Change opens the door to withdrawal from the Indian Act in favour of a negotiated nation-to-nation self-government agreement
On July 22, 2022, Canada announced the repeal of its longstanding policy requiring Indigenous Nations to phase out the s. 87 Indian Act tax exemption as a condition for entering into a modern treaty or self-government agreement.
This policy reversal means that Nations have a much clearer and more viable path forward to extract themselves from the Indian Act, in favour of a negotiated nation-to-nation self-government agreement. Nations can now embark on this path without having to relinquish one of the few beneficial aspects of the Indian Act: the exemption from tax for the Nation and its members in regard to on-reserve property - an exemption that has been a cornerstone of the Crown-Indigenous relationship since before Confederation.
Under the new policy, Nations will be entitled to maintain the tax exemption upon attaining self-government, even upon conversion of former reserve lands into lands held in fee simple.
In this article, we briefly outline i) the history of the s. 87 exemption and its role in the Crown-Indigenous relationship, ii) the federal policy change, and iii) the implications of the change for Indigenous Nations interested in pursuing self-government or treaty.
The role of tax exemption in the Crown-Indigenous relationship
Section 87 of the Indian Act provides that "personal property" owned by "an Indian or Band" and "situated on a reserve" is exempt from taxation. Among other things, s. 87 can apply to employment or business income of a status Indian earned on reserve.
Though it is codified in s. 87 of the Indian Act, this tax exemption flows from, and has always been a part of, the historical Crown-Indigenous relationship.
Indigenous exemption from Canadian tax pre-dates Confederation and reflects the principles that underpinned the original basis of the relationship: cooperation and respect for Indigenous autonomy. As stated by the Supreme Court of Canada, "The exemption was rooted in the promises made to Indians that they would not be interfered with in their mode of life." It is part of the legislative and constitutional "package" at the heart of the Crown-Indigenous relationship, by which Canadian law seeks to reconcile the assertion of Crown sovereignty and de facto control with pre-existing Indigenous sovereignty and self-determination.
From the outset of the relationship, the Crown (and the courts) recognized that Indigenous people were autonomous and constituted Nations in their own right. Although over time the Crown sought to erode Indigenous sovereignty, it continued to recognize a basic sphere of Indigenous autonomy (at least in regard to certain important aspects of governance) in which Indigenous Nations could not be subject to certain aspects of Crown intrusion. Indigenous people were not subject to military service, and were not subject to taxation. Nor could Indigenous people vote until 1960 – a policy that was, ironically, rooted in both racist attitudes as well as an understanding that Indigenous people were autonomous and maintained their own distinct governance institutions. Respect for that underlying autonomy was critical to the basic but often fraught compact between Indigenous Nations and the Crown.
Thus, when municipalities first emerged and tried to impose municipal taxes on Indigenous inhabitants, Indigenous leaders reminded colonial authorities of their underlying autonomy, who agreed: Indigenous people were not subject to municipal tax ordinances. This exemption from tax was first codified in 1850, pursuant to An Act for the protection of the Indians in Upper Canada from imposition, and the property occupied or enjoyed by them from trespass and injury. Tellingly, although this legislation only applied in Upper Canada (now Ontario), Indians in Lower Canada (now Quebec) were not taxed either – a further indication that the exemption formed part of an accepted, basic sphere of Indigenous autonomy and was not simply an act of charity or benevolent policy intended to "help" Indigenous people.
Following Confederation in 1867, Parliament consolidated various pieces of legislation pertaining to Indigenous people in the form of the first Indian Act in 1876. By this time, federal policy had undeniably shifted away from a relationship of mutuality to one focused on assimilation, federal control, and so-called "enfranchisement," by which Indigenous people's civic rights were made conditional on the abandonment of their Indigenous rights. Despite this highly consequential shift, the Indian Act maintained certain vestiges of Indigenous autonomy, including the exemption from tax (though limited to reserves). That exemption, while undergoing certain changes in application, has remained in place ever since and remains a key component of the overarching Crown-Indigenous co-existence.
