connecting factors test to determine whether section 87 exempted certain investment income from tax. In that case, the only connection between the reserve and the investments was that the bank marketed the investments through a branch located on the reserve. This was too weak a connection to overcome the strong connection between the investment and its off-reserve economic basis. In the present case, the source of interest income earned by the appellants is found in the commercial mainstream in which the Royal Bank operates, and not on a reserve. It follows that, for the purposes of section 87 of the Indian Act, the investment income in issue was not situated on a reserve, unless a contrary result is mandated by the Bank Act. The fact that, in Mr. Frazer's case, the source of the money used to make the investments was his on-reserve business is a relatively weak connection to the reserve. Furthermore, it is not anomalous to determine the situs of income on a debt by reference to the location of the activities of the debtor rather than the activities of the creditor. The connecting factors test from Williams requires consideration of all the characteristics of the property in issue. Where the property is the interest on a debt, an analysis of the economic characteristics of the debtor is important. The appeals could not succeed on the basis of the connecting factors test.
Subsection 461(4) of the Bank Act provides that the indebtedness of a bank by reason of a deposit in a deposit account in the bank shall be deemed for all purposes to be situated at the place where the branch of account is situated. The Bank Act does not define the terms "deposit" or "deposit account". According to one author, a deposit is a contract by which a customer lends money to a bank. By this definition, the savings account of Mr. Frazer and the term investments of Ms. Sero and Mr. Frazer are "deposits". Each of these accounts is a "deposit account" within the meaning of that term in subsection 461(4) of the Bank Act. The Crown's assertion that a "deposit account" cannot have a fixed term is not consistent with the Disclosure of Interest (Banks) Regulations. The meaning of the term "deposit account" derives from the context in which it is used in the provisions of the Bank Act. A cursory survey of those provisions suggested that the term "deposit account" is used to describe the record that a bank maintains to keep track of the outstanding balance of its indebtedness to a particular customer. The appellants argued that the legal effect of subsection 461(4) of the Bank Act is to override the connecting factors test so that the savings account and term investments are located on the Six Nations Reserve. Such argument turned, first, on the word "deemed", and then on the phrase "for all purposes" in subsection 461(4). In R. v. Verrette, the Supreme Court of Canada interpreted statutory deeming provisions, pointing out that a deeming provision creates a fiction and that the statutory fiction resulting from a deeming rule generally applies only for the purposes of the statute that creates it. The purpose of subsection 461(4) is to preclude any debate that the situs of the indebtedness is at any location other than the branch of account. However, there is no reason to conclude that Parliament intended, when enacting subsection 461(4) of the Bank Act, to preclude any debate on the connecting factors test in Williams in a case where a determination must be made as to whether or not the tax exemption in section 87 of the Indian Act applies to interest paid by a bank on a deposit. For the same reason that the connecting factors test replaces the principles of the conflicts of law for the purposes of determinations made under section 87 of the Indian Act, the connecting factors test must prevail against the deeming rule in subsection 461(4) of the Bank Act. Finally, the words "for all purposes" in the English version of subsection 461(4) add nothing to the scope of the deeming rule. There are no words of like meaning in the French version. Subsection 461(4) of the Bank Act does not override the connecting factors test to compel the conclusion that the interest income in issue is "situated on a reserve" for the purposes of section 87 of the Indian Act.
statutes and regulations judicially
considered
| Bank Act, S.C. 1991, c. 46, ss. 413.1(1)(a) (as enacted by S.C. 1997, c. 15, s. 43; 2001, c. 9, s. 103), 439.1 (as enacted idem, s. 113), 445 (as am. by S.C. 1997, c. 15, s. 48; 2001, c. 9, s. 116), 446, 447, 448 (as am. idem, s. 117), 448.1 (as enacted idem), 448.2 (as enacted idem), 458.1 (as enacted idem, s. 123), 459.2 (as enacted idem, s. 125), 461(4), 462 (as am. idem, s. 126). |
| Canada Deposit Insurance Corporation Act, R.S.C., 1985, c. C-3. |
| Disclosure of Interest (Banks) Regulations, SOR/92-321, ss. 2 "deposit account", 5. |
| Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1. |
| Indian Act, R.S.C., 1985, c. I-5, ss. 2(1) "Indian", 87, 89(1) (as am. by R.S.C., 1985 (4th Supp.), c. 17, s. 12), 90(1). |
cases judicially considered
followed:
