Murray v. The Queen

Murray v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2013-08-20
Neutral citation
2013 TCC 253
File numbers
2009-1943(IT)G
Judges and Taxing Officers
Johanne D’Auray
Subjects
Income Tax Act
Decision Content
Docket: 2009-1943(IT)G
BETWEEN:
ROBERT MURRAY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
____________________________________________________________________
Appeal heard on September 17, 18 and 19, 2012, at Ottawa, Ontario.
Before: The Honourable Justice Johanne D'Auray
Appearances:
Counsel for the appellant:
Chantal Donaldson
Counsel for the respondent:
André LeBlanc
____________________________________________________________________
JUDGMENT
The appeal from the assessments made pursuant to the Income Tax Act for the 2001, 2002 and 2003 taxation years is dismissed with costs.
Signed at Toronto, Ontario, this 20th day of August 2013.
"Johanne D’Auray"
D'Auray J.
Translation certified true
Francois Brunet, Revisor
Citation: 2013 TCC 253
Date: 20130820
Docket: 2009-1943(IT)G
BETWEEN:
ROBERT MURRAY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
D'Auray J.
OVERVIEW
[1] Mr. Murray is a status Indian and a member of the Mohawks of Kanesatake First Nation in Quebec.
[2] In 1993, Mr. Murray opened an office supply store on the Kanesatake reserve, doing business as Produits de Bureau MTC.
[3] In 1995, the federal government decided to privatize 17 of its office supply stores. Mr. Murray acquired one of these stores in Gatineau.
[4] In 1996, the federal government implemented the Aboriginal Business Procurement Policy (the ABPP), the purpose of which was to increase the participation of Aboriginal business in the procurement process by encouraging and, in certain situations, requiring federal departments and agencies to grant contracts to Aboriginal businesses.
[5] During the period in question, the 2001, 2002 and 2003 taxation years, Mr. Murray was the sole shareholder and director of the companies The Mohawk Trading Company Inc. / La Compagnie de Commerce Mohawk Inc. (MTC) and Mohawk Contract Furniture Inc. / Les Meubles de Bureau Mohawk Inc. (MCF). MTC sold office supplies and MCF, office furniture. The primary places of business of both companies were in Gatineau.
[6] Because of Mr. Murray's business sense and incentives offered through the ABPP to Aboriginal businesses, MTC and MCF became successful and reached sales levels that surpassed all expectations.
[7] Mr. Murray received management fees from the companies at the end of each fiscal year. The amount of the management fees Mr. Murray received was equal to the retained earnings of the companies, namely, profits minus personal expenses incurred by the companies for Mr. Murray.
[8] Mr. Murray argues that the management fees received were only for the work he carried out on the reserve. He submits that the management fees are located on the reserve. As a result, pursuant to his Indian status, he did not have to pay taxes on these fees, which could be considered property. As for the personal expenses paid by the companies, he submits that he cannot be assessed on personal taxable benefits received when the amounts that constituted these taxable benefits were tax exempt.
[9] The Minister of National Revenue (the Minister) notes that the exemption provided under the Income Tax Act (ITA) and the Indian Act (IA) does not apply to the management fees. As for the taxable personal benefits conferred by MTC and MCF, the Minister submits they were rightly included in the calculation of Mr. Murray's income.
ISSUES
[10] Were the management fees Mr. Murray received from MTC and MCF for the 2001, 2002 and 2003 taxation years, under the combined application of section 87 of the IA and section 81 of the ITA, tax exempt as personal property situated on a reserve?
[11] Were the amounts included in the calculation of Mr. Murray's income as taxable benefits also tax exempt as personal property situated on a reserve?
[12] Were the penalties imposed by the Minister for the late filing of tax returns for 2001 and 2002 warranted?
FACTS
[13] Mr. Murray was born on the Kanesatake reserve at 204 Sainte-Sophie Street, and lived there until he was around 16. At 16, he left the reserve to work in a circus in Saint-Eustache.