Nevertheless, federal assaults on Indigenous autonomy continued, including in relation to the tax exemption, which the Crown has long opposed and sought to be rid of. Repealing the tax exemption outright has been considered politically unviable. Instead, the federal government worked on two fronts to gradually strip it away: (1) by seeking to limit its application through a narrow interpretation of s. 87; and (2) by requiring First Nations to formally relinquish the tax exemption as a condition of achieving true reconciliation with the Crown through a modern treaty or self-government agreement.
The first of these approaches – applying the tax exemption narrowly and securing favourable Tax Court rulings – proved highly successful for a time. Between 1992 and 2011 in particular, access to the s. 87 tax exemption was seriously eroded as a result of aggressive federal tax audits, re-assessment, and resulting litigation. In court, Canada secured a string of successes that had the effect of severely narrowing the application of s. 87 to the point of near obsolescence. Particularly damaging for status Indian claimants was an erroneous premise in the case law that the exemption could not apply in regard to property that was deemed to be "in the commercial mainstream." This idea found no basis in the wording of s. 87 itself, but was instead a misinterpretation of certain Supreme Court of Canada pronouncements interpreting s. 90 of the Indian Act – a related but distinct provision. The Tax Court and the Federal Court of Appeal proceeded to hold almost all forms of Indian-owned personal property and income to be "in the commercial mainstream" and therefore ineligible for tax exemption.
In 2011, the Supreme Court of Canada finally brought about a major course correction by way of the Bastien and Dubé cases, setting aside the "commercial mainstream" approach and affirming the availability of the tax exemption to all Indian-owned property that is physically or legally situated on reserve, regardless of its nature. 
The second front in Canada's efforts to undermine s. 87 – its policy of requiring treaty and self-governing nations to agree to phase out its application – has had more mitigated success. On the one hand, the policy was successful in phasing out the tax exemption for about 20 First Nations, who agreed to relinquish the exemption as part of comprehensive land claims and self-government agreements (and, it must be noted, consequently assumed the authority to tax their own citizens and lands and to receive the resulting tax revenues to support their self-governments). On the other hand, the "uptake" in this regard has been relatively limited, representing only 0.03 per cent of all First Nations in Canada. All but eight of the Nations that agreed to relinquish the application of s. 87 had very limited access to the tax exemption to begin with: being located "North of 60" in the N.W.T. and Yukon, they did not have reserves and therefore their members could only benefit from the tax exemption when making purchases on other Nations' reserves out of territory and "South of 60." Members living and working in those Nations' communities or treaty lands, for instance, never accessed the tax exemption in regard to income, since they did not reside or work on reserve. As such, only 0.01 per cent of Nations that have meaningful access to the tax exemption have agreed to forego it.
In this regard, and as discussed below, it seems clear that the requirement to agree to the phase-out was itself a major impediment to Nations' willingness to go down the path of self-government.
The Indian Act and self-government
Despite the self-evident and pre-existing sovereignty of Indigenous Nations, Canada used the Indian Act to impose a single, predetermined form of governance on Indigenous Nations which undermined their own systems of governance and their ability to make decisions regarding their collective and individual interests. Predictably, the outcome of this imposition has been catastrophic – a fact that Canada has acknowledged for some time.
Today, it is widely agreed that the Indian Act continues to inflict harm on Nations and is frustratingly paternalistic, even with some reforms over the years. However, no agreement has ever been reached on what should replace it. This reflects, in large part, one of the central problems with the Indian Act: the underlying assumption that all Indigenous Nations are a monolith, to be lumped together in one legislative box. It is clear that no single "replacement" to the Indian Act would serve the interests of all Indigenous Nations. As such, there is also wide agreement that dismantling the Indian Act must be accomplished brick by brick, with replacement pursued on a nation-by-nation basis and in accordance with the principle of self-determination for each individual Nation (whether distinct First Nations/bands or wider Nations that group together several First Nations/bands, in line with each Nation's own conception of its nationhood). Self-government and modern treaties reflect this principle.