R. v. Verrette, [1978] 2 S.C.R. 838; (1978), 85 D.L.R. (3d) 1; 40 C.C.C. (2d) 273; 3 C.R. (3d) 132; 21 N.R. 571.
applied:
Recalma v. Canada (1998), 158 D.L.R. (4th) 59; [1998] 3 C.N.L.R. 279; [1998] 2 C.T.C. 403; 98 DTC 6238; 232 N.R. 7 (F.C.A.); leave to appeal to S.C.C. refused, [1998] 3 S.C.R. vii; Williams v. Canada, [1992] 1 S.C.R. 877; (1992), 90 D.L.R. (4th) 129; 41; C.C.E.L. 1; [1992] 3 C.N.L.R. 181; [1992] 1 C.T.C. 225; 92 DTC 6320; 136 N.R. 161; Mitchell v. Peguis Indian Band, [1990] 2 S.C.R. 85; (1990), 71 D.L.R. (4th) 193; [1990] 5 W.W.R. 97; 67 Man. R. (2d) 81; [1990] 3 C.N.L.R. 46; 110 N.R. 241; 3 T.C.T. 5219; Schreiber v. Canada (Attorney General), [2002] 3 S.C.R. 269; (2002), 216 D.L.R. (4th) 513; 167 C.C.C. (3d) 51; 22 C.P.C. (5th) 207; 292 N.R. 250; 164 O.A.C. 354.
considered:
Lewin v. Canada, [2003] 3 C.T.C. 151; 2002 DTC 7582 (Fr.); 2003 DTC 5476 (Eng.) (F.C.A.); leave to appeal to S.C.C. refused, [2003] 1 S.C.R. xiii.
referred to:
Canadian Imperial Bank of Commerce v. E. & S. Liquidators Ltd., [1995] 1 C.N.L.R. 23; (1994), 34 C.P.C. (3d) 338 (B.C.S.C.); Gifford v. Lax Kw'Alaams Indian Band (2000), 72 B.C.L.R. (3d) 363; [2000] 2 C.N.L.R. 30 (S.C.); leave to appeal to B.C.C.A. granted, 2000 BCCA 280; [2000] B.C.J. No. 883 (QL); Houston v. Standingready, [1991] 1 W.W.R. 744; 88 Sask. R. 316; [1991] 2 C.N.L.R. 65 (Sask. C.A.); Alberta (Workers' Compensation Board) v. Enoch Indian Band (1993), 141 A.R. 204; 106 D.L.R. (4th) 279; [1993] 8 W.W.R. 77; 11 Alta. L.R. (3d) 305; [1994] 2 C.N.L.R. 3; 20 C.P.C. (3d) 192 (C.A.); Webtech Controls Inc. v. Cross Lake Band of Indians, [1991] 3 C.N.L.R. 182 (Man. Q.B.).
authors cited
Biberdorf, Donald K. "Aboriginal Income and the Economic Mainstream" in Report of Proceedings of the Forty-Ninth Tax Conference, 1997 Conference Report. Toronto: Canadian Tax Foundation, 1998.
Crawford and Falconbridge, Banking and Bills of Exchange: a Treatise on the Law of Banks, Banking, Bills of Exchange and the Payment System in Canada, 8th ed. by Bradley Crawford. Toronto: Canada Law Book, 1986.
Maclagan, Bill. "Section 87 of the Indian Act: Recent Developments in the Taxation of Investment Income" (2000), 48 Can. Tax J. 1503.
Marshall, Murray. "Business and Investment Income and Section 87 of the Indian Act: Recalma v. Canada" (1998), 77 Can. Bar Rev. 528.
McDonnell, Thomas E. "Taxation of an Indian's Investment Income" (2001), 49 Can. Tax J. 954.
O'Brien, Martha. "Income Tax, Investment Income and the Indian Act: Getting Back on Track" (2002), 50 Can. Tax J. 1570.
APPEALS from a decision by the Tax Court of Canada (Sero v. Canada, [2001] 4 C.N.L.R. 307; [2001] 3 C.T.C. 2224; 2001 DTC 575) that the interest income earned by the appellantsat a branch of the Royal Bank of Canada located on the Six Nations Reserve in Ohsweken, Ontario was not exempt from tax by paragraph 87(1)(b) of the Indian Act. Appeals dismissed.
appearances:
Richard B. Thomas and Laura J. Stoddard for appellants.
Wendy M. Yoshida and Tom Torrie for respondent.
solicitors of record:
McMillan Binch LLP, Toronto, for appellants.
Deputy Attorney General of Canada for respondent.