[14] Later, he lived in Ottawa, Montréal, Calgary and the United States, and held various jobs. In the 1980s, Mr. Murray left Canada for Florida. From 1980 to 1985, he worked in bars and motels in Miami Beach as manager, bartender and doorman. During this period, he became the owner of many restaurants. Between 1985 and 1990, he left Florida to work in Texas for a friend's oil company. It was also during this period that he met his wife, Glynn House Murray. Mr. Murray's absence lasted a total of more than 15 years.
[15] In 1988, he began thinking about returning to his home reserve to encourage economic development. In 1990, at around 33, he left the US and moved to Montreal to study management at McGill University. Through various research and readings, he realized there was a demand for office supply businesses. Moreover, he was familiar with this field because his wife worked for a company that sold paper.
[16] In 1991, he returned to the reserve to live with his wife in his family home at 204 Sainte-Sophie Street, in Oka, where his mother also lived.
[17] In 1992, he purchased a building at 84 Notre-Dame Street, in Oka, and began operating a paper supply business. At that time, the business, Produits de Bureau MTC, was operated as a sole proprietorship.
[18] In 1993, Mr. Murray purchased the house and ancestral land (ancestral home) at 204 Sainte-Sophie Street, in Oka, from his mother for one dollar.
[19] From 1993 to 1999, he lived in a house with his wife at St‑Paul Street in the village of Oka. During this period, Mr. Murray was still the owner of the ancestral home, but did not reside there. His mother lived there until her death, after which Mr. Murray's niece moved in with her six children.
[20] In 1995, the federal government decided to privatize 17 of its office supply stores. On April 17, 1995, Mr. Murray acquired one of these stores, located at 1 Promenade du Portage, at Terrasses de la Chaudière, in Gatineau.
[21] On March 8, 1996, Mr. Murray incorporated 3236871 Canada Inc., which would then become MTC. MTC conducted retail sales of office supplies.
[22] On March 27, 1996, the federal government announced the ABPP.
[23] The ABPP is described in Contracting Policy Notice 1996-2, as an initiative "to promote Aboriginal business participation in government procurement." This initiative consists of the following elements:
• greater emphasis on Aboriginal economic development when planning procurements;
• mandatory setasides in procurements above a threshold which are destined for Aboriginal populations;
• selective setasides for specific procurements;
• provision for subcontracting with Aboriginal firms when the primary requirement is outside of NAFTA and WTOAGP;
• related changes to the Contracting and Procurement Review policies to support these initiatives; and
• under phase two of this initiative, each department and agency with an annual contracting budget in excess of $1.0 million shall develop multiyear performance objectives for contracting with Aboriginal businesses. Details of how this goal will be pursued will be announced in the near future.
[24] Because of the ABPP, MTC grew by leaps and bounds. Through the ABPP, MTC was able to participate in offers reserved for Aboriginal businesses, which was very lucrative for MTC.
[25] On June 25, 2002, Mr. Murray incorporated a second company, 4087771 Canada Inc., which would become MCF. MCF sold office furniture.
[26] During the years in question, the companies had three stores, one showroom and one warehouse. Two of the three stores were in Gatineau: one in the Terrasses de la Chaudière building at 1 Promenade du Portage, and the other at Place Vincent‑Massey at 351 St‑Joseph Boulevard. The third store was on the reserve at 84 Notre-Dame Street, in Oka. The showroom was at 25 Eddy Street, in Gatineau, and the warehouse, at 35 and 45 Villebois Street, in Gatineau.
[27] The sales figures for MTC and MCF in Gatineau were $7,774,796 in 2001, $11,849,459 in 2002 and $3,763,130 in 2003, whereas sales at the Oka store were around $300,000, according to Mr. Murray's testimony.
