Report calls on federal government to end Indigenous tax exemption

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Income earned by Indigenous people on reserve should not be exempt from taxation, argues a new paper from the conservative Aristotle Foundation for Public Policy.

In his study, The Section 87 Indian Act Taxation Exemption: An Analysis, Tom Flanagan argues the tax exemptions for Indigenous people are “contrary to the general ethos of democratic societies, which assumes that the state should treat all citizens equally and that all citizens should pay their fair share to support the state.”

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The emeritus professor of history at the University of Calgary says that the main outcome of this tax policy “has been to generate resentment by the other 39 million Canadians who are required to pay taxes on income and sales.”

Since 1876, property owned on reserve has not been subject to taxation in order to protect reserves from the depredations of local and provincial governments. Since 1983, that earlier rule that’s codified in the Indian Act has expanded to other forms of income, such as earnings made on reserve by those who are what the Indian Act calls “Registered Indians,” capital gains on such property or GST and HST on sales made on a reserve.

Those expansions, Flanagan writes, are primarily due to court decisions, and not modifications of the Indian Act made by Parliament.

“If it wanted to exempt Indians from paying income tax, it could easily have amended the wording of the Indian Act to make that clear. Several generations of politicians apparently had no desire to absolve Indians from paying income tax in the same way as other Canadians do,” the report says.

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Flanagan argues that the original 1876 exemption to property is “justified by the unique purpose of Indian reserves,” but that other forms of tax exemption should be done away with. At present, he says, they “create incentives to locate, or appear to locate, economic activities and holdings on reserve,” but he claims there is “considerable gamesmanship” of the system.

“I have been speaking to audiences in Canada about Indigenous issues for decades. The topic that has always aroused the most indignation is the non-payment of taxes by Registered Indians on Indian reserves,” Flanagan said in a statement published alongside his study. “Whatever small benefit the tax exemption confers is not worth the antagonism caused by the feeling that the recipients are not pulling their weight.”

There are some modifications to the broader rules. For example, in some instances, the federal government will collect GST on reserve, while suspending federal taxes on, for example, tobacco, and remit the GST earned to the First Nation. The problem Flanagan identifies with this is that “the Fist Nation is taxing its own members to a small extent but taxing Canada to a greater extent,” because non-reserve members may come to buy products on reserve, such as low-tax tobacco, and the band then reaps the rewards.

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Flanagan says the idea of creating “tax-free economic zones” ought to be an inducement to economic success, but it has yet to materialize outside of “perhaps a few dozen” specific cases.

“The conclusion is inescapable that the tax exemption has not improved measurable aspects of living standards on reserve as compared to living off reserve,” Flanagan writes.

Around one-quarter of reserves have put in place a property tax system, Flanagan writes, but that’s mainly a way to tax non-resident properties, such as pipelines or business parks. To implement a broader property tax might not be of much benefit — if the band already owned a certain property and decided to tax it, they would simply be taxing themselves, and income levels may not be high enough to generate much revenue from a property tax.

The solution, Flanagan argues, is to end tax exemptions, other than for “real” property — not income or personal property. Income tax and GST would return to reserves, and “a portion of revenue from such taxes should be returned to the First Nation after it signs a tax administration agreement.” Since it would be federal tax only, and not provincial tax, this would leave “a bit of a tax advantage for its citizens.”

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Flanagan argues this would “engender greater interest by members in how the band government spends its revenues, leading to better, more informed participation by members,” if they were having to pay taxes that ended up in band coffers.

These taxes would support some of the benefits derived from government, while other benefits would still be funded by general tax revenues, the report says.

“Our proposed changes to the tax regime for Indian reserves and Registered Indians are modest in impact,” Flanagan said in a statement. “But they would help move First Nations in the direction of meaningful self-government, increase equality before the law, and reduce the resentment that many Canadians feel about the special privilege of immunity from taxation.”

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