The following are the reasons for judgment rendered in English by
[1]Sharlow J.A.: The appellants Audrey J. Sero and Cyril Frazer, who are "Indians" as defined in the Indian Act, R.S.C., 1985, c. I-5 [s. 2(1)], earned interest on money invested at a branch of the Royal Bank of Canada located in the Iroquois Village Plaza in Ohsweken, Ontario, on the Six Nations Reserve. They were assessed tax on that interest income under the Income Tax Act, R.S.C., 1985 (5th supp.), c. 1. They appealed their assessments to the Tax Court of Canada on the basis that the interest was exempt from tax by paragraph 87(1)(b) of the Indian Act. Their appeals were dismissed: see Sero v. Canada, [2001] 4 C.N.L.R. 307 (T.C.C.). Ms. Sero and Mr. Frazer now appeal to this Court.
Section 87 of the Indian Act
[2]The statutory basis of the tax exemption claimed by the appellants, paragraph 87(1)(b) of the Indian Act, is part of a statutory scheme for the protection of certain property owned by an Indian or an Indian Band if it is located on a reserve. The portions of that statutory scheme that are most relevant to this case read as follows [s. 89(1) (as am. by R.S.C., 1985 (4th Supp.), c. 17, s. 12)]:
87. (1) Notwithstanding any other Act of Parliament or any Act of the legislature of a province, but subject to section 83, the following property is exempt from taxation, namely,
(a) the interest of an Indian or a band in reserve lands or surrendered lands; and
(b) the personal property of an Indian or a band situated on a reserve.
(2) No Indian or band is subject to taxation in respect of the ownership, occupation, possession or use of any property mentioned in paragraph (1)(a) or (b) or is otherwise subject to taxation in respect of any such property.
. . .
89. (1) Subject to this Act, the real and personal property of an Indian or a band situated on a reserve is not subject to charge, pledge, mortgage, attachment, levy, seizure, distress or execution in favour or at the instance of any person other than an Indian or a band.
. . .
90. (1) For the purposes of sections 87 and 89, personal property that was
(a) purchased by Her Majesty with Indian moneys or moneys appropriated by Parliament for the use and benefit of Indians or bands, or
(b) given to Indians or to a band under a treaty or agreement between a band and Her Majesty,
shall be deemed always to be situated on a reserve.
Issue
[3]It is undisputed that, for the purposes of section 87 of the Indian Act, the interest income in issue in this case is personal property of the appellants. The only issue is whether it is "situated on a reserve". The principal argument for Ms. Sero and Mr. Frazer is that, by virtue of subsection 461(4) of the Bank Act, S.C. 1991, c. 46, the interest income is deemed to be located at the Ohsweken branch on the reserve.
Facts
[4]Ms. Sero has lived in Etobicoke since 1977. Prior to her retirement, she worked as a library technician for the City of York Board of Education. She has never resided or worked on a reserve.
[5]The interest income in issue in Ms. Sero's appeal is approximately $13,000, which was paid to her on nine term investments she made at the Ohsweken branch of the Royal Bank. Each term investment was governed by a contract called a "Term Deposit Account Agreement", and was evidenced by a "Term Deposit Receipt". None of the funds used by Ms. Sero to invest in the term investments was earned on a reserve.
[6]Cyril Frazer was born on the Six Nations Reserve in 1932 and resided there until he was 17 years old. He worked as a construction supervisor in Simcoe, Ontario (not on a reserve) until his retirement in 1985. Between 1949 and 1985, he did not reside on a reserve for any continuous or lengthy period of time. Since 1985, Mr. Frazer has resided on the Six Nations Reserve and has operated a laundry business there, earning approximately $80,000 per annum, after expenses. The Court was told that the laundry business income was exempt from tax.
[7]Mr. Frazer and his spouse maintained a joint savings account at the Ohsweken branch of the Royal Bank. He could have had access to that account through automated bank machines or point of sale terminals. Between 1993 and 1996, Mr. Frazer also invested in term deposits at the same branch, using funds from his laundry business. Each term investment was governed by a contract evidenced by a "Term Deposit Account Agreement" and a "Term Investment Certificate". In 1996, Mr. Frazer was paid interest of approximately $200 on his savings account and approximately $10,000 on his term investments. All of this interest is in issue in this case.
[8]The Royal Bank is a "Schedule I bank" within the meaning of the Bank Act. In the year 2000, it operated about 1,300 branches and other units (such as kiosks in stores), as well as about 4,500 bank machines in Canada. In 1999, the number of branches and other units was 1,400. Outside of Canada, the Royal Bank has 300 offices in more than 30 countries. It earns about 30% of its net income outside of Canada. Of all the income earning activities of the Royal Bank, only a very minor percentage is carried out on reserves, and only a very minor percentage of its assets is located on reserves. Neither the head office nor the directors of the Royal Bank are located on a reserve. The meetings of the directors are not held on a reserve, and the control and management of the Royal Bank is not situated on a reserve.