[28] During the 2001, 2002 and 2003 taxation years, the companies paid Mr. Murray management fees and paid for his personal expenses. Mr. Murray did not include these amounts in the calculation of his income, claiming to be entitled to an exemption in view of his Indian status. In notices dated March 30, 2006, the Minister assessed Mr. Murray as follows:
2001
Benefits conferred
$243,594.00
Management fees
$532,000.00
Total
$775,594.00
CPP and QPP deductions
$1,496.00
Total income
$774,098.00
2002
Benefits conferred
$218,281.00
Management fees - MTC
$932,574.00
Management fees - MCF
$98,143.00
$1,030,717.00
Total
$1,248,998.00
CPP and QPP deductions
$1,673.00
Total income
$1,247,325.00
2003
Income as reported
$648,570.00
Benefits conferred
$94,400.00
Total
$742,970.00
CPP and QPP deductions
$1,802.00
Total income
$741,168.00
[29] Two witnesses appeared at the hearing: Mr. Murray and Ms. Thibeault, the Canada Revenue Agency auditor responsible for the file.
[30] Mr. Murray was honest and the majority of his testimony was clear and credible. However, certain uncollaborated statements were contradictory or unlikely in the light of the circumstances.
[31] For example, he considers 204 Sainte-Sophie Street, in Oka, to be his residence, even though he lived in the US for 10 years.[1] From the start, Mr. Murray admitted that he knew of the tax exemption for registered Indians and the importance of maintaining a connection with the reserve.
[32] Mr. Murray stated that during the years in question, he received management fees from the companies for his work with the financial and strategic planning of the companies. Although he made decisions both on and off the reserve, he did not keep any records, reports or time sheets showing the proportion of work performed on the reserve and that performed off the reserve. He claims that he spent around 25% of his time on the reserve, whereas the respondent claims that Mr. Murray spent around 5% of his time on the reserve. Mr. Murray was also unable to state the hourly wage he was paid for his services, either for those provided on the reserve or those provided off the reserve. He did not have a contract or agreement with the companies that set out the terms in this regard. The evidence showed that the management fees Mr. Murray received yearly were equal to the retained earnings the companies had accumulated through the year.
[33] Mr. Murray stated many times that it was [translation] "by design" and for tax purposes[2] that he chose to bill the companies only for the work performed on the reserve. During his testimony, he stated that he did not receive any compensation for the work performed in Gatineau.
[34] However, in his testimony, Mr. Murray was much more specific about the work he performed in Gatineau. For example, he met with deputy ministers and directors general from various departments to encourage them to set aside some orders for Aboriginal businesses pursuant to the ABPP. He implemented marketing strategies at his Gatineau stores to encourage public servants responsible for procurement to go to the stores to purchase their office supplies. He oversaw the daily management of the stores and made the decisions required to increase sales of office supplies and furniture. He admitted that he was present at the store in Promenade du Portage almost every day and had an office to work in at the showroom at 25 Eddy Street. During the audit, Ms. Thibault spent a significant amount of time there. In her testimony, she stated that Mr. Murray was very present and active in his business. The clients knew him well and he often knew them by their first names.
[35] Mr. Murray stated that his wife, Mrs. House Murray, also worked at the Gatineau stores. She was even the vice-president of the companies for a certain period. Mrs. House Murray did not testify at the hearing to corroborate any of Mr. Murray's testimony. It must be noted, however, that Mrs. House Murray does not have registered Indian status. Moreover, she did not receive any compensation for the work performed for the companies.
[36] The evidence also established that during the years in question, Mr. Murray lived in residences located in the national capital region, namely:
• from 2000 to 2002, in a penthouse at 259 Champlain Street in Gatineau; Mr. Murray's wife is the owner;
• in 2002, in a rental apartment at 221 Lyon Street in Ottawa;
• from the winter of 2002 to October 2003, in a country home he rented in Val-des-Monts;
• at the end of 2003, at 113 des Montagnais Road in Gatineau; Mr. Murray and his wife are the owners.
[37] The evidence submitted at the hearing shows that Mr. Murray was present in the national capital region not only for his business activities, but also for his personal activities. He was a member of a golf club and a yacht club in Gatineau. The credit card statements submitted in evidence also show that Mr. Murray spent the majority of his time in the national capital region. Indeed, from January 1, 2001, to July 1, 2003, the credit card statements show hundreds of transactions in the national capital region whereas only eight could be found that were conducted on or near the reserve.
