Aboriginal groups have become much more active in the commercial mainstream in recent years, taking significant roles in joint ventures and other commercial arrangements. Much of this activity in Western Canada has been driven by the abundant energy related opportunities on or near reserve lands. In many cases, creative financing and structuring for the participation of the aboriginal group in the venture is required. Whether the venture involves a loan to the aboriginal group, a development on reserve lands or other business undertaking in which security is being taken over property of such aboriginal group located on reserve lands, the impact of restrictions on seizure and execution against Indian property under the Indian Act (Canada) must be examined. This article does not apply to any grant, lease, permit, licence or other disposition respecting oil and gas in Indian lands which are governed by the Indian Oil and Gas Act (Canada) and related regulations. Note that the terms Indian, band and reserve used below are as defined in the Indian Act.
Section 89(1) of the Indian Act provides that the real and personal property of an Indian or a band situated on a reserve is not subject to charge, pledge, mortgage, attachment, levy, seizure, distress or execution in favour or at the instance of any person other than an Indian or a band. In essence, it results in reserves being a safe-haven for an Indian or a band seeking to shield qualifying real or personal property from creditors.
Lenders to Indians and bands are not the only parties who should be concerned with respect to the restrictions under Section 89(1). For instance, joint ventures or partnerships with bands involving the joint development of assets on reserve lands may also be potentially exposed to the Section 89(1) restrictions such that the non-Indian participant may be prevented from seizing even its share of the assets, particularly where the interest is an undivided interest. Careful attention to the potential impact of Section 89(1) restrictions is important.
The protection afforded by Section 89(1) to an Indian or band's real property is broad. Any interest in reserve land held by Indians or a band will fall within Section 89(1). However, the real property protections contained in Section 89(1) are mitigated by statutory exceptions. For instance, the Indian Act contains an express exception in respect of leaseholds in “designated lands”. “Designated lands” are defined in the Act as being reserve lands to which a band has, for a limited time, released or surrendered its rights and interests. Accordingly, a leasehold interest in designated lands is not subject to the Section 89(1) restrictions.
In commercial ventures involving the development of assets on reserve lands, it is also important to assess any risk of personal property becoming affixed to such lands which may qualify as interest in land, thereby attracting the Section 89(1) protections.
The implications of Section 89(1) are less clear in respect of personal property. Section 89(2) clearly exempts conditional sales. Section 90(1) of the Indian Act provides that certain types of personal property are deemed always to be situated on reserve. These include property purchased by the government with Indian moneys, or property given to Indians or to a band under a treaty or agreement with the government.
However, in applying Section 89(1), the courts have struggled to provide a clear definition of what constitutes “on reserve” property. Case law indicates that the question of whether the property of an Indian or band is situated on or off reserve cannot be determined solely by the physical location of the property. In some cases, the courts have applied the “paramount location” test, which examines the pattern of use and safekeeping of the property in question. For example, in one case a school bus was physically stored off reserve, but its paramount location was found by the court to be on reserve due to its use and regular storage on reserve land.
In other instances, the courts have used a “connecting factors” analysis to determine the situs of personal property. Here the court will weigh the various connecting factors which tie the property to one location or another. Where the property is employment income, the residence of the individual, the type of work being performed, and the place where the work was done have been given great weight. For unemployment insurance benefits, courts have given the most weight to where the qualifying work was performed. In the context of business income, courts have placed greater emphasis on where the work was done and where the source of the income was situated than on other factors.
One general exception to the Section 89(1) restrictions lies in a corporate structure. The courts have determined that a corporation is not considered to be an Indian or a band within the meaning of the Indian Act, even if a corporation has its registered office on reserve and all shareholders are registered Indians and band members residing on reserve. This exception is often relied on by lenders or other parties wishing to take security over property that would otherwise be subject to Section 89(1). However a common obstacle to the use of a corporation is the lack of tax effectiveness of such structure to the band. For tax reasons, bands often prefer to use a partnership structure which may not be exempt from the Section 89(1) restrictions.
A further exception to the Section 89(1) restrictions to be noted is that the real and personal property of an Indian or band situated on a reserve is subject to charge, seizure, or execution in favour of an Indian or a band. Accordingly, a band can enforce security against on-reserve property of an Indian or another band, and an Indian may enforce a debt or seize the on-reserve property of another Indian or band.
Once the Section 89(1) risks associated with a proposed venture have been identified and assessed, to the extent that an exception to the restrictions is not available, the parties will need to consider ways of mitigating such risks including the structuring of the commercial agreements with appropriate covenants, rights, indemnities, representations and warranties, each of which will vary in their efficacy, or otherwise consider whether an enhanced return to compensate a party for bearing such risks is appropriate. Where the venture is robust, creativity abounds.