[9]The Royal Bank operates six branches on reserves in Canada. One is the Ohsweken branch, which is operated on leased premises in the Iroquois Village Plaza in Ohsweken, Ontario. The Ohsweken Branch was opened on December 2, 1991. In 1991 or 1992, Royal Bank sold "First Nations term investments" at the Ohsweken Branch. A term investment with exactly the same terms and conditions was available at all branches of the Royal Bank, but in those branches it would not have been called a First Nations term investment. The rate of interest on such term investments bore rates of interest comparable to those of guaranteed investment certificates. They were redeemable prior to maturity. Some of the term investments of Ms. Sero and Mr. Frazer may have been First Nations term investments, but neither they nor the Royal Bank can identify which ones.
[10]The terms and conditions of First Nations term investments, including the rates of interest, were developed by personnel at the head office of the Royal Bank. They also drafted the promotional material and relevant bank documents and authorized the sale of the investments to customers. Head office personnel did not approve each individual sale of term investments. Any customer of Royal Bank, Indian or not, could purchase a First Nations term investment at the Ohsweken Branch.
[11]The Ohsweken Branch maintains the records for Mr. Frazer's savings account and for each of the term investments acquired by Ms. Sero and Mr. Frazer at that branch. The Royal Bank pays interest on Mr. Frazer's savings account by crediting the amount of the interest to his savings account. Similarly, the Royal Bank pays interest on each of the term investments by crediting the amount of the interest to the account for that term investment.
[12]It is impossible for the Royal Bank or the Ohsweken Branch to track the use of any specific funds the Royal Bank received from Ms. Sero or Mr. Frazer. The funds became part of, and were mingled with, the general pool of the Royal Bank's funds to be used by the Royal Bank at its discretion in earning its income.
Williams v. Canada and the connecting factors test
[13]According to Williams v. Canada, [1992] 1 S.C.R. 877, the principles to be applied in determining the situs of property for purposes of section 87 of the Indian Act must be rooted in the objective of the tax exemption it provides. Prior to 1992, such determinations were made on the basis of the principles of the conflicts of laws. After Williams, those principles can no longer be used for that purpose.
[14]The purpose of the Indian Act exemptions was explained as follows by Justice La Forest in Mitchell v. Peguis Indian Band, [1990] 2 S.C.R. 85, at pages 130-131:
The exemptions from taxation and distraint have historically protected the ability of Indians to benefit from this property in two ways. First, they guard against the possibility that one branch of government, through the imposition of taxes, could erode the full measure of the benefits given by that branch of government entrusted with the supervision of Indian affairs. Secondly, the protection against attachment ensures that the enforcement of civil judgments by non-natives will not be allowed to hinder Indians in the untrammelled enjoyment of such advantages as they had retained or might acquire pursuant to the fulfillment by the Crown of its treaty obligations. In effect, these sections shield Indians from the imposition of the civil liabilities that could lead, albeit through an indirect route, to the alienation of the Indian land base through the medium of foreclosure sales and the like . . . .
In summary, the historical record makes it clear that ss. 87 and 89 of the Indian Act, the sections to which the deeming provision of s. 90 applies, constitute part of a legislative "package" which bears the impress of an obligation to native peoples which the Crown has recognized at least since the signing of the Royal Proclamation of 1763. From that time on, the Crown has always acknowledged that it is honour-bound to shield Indians from any efforts by non-natives to dispossess Indians of the property which they hold qua Indians, i.e., their land base and the chattels on that land base.
It is also important to underscore the corollary to the conclusion I have just drawn. The fact that the modern-day legislation, like its historical counterparts, is so careful to underline that exemptions from taxation and distraint apply only in respect of personal property situated on reserves demonstrates that the purpose of the legislation is not to remedy the economically disadvantaged position of Indians by ensuring that Indians may acquire, hold, and deal with property in the commercial mainstream on different terms than their fellow citizens. An examination of the decisions bearing on these sections confirms that Indians who acquire and deal in property outside lands reserved for their use, deal with it on the same basis as all other Canadians.