Since at least 1995, Canada has recognized the inherent right of self-government as an existing Aboriginal right under s. 35 of the Constitution Act, 1982. There are currently 25 self-government agreements involving 43 Indigenous communities, and another 50 are under negotiation. Some of these agreements are part of a broader land claim or modern treaty, some followed concluded land claims, and others are stand-alone agreements. While each is distinct, some typical features of self-government agreements include:
- The Indian Act band is dissolved and replaced with a formal government that possesses defined authority and the powers of a natural person;
- Provisions are made for the Nation's Constitution, which confirms the Nation's structure of government;
- The jurisdiction of the Nation is set out over various areas (this jurisdiction is not usually "taken up" by the Nation or transferred from the provincial or federal government until the Nation is in a position to do so); and
- Rules are established about the application of federal and provincial or territorial laws, and which laws prevail if a conflict of law arises.
Previous federal policy on s. 87 and self-government
The s. 87 tax exemption and Canada's phase-out policy has had major implications for Nations contemplating self-government or a modern treaty, the latter acting as a serious disincentive to pursuing self-government.
Since the mid-1990s, Finance Canada's modern treaty negotiation mandate required the s. 87 exemption to be phased out for status Indian treaty beneficiaries. The phase-out applied on former reserve land which was converted to fee simple treaty settlement land held by the Indigenous signatory, as well as on other Indian Act reserves.
Canada's official rationale for this policy was that the s. 87 exemption should no longer apply if a Nation has removed itself from the application of the Indian Act. In addition, s. 87 applies only to reserve land, and typically a Nation's land ceases to be reserve land under a modern treaty, converted instead into fee simple land owned by the Nation.
However, it seems clear that Canada's previous policy stemmed from its longstanding history of hostility towards the s. 87 exemption and a desire to reduce its financial obligations towards Indigenous peoples. After all, Canada could have agreed to maintain the exemption despite a Nation's withdrawal from the Indian Act and despite the conversion of reserve land to fee simple land; there was no legal impediment to doing so – it was merely a policy choice.
In 2016, Finance Canada began engaging Indigenous groups and provincial/territorial officials to explore options for reforming how s. 87 of the Indian Act is addressed in modern treaties and self-government agreements. Many Indigenous groups expressed concerns about Canada's mandatory phase-out policy: for many Nations, phasing out the s. 87 tax exemption was "a significant disincentive to advancing self-government, a divisive issue within communities that have recently signed modern treaty arrangements, and a material barrier to entering into modern treaties." It was clear that Canada's phase-out policy was acting as a serious impediment to advancing self-government for many Nations across the country.
New federal policy on s. 87 and self-government
In July 2022, Crown-Indigenous Relations and Northern Affairs Canada announced that Canada would change its approach to the phasing out of s. 87 of the Indian Act as a requirement of modern treaties.
Instead, Canada's new policy is that the tax exemption can continue on an Indigenous government's former reserves and on other First Nations reserves in Canada for prospective and existing modern treaty beneficiaries who are registered under the Indian Act. Indigenous governments will continue to have the choice to maintain existing tax arrangements or take up direct tax powers on their own timeline.
Canada's new approach to s. 87 and self-government highlights two key points from feedback received from Indigenous participants. First, modern treaty beneficiaries who are registered under the Indian Act should not have to exchange a tax exemption for their modern treaty rights. Second, Indigenous governments should not be compelled to exercise their tax jurisdiction on an arbitrary timeline.
Canada has said that the new policy will also apply where lands that were formerly First Nations reserves cease to be "reserve land" as part of reconciliation agreements.
Implications of the new federal policy and next steps
It remains to be seen whether Nations that have phased out the s. 87 tax exemption due to Canada's previous policy will restore it, whether future self-governing Nations will take up jurisdiction over taxation or maintain the exemption, and whether the policy change will increase the number of active self-government and modern treaty negotiation tables.
In any event, the positive impact of this change is clear: the new federal policy removes a major barrier for Indigenous communities who wish to pursue self-determination, including self-determination with respect to tax. In the wake of this change, Nations should seriously consider whether a modern treaty or self-government serves their interests and those of their members.