[38] With regard to the companies' activities, the evidence shows that all or almost all of the sales are attributable to the two stores in Gatineau. Moreover, the sales generated at 84 Notre-Dame Street in Oka do not appear to be included in the financial records presented by the corporation's accountant, because under the inventory listing, 84 Notre-Dame Street does not appear as one of the companies' establishments.
PARTIES' POSITIONS
Mr. Murray's position
[39] Mr. Murray submits that, in view of the connecting factors stated in Williams v. R,[3] the management fees and taxable benefits are income earned on a reserve and are, therefore, tax exempt.
[40] He also submits that one of the relevant connecting factors to determine the situs of the management fees is the place where he made important and strategic decisions for the companies.
[41] He also submits that the important and strategic decisions related to the management fees were made on the reserve. MTC and MCF had their head offices on the Kanesetake reserve, where the management fees were generated. Mr. Murray is also connected to the reserve through the store he ran at 84 Notre-Dame Street. He was the owner of the building that housed the store and accommodations. At one time, he allegedly kept the "small apartment" for personal use. He is also the owner of the ancestral home located on the reserve at 204 Sainte‑Sophie Street.
[42] He submits that the ABPP is another relevant connecting factor because, without it, the companies would not have been able to participate in setaside orders. MTC's and MCF's income is from the ABPP. The companies were able to participate in offers set aside for Aboriginal businesses because of Mr. Murray's Indian status. As a result, the management fees and benefits conferred were granted because of his Indian status. Moreover, he submits that the companies' profits related to the ABPP are not part of the commercial mainstream.
[43] With regard to the amounts the Minister included as taxable benefits, Mr. Murray submits that the companies were only acting as intermediaries and gave him no taxable benefit. The amounts incurred by the companies to pay his personal expenses are therefore non-taxable. Moreover, Mr. Murray submits he could have chosen to pay himself higher management fees instead of paying for his personal expenses with the credit cards belonging to the companies.
[44] Mr. Murray also submits that the management fees and benefits conferred on him were deemed to be property situated on a reserve under paragraph 90(1)(a) of the IA. He states that Her Majesty purchased the property, namely office supplies and furniture, with money or funds destined for the use and benefit of Indians, in accordance with the ABPP. Therefore, the resulting income, namely, the management fees and taxable benefits, must be tax exempt.
Respondent's position
[45] According to the Respondent, Mr. Murray admitted he deliberately ("by design") chose not to be compensated for the management work he performed for the companies outside the reserve, in order to benefit from the exemption under section 87 of the IA.
[46] The respondent also submits that Mr. Murray ignored the corporate structures of MTC and MCF, claiming that the amounts he took from these companies to pay for personal expenses are indirect management fees because if not for the expenses paid by the companies, the management fees would have been higher.
[47] As for the connecting factors, the respondent submits that the situs of the management fees granted to Mr. Murray is Gatineau and not the reserve, for the following reasons:
• the main establishments of MTC and MCF are situated in Gatineau;
• the sales for MTC and MCF are generated in Gatineau;
• the companies' bank accounts are in Ottawa, at the Royal Bank of Canada;
• the daily management of and decision making for MTC and MCF and the control of these companies take place in Gatineau;
• the management fees are generated by Mr. Murray in Gatineau and deposited by the debtor companies MTC and MCF to Mr. Murray's bank account at the Royal Bank in Ottawa;
• during the years in question, Mr. Murray resided in the national capital region and all his activities and lifestyle are connected to this region.
[48] Moreover, the respondent submits that paragraph 90(1)(a) of the IA does not apply for the following reasons:
• Pursuant to paragraph 90(1)(a), the property to which the paragraph applies must be defined. In this appeal, it is the management fees and benefits conferred on Mr. Murray; therefore, even if the office supplies and furniture had been purchased by MTC and MCF with Indian moneys by federal departments and agencies, it cannot be claimed that they were purchased for the benefit of Indians and bands. Additionally, it would be the office supplies and furniture that were considered to be situated on the reserve and not the management fees. Therefore, this would not give Mr. Murray any advantage.