[15]Based on that foundation, Justice Gonthier in Williams developed what has come to be called the "connecting factors" test, which he described as follows in the context of intangible personal property (at pages 899-900):
Determining the situs of intangible personal property requires a court to evaluate various connecting factors which tie the property to one location or another. In the context of the exemption from taxation in the Indian Act, there are three important considerations: the purpose of the exemption; the character of the property in question; and the incidence of taxation upon that property. Given the purpose of the exemption, the ultimate question is to what extent each factor is relevant in determining whether to tax the particular kind of property in a particular manner would erode the entitlement of an Indian qua Indian to personal property on the reserve.
Recalma v. Canada (1998, F.C.A.)
[16]Recalma v. Canada (1998), 158 D.L.R. (4th) 59 (F.C.A.) applied the connecting factors test to determine whether section 87 exempted certain investment income from tax. It is now the leading authority on that question. Recalma was followed most recently in Lewin v. Canada, [2003] 3 C.T.C. 151 (F.C.A.). The Supreme Court of Canada has refused leave to appeal in both cases: Recalma v. Canada, [1998] 3 S.C.R. vii; Lewin v. Canada, [2003] 1 S.C.R. xiii.
[17]The investment income in Recalma came from mutual funds and bankers' acceptances purchased by Indians at a branch of a Canadian bank located on a reserve. The key part of the reasoning in that case is found in paragraph 11, which reads as follows:
. . . where investment income is at issue, it must be viewed in relation to its connection to the Reserve, its benefit to the traditional Native way of life, the potential danger to the erosion of Native property and the extent to which it may be considered as being derived from economic mainstream activity. In our view, the Tax Court Judge correctly placed considerable weight on the way the investment income was generated, just as the Courts have done in cases involving employment, U.I. benefits and business income. Investment income, being passive income, is not generated by the individual work of the taxpayer. In a way, the work is done by the money which is invested across the land. The Tax Court Judge rightly placed great weight on factors such as the residence of the issuer of the security, the location of the issuer's income generating operations, and the location of the security issuer's property. While the dealer in these securities, the local branch of the Bank of Montreal, was on a Reserve, the issuers of the securities were not; the corporations which offered the Bankers' Acceptances and the managers of the Mutual Funds in question were not connected in any way to a Reserve. They were in the head offices of the corporations in cities far removed from any reserve. Similarly, the main income generating activity of the issuers was situated in towns and cities across Canada and around the world, not on Reserves. In addition, the assets of the issuers of the securities in question were predominantly off Reserves, which in case of default would be most significant.
[18]In Recalma, the only connection between the reserve and the investments was that the bank marketing the investments did so through a branch located on the reserve. That was too weak a connection to overcome the strong connection between the investment and its off-reserve economic basis.
[19]The investment income in issue in Lewin was paid to an Indian on investment certificates issued by a credit union located on a reserve. Thus, the investments in that case derived their value from the assets of the credit union itself and not, as in Recalma, on the assets of third party corporations. Indians resident on the reserve became members of the credit union, and invested money with the credit union. The credit union in turn made some loans to those members, mainly to fund housing costs. However, the borrowing needs of the people on the reserve were not sufficient to support the credit union's activities. As a result, the credit union invested its funds mainly in traditional capital markets off the reserve.
[20]It was argued in Lewin that the location of the credit union on the reserve, combined with the fact that the investments in issue were debts of the credit union itself rather than third party corporations, created a connection to the reserve that was enough to distinguish Lewin from Recalma. However, the Court found no reason to distinguish the two cases.
[21]When Ms. Sero and Mr. Frazer lent their money to the Royal Bank, they became entitled to interest on the terms and conditions that the Royal Bank offered to them at the relevant time, which was substantially the same offer that was made to all of its other customers in Canada.
[22]The Royal Bank operates in the "commercial mainstream", to use the phrase from Mitchell v. Peguis Indian Band. The source of the interest income earned by Ms. Sero and Mr. Frazer is found in that commercial mainstream, and not on a reserve. I can discern no relevant factual distinction between these cases and Recalma and Lewin. It follows that, for the purposes of section 87 of the Indian Act, the investment income in issue is not situated on a reserve, unless a contrary result is mandated by the Bank Act (the Bank Act arguments are discussed under the next heading).
[23]In reaching the conclusion that these appeals must be decided in the same way as Recalma, I have not ignored the fact that, in Mr. Frazer's case, the source of the money used to make the investments was Mr. Frazer's on-reserve business. That is a connection to the reserve but, in my view, a relatively weak one. It is not enough to overcome the fact that once Mr. Frazer invested his money in the Royal Bank, his investments became a source of income with no more connection to the reserve than the investment of Ms. Sero.