It should also be noted that the new policy does not prevent a Nation from relinquishing the tax exemption, in whole or in part, and instead exercising its own tax jurisdiction to benefit from the resulting revenues. The significance of taxation as a fundamental feature of governance is difficult to overstate, and many Nations have benefitted significantly from exercising tax jurisdiction and the revenues that flow from it. In many cases the exercise of tax jurisdiction is limited to property tax, and only in regard to non-members, while in other cases Nations have seen the benefits of taxing both members and non-members as outweighing the benefits of maintaining the s. 87 tax exemption.
Gowling WLG has assisted several Nations in the negotiation of self-government agreements, including the Deline Got'ine Government, Gwich'in Tribal Council and Whitecap Dakota First Nation. If your Nation is contemplating a modern treaty or self-government agreement, we invite you to contact any of the authors or another member of our experienced Indigenous law team.
 Indian Act, R.S.C. 1985, c. I-5 at s. 87
 Bastien Estate v. Canada, 2011 SCC 38 at para 28
 Mitchell v. Peguis Indian Band,  2 SCR 85 at p. 131
 Importantly, when the right to vote was finally extended to Indigenous people, it was on the express commitment that this would not negate or interfere with existing rights, including the exemption from taxation.
 For example, see James Hopkins, "Bridging The Gap: Taxation and First Nations Governance," National Centre for First Nations Governance, May 2008 at pp. 8-9, referencing a series of petitions by the Abenakis of Saint-Francois, beginning in 1841, to the Colonial Governor in protest over municipal taxes that were being levied upon them; see also Alain Beaulieu, "Indians and Taxation: A Historical Study of the Provisions of the Indian Act," Canada Revenue Agency, January 2006 at pp. 11-13. See also the Six Nations petition of 1847 ("Petition from the Six nations Indians to be relieved from Government Taxes," Onondaga, June 4, 1847) and the Oneida petition of 1850 ("Petition of the Chiefs of the Oneida Indians to James Earl Elgin," Delaware, February 5, 1850).
 An Act for the protection of the Indians in Upper Canada from imposition, and the property occupied or enjoyed by them from trespass and injury, S.C. 1850, c. 74
 Section 90 deems certain discrete types of property to be always "situated on a reserve" for the purposes of s. 87 and s. 89 of the Indian Act, namely: "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." Unlike s. 87, s. 90 is dependent on the type or nature of property and not its actual location. In analyzing the scope of s. 90 in Mitchell, the SCC commented that its scope does not include property given by the Crown to Indians of bands "in the commercial mainstream," since the purpose of s. 90 is to protect treaty-promised property and similar forms of property. Section 87, conversely, is dependent solely on the location of the property at issue and not its nature. Any and all personal property, if owned by an Indian or a band, and situated on a reserve, is exempt under s. 87. Indeed, in Mitchell at p. 139, the SCC expressly underscored that "It must be remembered that the protections of ss. 87 and 89 will always apply to property situated on a reserve." [Emphasis added.] However, this important qualifier and reminder was seemingly lost for an extended period.
 See for example: Canada v. Folster,  3 F.C. 269 (C.A.); Southwind v. Canada (1998), 156 D.L.R. (4th) 87 (F.C.A.); Recalma v. Canada (1998), 158 D.L.R. (4th) 59 (F.C.A.); Desnomie v. Canada (2000), 186 D.L.R. (4th) 718 (F.C.A.); Canada v. Monias, 2001 FCA 239; Shilling v. M.N.R., 2001 FCA 178; Horn v. Canada, 2008 FCA 352; Stacey-Diabo v. The Queen (2002),  2 C.T.C. 2275 (T.C.C.); McIvor v. The Queen, 2009 TCC 469; Ballantyne v. The Queen, 2009 TCC 325; Adams v. The Queen (1999),  1 C.T.C. 2182 (T.C.C.)
 Crown-Indigenous Relations and Northern Affairs Canada, "Self-government," Date modified: 2020-08-25
 For instance, Whitecap Dakota First Nation applies a 5 per cent "Whitecap Community Improvement Fee" in lieu of GST for all purchases made on its reserve lands (whether by members or non-members). The revenues – which are collected, administered and remitted to the Nation by Canada – benefit community programs and services.