• It cannot be claimed that Her Majesty purchased the management fees and the taxable benefits Mr. Murray received. Contrary to Mr. Murray's claims, one cannot lift the corporate veil and ignore the corporate structure of the companies.
• Section 2 of the IA defines the words "Indian moneys". This money is subject to a strict administrative regime under sections 61 to 69 of the IA. The ABPP does not make any reference to this regime. Mr. Murray did not present any evidence to show that it was "Indian moneys" within the meaning of the IA that was used by the public servants to purchase the office supplies and furniture.
• Moreover, there is no evidence in the record that shows that the funds were voted by Parliament for the use and profit of Indians or bands.
ANALYSIS
Section 87 of the IA
[49] The ITA excludes certain tax-exempt amounts from a taxpayer's income under specific federal statutes. It is the interaction between paragraph 81(1)(a) of the ITA and section 87 of the IA that leads to the tax-exemption of property situated on a reserve and belonging to a registered Indian:
Income Tax Act
81. (1) There shall not be included in computing the income of a taxpayer for a taxation year,
(a) an amount that is declared to be exempt from income tax by any other enactment of Parliament, other than an amount received or receivable by an individual that is exempt by virtue of a provision contained in a tax convention or agreement with another country that has the force of law in Canada;
Indian Act
87. (1) Notwithstanding any other Act of Parliament or any Act of the legislature of a province, but subject to section 83 and section 5 of the First Nations Fiscal Management Act, the following property is exempt from taxation:
(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.
[50] The parties agree that the management fees and benefits conferred on Mr. Murray by the companies are property within the meaning of section 87 of the IA.
[51] In the present appeal, to decide whether this property is tax exempt, I must determine whether the management fees and benefits conferred on Mr. Murray were situated on the reserve.
[52] In Bastien Estate v. Canada, [4] Cromwell J. of the Supreme Court of Canada recently considered the analysis the courts must conduct to determine whether property is tax exempt under section 87 of the IA.
[53] In short, Cromwell J. proposed the following analytical grid, which consists of two parts:
• The analysis must take into consideration the substance and the plain and ordinary meaning of the terms used at subsection 87(1) of the IA. In accordance with the words used at section 87 of the IA, "personal property of an Indian ...situated on a reserve", the analysis must address the issue of whether the property is situated on a reserve.
• When the location of the property is objectively difficult to determine because of the nature of the property or the type of exemption in question, the courts must consider the connecting factors described in Williams to determine where the property is situated. These factors are only relevant to the extent that they lead to the identification of the location of the property for the purposes of section 87.
• The relevance of the connecting factors will vary depending on the type of property and the nature of the tax treatment reserved for this income.
[54] Once the connecting factors have been determined, the Court must proceed with a purposive analysis to determine the weight to grant each connecting factor. There are not necessarily any overriding factors. All the factors must be analyzed and weighed, and the location associated with the income must be determined in the light of the type of property in question and the nature of the taxation of that property.
[55] I will begin as Cromwell J. did in Bastien Estate at paragraph 21, where he began with determining the purpose of the exemption, the type of property and the nature of the taxation. Then, he determined the relevant connecting factors and analyzed them in the light of the purpose of the exemption, the type of property and the nature of the taxation.
Purpose of the exemption
[56] With regard to the purpose of the exemption, at paragraph 21, Cromwell J. reproduces the comment made by La Forest J. in Mitchell v Peguis Indian band[5]:
...With respect to the exemption from taxation, he observed that it serves to “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” (p. 130). He summed up his discussion of the purpose of the provisions by noting that since the Royal Proclamation of 1763, R.S.C. 1985, App. II, No. 1, “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”. He added an important qualification: the purpose of the exemptions is to preserve property reserved for their use, “not to remedy the economically disadvantaged position of Indians by ensuring that [they could] acquire, hold and deal with property in the commercial mainstream on different terms than their fellow citizens”: p. 131. As La Forest J. put it:
These provisions are not intended to confer privileges on Indians in respect of any property they may acquire and possess, wherever situated. Rather, their purpose is simply to insulate the property interests of Indians in their reserve lands from the intrusions and interference of the larger society so as to ensure that Indians are not dispossessed of their entitlements. [Emphasis added; p. 133.]