[24]Nor have I ignored the published criticisms of Recalma: see, for example, Donald K. Biberdorf, "Aboriginal Income and the Economic Mainstream" in Report of Proceedings of the Forty-Ninth Tax Conference, 1997 Conference Report (Toronto: Canadian Tax Foundation, 1998), at pages 25:1-23; Murray Marshall, "Business and Investment Income and Section 87 of the Indian Act: Recalma v. Canada" (1998), 77 Can. Bar Rev. 528; Bill Maclagan, "Section 87 of the Indian Act: Recent Developments in the Taxation of Investment Income" (2000), 48 Can.Tax J. 1503; Thomas E. McDonnell, "Taxation of an Indian's Investment Income" (2001), 49 Can. Tax J. 954; Martha O'Brien, "Income Tax, Investment Income and the Indian Act: Getting Back on Track" (2002), 50 Can. Tax J. 1570.
[25]There may be merit to some of the criticisms of Recalma. For example, it is not clear to me whether, in determining the situs of investment income for purposes of section 87 of the Indian Act, it is relevant to consider the extent to which investment income benefits the "traditional Native way of life". This seems to me a difficult test to apply, since it is at least arguable that the "traditional Native way of life" has little or nothing to do with reserves. However, it is not necessary to express an opinion on that point, because it is of no consequence in these appeals.
[26]The principal criticism of Recalma is that it is anomalous to determine the situs of income on a debt by reference to the location of the activities of the debtor rather than the activities of the creditor. I see no anomaly in such an approach. The connecting factors test from Williams requires consideration of all of the characteristics of the property in issue. It seems to me that where the property is the interest on a debt, an analysis of the economic characteristics of the debtor is important.
[27]Some critics also point out that the practical result of Recalma is to make it impossible for an Indian to earn tax-exempt investment income, except perhaps by investing in a financial or other enterprise with an asset base that is located or mostly located on a reserve. That criticism is based on the premise that section 87 is intended to permit an Indian to earn tax-exempt income on any investment, as long as it is acquired through a financial institution with a presence on a reserve in the form of a branch. That is the premise that Recalma found to be unsound.
[28]I note finally the jurisprudence that supports the proposition that section 89 would exempt from attachment a debt owed by a bank to an Indian if the debt was acquired at an on-reserve branch of the bank. There are at least two cases in which an order attaching such a bank account was defeated by section 89: Canadian Imperial Bank of Commerce v. E. & S. Liquidators Ltd., [1995] 1 C.N.L.R. 23 (B.C.S.C.); Gifford v. Lax Kw' Alaams Indian Band (2000), 72 B.C.L.R. (3d) 363 (S.C.); leave to appeal to the British Columbia Court of Appeal granted: 2000 BCCA 280; [2000] B.C.J. No. 883 (QL). Other cases contain some discussion that could support the proposition that section 89 of the Indian Act exempts an on-reserve bank account of an Indian or an Indian band from attachment, although in those cases the attachment was not defeated, or it was defeated for reasons other than section 89: Houston v. Standingready, [1991] 1 W.W.R. 744 (Sask. C.A.); Alberta (Workers' Compensation Board) v. Enoch Indian Band (1993), 141 A.R. 204 (C.A.); Webtech Controls Inc. v. Cross Lake Band of Indians, [1991] 3 C.N.L.R. 182 (Man. Q.B.). It is arguable that, because the exemption from attachment in section 89 of the Indian Act is expressed in language that is similar to the exemption from tax in section 87, the scope of the two exemptions should be the same. I do not consider it necessary to resolve any inconsistency that may exist between any of these cases and Recalma. They were all decided before Recalma except Gifford v. Lax Kw' Alaams Indian Band and in that case, Recalma was not cited.
Bank Act, section 461
[29]Having concluded, on the authority of Recalma, that the appeals of Ms. Sero and Mr. Frazer cannot succeed on the basis of the connecting factors test, I turn to their principal argument, which is that the situs of their bank investments is deemed by subsection 461(4) of the Bank Act to be the Ohsweken Branch, and for that reason alone their income from those investments should be held to be within the scope of section 87 of the Indian Act. Subsection 461(4) of the Bank Act reads as follows:
461. . . .
(4) The indebtedness of a bank by reason of a deposit in a deposit account in the bank shall be deemed for all purposes to be situated at the place where the branch of account is situated.
