Ottawa should abolish Indian Act tax exemptions

Photo Credit: Financial Post

Tom Flanagan, Financial Post, March 20, 2024

Since it was passed in 1876 the Indian Act has contained a tax exemption for real and personal property owned by Registered Indians on Indian reserves. (“Registered Indian” is the term used in the constitution, legislation, orders-in-council and Canada Revenue Agency interpretation bulletins and is thus precise about who is impacted by the act.)  The purpose of the exemption was to protect reserve land — federal Crown property set aside for the use and benefit of First Nation people — from being taken over by local or provincial governments for non-payment of taxes

The exemption is consistent with the general principle of Canadian law that one government cannot tax another and it has effectively served its purpose of protecting reserve land from confiscation by local governments. It is also arguably consistent with the principle of equality before the law, which says people should be divided into legal categories when there is a demonstrable difference between groups that is relevant to public policy. 

It is almost an iron law of politics, however, that good ideas sooner or later lead to harmful initiatives. The Supreme Court of Canada demonstrated as much in 1983’s Nowegijick case, in which it extended the exemption from taxes to include income earned or purchases made by Registered Indians on reserve. 

If Parliament had wanted to exempt income and sales on Indian reserves from taxation, it could have said so in the Indian Act. This new court-created privilege applying potentially to the approximately one million Registered Indians in Canada has no logical foundation and serves no obvious purpose of public policy. Its main effect is to generate resentment among the other 39 million Canadians who are required to pay taxes on income and sales. 

Not being part of the Constitution, the tax exemption on income and sales could and should be repealed by federal legislation. There will, of course, be resistance. No one who has enjoyed a tax exemption likes to lose it. But Parliament can sweeten the medicine by returning the revenue raised by taxing Indians’ income and sales to the First Nations to help them support their own governments, making self-government more of a reality. 

Since the 1980s, some progress has been made in this direction. Changes in legislation have allowed about 160 First Nations to create their own property taxes. Mainly, however, these are levied on leases of reserve land to outsiders, such as those underpinning railways, pipelines, commercial parks, and residential developments. The next logical step would be to extend them to reserve property held by Indians in the form of Certificates of Possession, which are a limited form of ownership issued by the federal minister upon the recommendation of the band council. 

Federal legislation has also enabled reserve governments to charge sales taxes for on-reserve transactions. In the few First Nations that so far use them, most of the revenue generated comes from non-members shopping on reserve although there are impacts on their own members, as well. 

Finally, a form of income tax is used by First Nations who have signed modern-day treaties under which their lands are not reserve lands in the sense of the Indian Act and hence do not carry a tax exemption. The tax applies mainly to First Nations people who are employed by the band government but are ultimately paid by the federal government. In practice, it ensures federal transfers supporting the community stay within the community. 

These small-scale forms of property, income and sales taxation are all praiseworthy initiatives created by co-operation between First Nations and the federal government. They belie the common belief that the Indian Act must be totally repealed because it cannot be amended. In fact, Indigenous policy, like all other policy areas in Canada, is susceptible to gradual improvement through consultation, negotiation and legislative amendment. 

Our time-honoured democratic processes could further modernize the taxation of Registered Indians. Neither Metis nor non-Registered Indians enjoy tax exemption. In a constitutional democracy like Canada, there is little justification for exempting one subset of Indigenous people in this way. Sharing in the expense of government is a hallmark of citizenship and self-government that should gradually be extended to all Canadians. 

I have been speaking to audiences in Canada about Indigenous issues for more than 50 years. The topic that has always aroused the most indignation is the non-payment of taxes by Registered Indians on Indian reserves. Whatever small benefit the tax exemption confers is not worth the antagonism caused by the feeling that its recipients are not pulling their weight. It is not good for taxpayers in general to feel that they are obliged to support one category of people, and it is not good for the recipients of this largesse to feel that their fellow citizens are obliged to support them. 

Tom Flanagan is professor emeritus of political science at the University of Calgary and a Senior Fellow at the Aristotle Foundation for Public Policy and author of The Section 87 Indian Act Taxation Exemption: An Analysis. Permission is granted to reproduce or re-publish this column only in full and with attribution to the Aristotle Foundation for Public Policy.

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