Cromwell J. made two additional comments in Bastien Estate regarding the purpose of the exemption. First, consideration of the purpose of the exemption does not give the court licence to ignore the words of the Act.[6] Second, the application of the exemption does not depend on the issue of whether the property is integral to life on the reserve or to the preservation of the traditional Indian way of life. Thus, the words "property which Indians hold qua Indians" should be interpreted on the basis of the need to establish a connection between the property and the reserve such that it may be said that the property is situated there for the purposes of the IA.
The type of property
[57] As mentioned above, the case law clearly holds that, for the purposes of section 87 of the IA, income is personal property.
[58] In their pleadings and at the hearing, the parties made submissions to the effect that the management fees and benefits conferred on Mr. Murray constituted employment income. Considering the evidence, and with respect, it seems to me that in this specific case, the management fees Mr. Murray received should instead be considered business income.
[59] Under article 2085 of the Civil Code of Québec[7]:
A contract of employment is a contract by which a person, the employee, undertakes for a limited period to do work for remuneration, according to the instructions and under the direction or control of another person, the employer.
Also, section 248 of the ITA defines the words employment and business:
“employment” means the position of an individual in the service of some other person (including Her Majesty or a foreign state or sovereign) and “servant” or “employee” means a person holding such a position;
“business” includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2, subsection 95(1) and paragraph 110.6(14)(f), an adventure or concern in the nature of trade but does not include an office or employment;
[60] In view of the evidence, the parameters of the relationship between Mr. Murray and the companies do not match those normally found in a contract of employment. First, there is no contract in this case. Second, there is no pre‑determined compensation and no work schedule. Concretely, Mr. Murray is the sole shareholder, director and officer of the companies. His compensation, every year, consists of the companies' profits minus personal expenses incurred by the companies for Mr. Murray (which, moreover, constituted taxable benefits pursuant to the ITA). Therefore, in the light of the evidence, the management fees are, for Mr. Murray, considered business income. It was as business income that the fees were included in Mr. Murray's income when the first draft assessment was made.
[61] As mentioned above, the evidence presented at the hearing shows that the management fees essentially correspond to the companies' annual profits. These fees were paid as follows: through the year, Mr. Murray paid his own personal expenses with the corporation's liquid assets, mainly using credit cards belonging to the companies; at the end of the year, the companies paid Mr. Murray the difference between the annual profit and the personal expenses incurred throughout the year. This "balance" corresponded to the management fees Mr. Murray chose to exclude from the calculation of his income.
[62] First, I will conduct an analysis considering the management fees as business income, and second, considering them as employment income. As for the benefits, I will analyze them as benefits conferred on a shareholder pursuant to section 15 of the ITA and then as benefits in respect of employment pursuant to section 6 of the ITA.
[63] It is also important to determine the nature of the management fees and benefits conferred on Mr. Murray. The management fees were received by Mr. Murray for the work he performed for the companies MTC and MCF. This includes all the duties Mr. Murray carried out for the companies such as meetings with deputy ministers and directors general to promote the companies, developing marketing strategies, daily management of the stores by being present in the Gatineau stores, making strategic decisions, financial planning, developing financial strategies (including income and expenditure projections) and preparing submissions for the selective tendering set aside for Aboriginal businesses. With regard to the benefits conferred, they were personal expenditures paid for by the companies. Contrary to Mr. Murray's submissions, the management fees he received cannot be only from the work he performed on the reserve. I will address Mr. Murray's submissions on this subject below, in these reasons.