[30]It is argued for the Crown that subsection 461(4) of the Bank Act has no application to this case because subsection 461(4) is only a codification of a principle of the conflicts of laws. As it was determined in Williams that those principles do not apply to the determination of the situs of property for purposes of section 87 of the Indian Act, subsection 461(4) should not apply either. The Crown also argues that the term investments in this case are not "deposit accounts", that subsection 461(4) is relevant only to questions going to bank practice, and that subsection 461(4) at most can determine the situs of a bank's indebtedness, not the situs of interest income earned on such indebtedness.
[31]I begin with an attempt to determine the meaning of the term "deposit account", which in turn requires an understanding of the meaning of the word "deposit". The Bank Act does not define either term.
[32]I accept the following definition of "deposit" from Bradley Crawford, Crawford and Falconbridge, Banking and Bills of Exchange: a Treatise on the Law of Banks, Banking, Bills of Exchange and the Payment System in Canada, 8th ed. (Toronto: Canada Law Book, 1986), at page 747 (§3301.1):
The term "deposit" has a deceptive appearance of simplicity. Its primary dictionary meaning is "something laid /up in a place or committed to the charge of a person for safekeeping". Its application to banking probably reflects the historical origins of modern banks in the goldsmiths' depository functions. A more technical meaning is derived from a consideration of the contractual nature of the banking relationship, which has been consistently characterized judicially as one of debtor and creditor (see §3202). In this sense a deposit is a contract by which a customer lends money to a bank. Its terms may vary as the ingenuity of bankers and customers may devise. [My emphasis.]
[33]By this definition, the savings account of Mr. Frazer and the term investments of Ms. Sero and Mr. Frazer are "deposits". The Crown does not dispute that conclusion, but argues that a "deposit account" is a kind of deposit that is characterized by an indefinite term, and by the right on the part of the customer to increase the balance from time to time by adding money to it, or decreasing the balance by withdrawals. According to the Crown's argument, the term investments of Ms. Sero and Mr. Frazer are not "deposit accounts" because they have a definite term and are issued in a fixed amount (although withdrawals are permitted before maturity). The Crown does not take the position that Mr. Frazer's savings account is not a "deposit account".
[34]The Crown's assertion that a "deposit account" cannot have a fixed term is not consistent with the Disclosure of Interest (Banks) Regulations, SOR/92-321, which set out the information that banks are required to provide to their customers about interest on "deposit accounts". Section 2 defines "deposit account" for purposes of the Regulations, as "an interest-bearing deposit account". This is not helpful. However, section 5 suggests that a term deposit may be a "deposit account". It reads as follows:
5. Where a bank renews a fixed term deposit account, the bank shall disclose the rate of interest and the manner of calculating the amount of interest that are applicable to the deposit account in the manner described in subparagraph 3(1)(b)(i) or (ii).
[35]I am not persuaded that the Crown's proposed definition of "deposit account" is well founded. It seems to me more useful to discern the meaning of the term "deposit account" from the context in which it is used in the provisions of the Bank Act. A cursory survey of those provisions suggests that the term "deposit account" is used to describe the record that a bank maintains to keep track of the outstanding balance of its indebtedness to a particular customer.
[36]That is how the term "deposit account" is used, for example, in paragraph 413.1(1)(a) [as enacted by S.C. 1997, c. 15, s. 43; 2001, c. 9, s. 103] of the Bank Act. A bank that is not a member institution of the Canada Deposit Insurance Corporation Act, R.S.C., 1985, c. C-3, cannot accept deposits in Canada unless it is given special authority under that Act. Paragraph 413.1(1)(a) provides that a bank that has been given such special authority must, before opening a "deposit account" in Canada, notify the person requesting the opening of the account that the deposit will not be insured by the Canada Deposit Insurance Corporation. See also similar uses of the term "deposit account" in sections 439.1 [as enacted by S.C. 2001, c. 9, s. 113], 445 [as am. by S.C. 1997, c. 15, s. 48, 2001, c. 9, s. 116] to 448 [as am. idem, s. 117], 448.1 [as enacted idem], 448.2 [as enacted idem], 458.1 [as enacted idem, s. 123], 459.2 [as enacted idem, s. 125] and 462 [as am. idem, s. 126] of the Bank Act.
[37]The savings account of Mr. Frazer, and the term investments of Ms. Sero and Mr. Frazer, are "deposits", as explained above. In each case, the outstanding balance is tracked in a separate account, to which the Royal Bank credits interest as earned. It seems to me self-evident that each of these accounts is a "deposit account" within the meaning of that term in subsection 461(4) of the Bank Act.
