Apparently, some Canadians find it troubling that some First Nations citizens do not pay taxes. This supposed unfairness is the subject of frequent criticism. For example, the Frontier Centre for Public Policy reprinted an article (originally appearing in C2C Journal) reading: “Tax relief and tax reform must be based on the principle of fairness. Taxes should be based on income; meaning if people do not pay taxes, it should be because they are too poor to pay, not because of their ancestry.” The Canadian Taxpayers Federation puts it more succinctly: “Income—not race or ancestry—is the only valid basis for a tax exemption.”
Many First Nations citizens see their tax-exempt status as a function of the treaties and other legal arrangements with the Crown, or as partial compensation for the resources taken from the lands. They believe that imposing an income tax would be not only unfair, but unconstitutional.
Canada’s courts have upheld tax exemptions as a means to preserve the collective rights of First Nations, ensuring that the Crown does not attempt to erode the reserve land base through taxation.
The federal government has made little effort to explain the policy to Canadians, allowing an unhealthy resentment to grow. There has been little counterpoint to the pressure from the right on this issue. Given the public confusion, it seems a worthwhile exercise to actually do the math and see what light it sheds on the matter.
First, it helps to be specific about whom we are talking. Income is only exempt from tax when earned by status Indians working on reserves. The 2006 census identified fewer than 700,000 people who have a North American Indian identity. This number includes about 133,000 who are non-status Indians and slightly more than 565,000 status Indians who might be exempted from paying income tax, if they earned income on-reserve. Bearing in mind that half of Aboriginal people are under 20, more than 40 per cent of status Indians live off-reserve, and Aboriginal people have an unemployment rate more than twice the national average, it is not surprising that the number of people exempted from paying taxes is actually quite small. In fact, the most recent figures tell us that the number of First Nations citizens living on reserves who had employment or self-employment income was only 103,885.
Unfortunately, Statistics Canada has not made average income numbers for on-reserve employment freely available—which would have allowed for a more precise calculation—but we do know that the median income is $13,637. This allows us to estimate the total employment and self-employment income earned on-reserve as somewhere in the neighbourhood of $1.4 billion.
So what is the total of tax revenues lost to Canada as a result of the exemption?
The federal income tax rate for those earning less than $41,544 is 15 percent. Provincial tax rates vary, but adding them into the calculation puts the tax rate somewhere between 20 and 25 percent across the country. The basic personal deduction is $10,382, which would leave just over $4,000 in taxable income from the median, even with no other deductions. On that amount, one would owe between $800 and $1,000. Multiplying that back out against the 103,885 earners, the exemption amounts to between $84 million and $104 million in foregone revenues.
If all of those earning income on-reserve actually qualify for the exemption, the Receiver General is collecting approximately $100 million less in taxes as a result.
It is possible to quibble with the figures here. I have used the most recent census figures from 2006 with the 2010 tax rates and using the median income level rather than the average leads to a lower total. Nonetheless, even the highest mark-ups on all of this data wouldn’t put the lost revenue higher than $120 million.
That number is nothing to sneeze at, of course. But in the context of a 2010 budget of more than $261 billion, it’s also not going to make or break the federal government. Nor does it seem disproportional or unfair, when looked at in context. By way of comparison, there are $1.4 billion in annual subsidies for oil and gas companies, equivalent to the total income earned on-reserve, and $120 million in subsidies for ethanol production, equivalent to the highest estimation of revenues lost to the Canadian government through the income tax exemption.
More to the point, the tax exemption in no way compensates for shortfalls in funding to First Nations. The provinces spend more than 20 percent more on children than the federal government does on First Nations children, whether those kids are in school or under child welfare services care. The disadvantage to First Nations children from these two policies alone amounts to far more than the foregone tax revenues, and there are dozens of other examples.
Taxes pay for public services like roads and water, and First Nations communities are notoriously under-serviced. A 2005 study by the Assembly of First Nations found that, per capita federal funding for First Nations citizens is $7,200. That’s far lower than the amount that the government spends on the population in general. In Ottawa, for instance, the combined per capita spending by all three levels of government totalled $14,900, more than double the amount being spent on-reserve.
Given the amount of energy certain groups have spent decrying this tax exemption, one might have expected them to conduct an analysis of this nature. The fact that they haven’t might suggest that there is another agenda at work in their complaints.
The balance of advantage is clear when the tax exemption is compared to the lack of services on-reserve. To whom is the system unfair when the numbers are so grossly tilted the other way? And why focus on this issue when there is so much else that needs to be done?
Recalling the views of the Supreme Court, if First Nations land can be eroded through tax policy, it is an efficient way to end communal land ownership in Canada. Once that is accomplished, First Nations can be fully assimilated into the mainstream and any resources on or near their lands can be exploited without the inconvenience of consultation or compensation. Complaining about tax policy is only one of many ways in which the right wing in Canada is seeking to achieve that goal.