Nature of the taxation
[64] If not for the exemption, the business income that the management fees represent would have been included in Mr. Murray's income under the joint application of sections 3 and 9 of the ITA. If, as Mr. Murray submitted at the hearing, the management fees constituted employment income, they would be taxable under the joint application of sections 3 and 5 of the ITA. As for the benefits conferred on Mr. Murray, namely the personal expenditures paid for by the companies, if not for the exemption, these would have been taxable, either as a benefit conferred on a shareholder pursuant to subsection 15(1) of the ITA, or as an employment benefit pursuant to subsection 6(1) of the ITA.
Analysis of connecting factors from the business income perspective
[65] The Supreme Court has not yet had an opportunity to analyze the relevant connecting factors when determining the situs of business income. The Federal Court of Appeal, however, has had to propose and apply certain factors in Southwind.[8] These factors were also considered by the same court in Ballantyne v Canada[9] and Canada v Robertson,[10] both of which followed Bastien Estate.
[66] In a recent unanimous Federal Court of Appeal decision, Kelly v Canada,[11] Stratas J.A. not only provides a detailed analysis of Bastien Estate, but also guidelines regarding the analysis for business income.
[67] In the light of this case law, I will review the following connecting factors to determine the situs of the management fees and benefits conferred on Mr. Murray by the companies:
(i) place of operation of the management services business;
(ii) place where the services were provided and type of services provided;
(iii) place where the management fees are generated;
(iv) place where the decisions are made;
(v) location of the debtors (clients), location of those receiving the services, place payments are made;
(vi) place of residence of the person operating the business;
(vii) place where the books are kept and location of the banks holding the bank accounts;
(viii) the commercial mainstream.
[68] From the start, it is important that the following clarification be made. The business income to be qualified as "on or off reserve" is the income Mr. Murray receives for the activities he carries out for the companies. These should not be confused with the companies' activities, as they have a distinct legal personality and separate assets.[12] In the light of the above, it is Mr. Murray's management services business that must be analyzed, not the companies' activities of selling office supplies and furniture. This must be done with care. It is impossible to analyze Mr. Murray's management activities in a vacuum, ignoring the context in which the activities are carried out. These activities consist of operating a business that sells office furniture and supplies almost exclusively off reserve by a sole director, shareholder and manager.
[69] I will review the first three connecting factors together because they are interrelated:
(i) place of operation of the management services business;
(ii) place where the services were provided and type of services provided;
(iii) place where the management fees are generated.
[70] Mr. Murray performs various management duties for the two companies. The nature of these activities are inherently connected to Mr. Murray because he personally provides the services, so the business is operated at the place Mr. Murray can be found, where he makes his decisions and where he takes care of the management of the companies in order to generate income. There is no distinct physical location where the business can be situated.
[71] The evidence shows that Mr. Murray operates his management services business in the Outaouais region. He spends the vast majority of his time carrying out his management activities in the Gatineau stores. According to the evidence, the time he spends working for the companies on the reserve is closer to 5% than the 25% Mr. Murray stated. At any rate, even if I accepted Mr. Murray's 25%, the majority of his work was carried out off reserve. It is simply not logical or likely that Mr. Murray, the majority of whose personal and professional activities were conducted in the Outaouais, would return to his store on the reserve at 84 Notre-Dame Street when important decisions had to be made, or to carry out management duties. Mr. Murray's sister Ginette was the one who took care of the daily management of the store on the reserve. I am not saying that Mr. Murray did not go to the reserve to carry out management duties and ensure the store was operating properly on the reserve. However, with reference to the evidence that the management services Mr. Murray provided for the companies were entirely or almost entirely provided in Gatineau, I find that Mr. Murray's business was operated in Gatineau.
[72] The near majority of the companies' clients, federal departments and agencies, are located in the Outaouais region and it is with and for these clients that Mr. Murray performed his management activities.