[38]It follows that, to the extent subsection 461(4) of the Bank Act has any application, it applies to the indebtedness of the Royal Bank to Mr. Frazer and Ms. Sero pursuant to the terms and conditions of the savings account and the terms and conditions of the term investments in issue in this case. That would include the indebtedness resulting from any interest on the term investments that is credited to those accounts.
[39]The question then becomes whether, as the appellants argue, the legal effect of subsection 461(4) of the Bank Act is to override the connecting factors test so that the savings account and term investments are located on the Six Nations Reserve. It seems to me that the appellants' Bank Act argument turns, first, on the word "deemed", and then on the phrase "for all purposes" in subsection 461(4).
[40]R. v. Verrette, [1978] 2 S.C.R. 838, is the leading authority on the interpretation of statutory deeming provisions. In that case Justice Beetz, writing for the Court, said this at pages 845-846:
A deeming provision is a statutory fiction; as a rule it implicitly admits that a thing is not what it is deemed to be but decrees that for some particular purpose it shall be taken as if it were that thing although it is not or there is doubt as to whether it is. A deeming provision artificially imports into a word or an expression an additional meaning which they would not otherwise convey beside the normal meaning which they retain where they are used; it plays a function of enlargement analogous to the word "includes" in certain definitions; however, "includes" would be logically inappropriate and would sound unreal because of the fictional aspect of the provision. Thus, a scantily dressed person is not really nude; but if under certain conditions that person be deemed to be nude in a provision prohibiting nudity, the word "nude" keeps its ordinary meaning which at the same time is extended to something which is not nudity. [Emphasis added.]
[41]This passage contains two notions that seem to me to be important to the interpretation of subsection 461(4) of the Bank Act. The first is that a deeming provision creates a fiction. The second is that the statutory fiction resulting from a deeming rule generally applies only for the purposes of the statute that creates it. It would follow that the purpose of subsection 461(4) of the Bank Act is to preclude any debate, at least as far as the bank is concerned, that the situs of the indebtedness of a bank arising from a deposit is at any location other than the branch of account. It would also follow that, to the extent that such a debate normally would engage the principles of the conflicts of laws, subsection 461(4) overrides those principles.
[42]However, there is no reason to conclude that Parliament intended, when enacting subsection 461(4) of the Bank Act, to preclude any debate on the connecting factors test in Williams in a case where a determination must be made as to whether or not the tax exemption in section 87 of the Indian Act applies to interest paid by a bank on a deposit. I agree with the Crown that, for the same reason that the connecting factors test replaces the principles of the conflicts of law for the purposes of determinations made under section 87 of the Indian Act, the connecting factors test must prevail against the deeming rule in subsection 461(4) of the Bank Act.
[43]It remains only to consider whether the words "for all purposes" in subsection 461(4) of the Bank Act extend the scope of the deeming rule beyond the Bank Act, so that it applies for the purposes of other statutory provisions, including section 87 of the Indian Act. I am not persuaded that the words "for all purposes" has that effect, but in any event the force of this argument is weakened by the fact that there are no words of like meaning in the French version. The English and French versions of subsection 461(4) are repeated here for ease of reference.
461. . . .
(4) The indebtedness of a bank by reason of a deposit in a deposit account in the bank shall be deemed for all purposes to be situated at the place where the branch of account is situated.
[44]A direct translation of the French version would read as follows:
Bank indebtedness resulting from a deposit made to a deposit account is deemed to have been contracted at the location of the branch where the account is maintained.
[45]If the words "for all purposes" were interpreted to extend the application of the deeming rule in subsection 461(4) of the Bank Act to determinations under section 87 of the Indian Act, the English version of subsection 461(4) would have a broader reach than the French version. That cannot be. In my view, this is an instance where it would be appropriate to apply the following principle from Schreiber v. Canada (Attorney General), [2002] 3 S.C.R. 269 (per Justice LeBel) at paragraph 56 (citations omitted):
A principle of bilingual statutory interpretation holds that where one version is ambiguous and the other is clear and unequivocal, the common meaning of the two versions would a priori be preferred . . . . Furthermore, where one of the two versions is broader than the other, the common meaning would favour the more restricted or limited meaning . . . .
[46]Applying this rule leads to the conclusion that the words "for all purposes" in the English version of subsection 461(4) add nothing to the scope of the deeming rule.
[47]For these reasons, I cannot accept the appellants' argument that subsection 461(4) of the Bank Act overrides the connecting factors test to compel the conclusion that the interest income in issue in this case is "situated on a reserve" for the purposes of section 87 of the Indian Act.
Conclusion
[48]These appeals should be dismissed with costs.
Stone J.A.: I agree.
Rothstein, J.A.: I agree.