[73] Having determined that Mr. Murray's business is operated in Gatineau, I also find that the management fees and benefits conferred on Mr. Murray are generated in Gatineau; this is where the management fees are earned. The management fees Mr. Murray received are equal to the retained earnings that are almost entirely generated by the profits of the Gatineau stores. Mr. Murray spends by far the majority of his time in the Gatineau stores. It follows that the management fees are generated through the management services physically provided by Mr. Murray in Gatineau. The benefits conferred on Mr. Murray are also located in Gatineau; the source of these benefits is the income from the stores that operate and are located in Gatineau. As for the destination of these benefits, the bulk of the expenses incurred by Mr. Murray occur in the national capital region and not on the reserve.
(iv) Place where the decisions are made
[74] The majority of the decisions for the companies are made in Gatineau. Mr. Murray was physically present in the stores and made decisions there that were required for the companies to function properly. I do not accept Mr. Murray's testimony that (indicated) he went to the reserve to make important decisions and carry out management duties. First, he became much more talkative when speaking about his management activities in Gatineau than those carried out on the reserve. As indicated above, Mr. Murray did not leave Gatineau every time an important decision had to be made.
[75] I also do not accept Mr. Murray's claim that he received management fees only for the management activities carried out and decisions made on the reserve. In my opinion, he created an economic fiction that is not supported by the evidence. I cannot accept this practice that does not reflect reality.
[76] Moreover, Mr. Murray did not have any records regarding the management activities carried out on the reserve and off reserve. Aside from Mr. Murray's testimony, there is no evidence regarding the proportion of activities performed on or off reserve. Additionally, since Mr. Murray was paid all the retained earnings as management fees at the end of each year, it is impossible for me to attribute certain amounts to the place the management activities were performed.
(v) Location of the debtors (clients) and place payments are made
[77] Mr. Murray received management fees from the companies in consideration for the management activities he performed. To analyze this connecting factor, it must be determined whether the companies are located on reserve or off reserve. At the hearing, the parties made submissions regarding the residence of the companies. Determining the residence of a corporation is essentially a question of facts and circumstances. According to De Beers Consolidated Mines Ltd v How,[13] "a company resides for purposes of income tax where its real business is carried on ... and the real business is carried on where the central management and control actually abides." This criterion refers to the power to control and manage the corporation that is held by the board of directors at the location where important decisions are made.
[78] Mr. Murray was the sole director of the companies, except for a short period during which he had appointed his wife as vice-president. The evidence shows that he was the only one who made the important decisions regarding the companies. As mentioned above, the evidence shows that Mr. Murray spent the majority of his time off the reserve in the Outaouais region. He even admitted that he made most of his decisions off reserve because he not only lived in the Outaouais region but was also present in his Gatineau stores or office. Therefore, in view of the evidence, I am convinced that the central management and control of the companies was off reserve, namely in Gatineau. As a result, the residence of the debtors of the management fees, namely the companies MTC and MCF, were located off reserve.
[79] As for where the payment of the management fees took place, the evidence shows that they took place in Mr. Murray's bank account at a branch of the Royal Bank in Ottawa. The funds remained in that account. Moreover, the evidence showed that the accountants who acted for the companies and for Mr. Murray were also located in Ottawa.
(vi) Residence of the person operating the business
[80] At the hearing, the parties did not hold back in their efforts to present a variety of evidence regarding Mr. Murray's residence. However, I must note certain contradictions between Mr. Murray's pleadings and his testimony:
• In his first notice of appeal dated May 27, 2009, Mr. Murray stated at subparagraph 6(f) that he resided on the reserve at 204 Sainte-Sophie Street, in Oka.
• In his re-amended notice of appeal dated September 17, 2012, Mr. Murray stated he resided on the reserve in the family home at 204 Sainte‑Sophie Street and/or at 84 Notre-Dame Street, in Oka.
• At the hearing, Mr. Murray stated he owned the ancestral home and store located at 84 Notre-Dame Street. However, he resided in the Outaouais region, but only received management fees for the management activities her carried out when physically present on the reserve.
[81] As to the determination of the situs of business income, the residence of the debtor is not a preponderant factor.[14] It is, however, important to take it into consideration for the analysis. The leading case on this issue