Every Canadian sits down with a form and, for the most part, truthfully declares to the Government of Canada exactly how much income they made last year, signs the form, and mails it off with a cheque for part of it. In many countries, the comment would be "Are you nuts?"

No, we're Canadians. And we do pretty much what we're told. What really burns us up is when someone else seems to be getting a better deal that the rest of us. So, do Indians pay taxes? If not, why not?

S. 87 of the Indian Act exempts the lands and the personal property (including wages) of a Band or an individual Indian, situated on a reserve, from taxes. So if you are an Indian receiving your pay on the reserve, you may not be subject to income tax. Yahoo!!

But the Feds are pretty stingy with their exemptions so there are a whole bunch of hoops to jump through. First, the exemption applies to "Indians" not all Aboriginal people. In an earlier column we discussed the differences between Indians, Inuit, Inuvialuit, and Metis people, so I will only note that the exemption applies to a sub set of Aboriginal people, not the whole group.

Next, the property has to be situated on the reserve. Exactly where the property is situated can be a tricky question if you are talking about the property that you have in the debt your employer owes you or income from an investment. The simplest case is if you were an Indian (most likely a Band member, but not necessarily) working for your Band Administration in any of the municipal type functions that modern Band Councils administer; such as office worker, snow plow operator, nurse, or teacher. Less obvious, but still eligible would be employees of a development company owned by the Band that was doing resource development such as oil and gas or agriculture on the reserve. A small owner-managed business like an electrician would also be eligible as long as the work was done and money paid on the reserve.

Those are the obvious ones. As soon as you start to get less Indian and arguably less situated on or connected to a reserve, the tax man starts to want his/her due. Corporations are not Indians so if you were to incorporate your business like many people do for purposes of planning or limited liability, you might destroy your exemption. If you were to do business off the reserve, or your bank was to invest in things off the reserve, it may make you ineligible as well.

So aside from that limited exemption, they pay the same taxes as anyone else. The Indian fellow who lives next door pays the whole burden of federal, provincial, municipal and customs taxes that you do. Even Indians who live on the reserve pay the whole package of consumption-related taxes as soon as they drive off the reserve to go to a movie or buy a car.

So that's the question of whether they pay income tax. But what about why?

That's a matter where there may be some disagreement. Most Indian people would say that the exemption was part of the basic deal they made during the treaty process. That's a hard one to decide because the main tax of the federal government, income tax, was not in use when the treaties were negotiated and signed. So they don't mention it specifically. There were Treaties (such as the Jay Treaty) which allowed the free flow of Indians and their goods back and forth between Canada and the USA and, as various types of customs and other duties were the main government revenue producer, an argument could be made that the Indian inhabitants were to be federal tax free as part of the deal.

A more basic answer to the why? question is in the power of the taxing authority and the Canadian practice in particular of using income tax to not only raise revenue, but to redistribute wealth and encourage certain economic activities deemed to be useful. All sorts of tax write offs and credits exist for the larger population: family trusts and off shore accounts for example. It was widely reported that a prominent Canadian family moved a billion dollar trust fund out of the country with Revenue Canada approval, saving perhaps half a billion in taxes. The Canadian Exploration Expense (widely known as "flow through shares") allows people with money to invest in exploratory drilling and write off all the expense in one year, making the effective price of the shares one-half of what they would have been. If a small business owner starts up a small company and later sells her business for a profit to someone else, the first $500,000 is tax free!

And these are not necessarily boondoggles. Exploration for oil and gas is very risky, but produces new wealth if it works. So why not encourage it? Small businesses are the leading employer of workers in the country so why not encourage small business owners to undertake the risk and long hours by allowing a tax break at the end?

The fact is that most Indian reserves are economically depressed and the economy needs stimulating. Indian nations have a legitimate interest in keeping their members on the reserve, if they can, to promote the cultural and economic health of the community. The government can, and probably should therefore should encourage individual members to keep a residence on the reserve, if at all possible, and to receive and spend their money on the reserve to help boost the local economy.

But that's only the story today. It takes a lot of money to run a country and the demands of a modern society on a local government not only grow with increased expectations, but also with the continual downloading of programs from the senior levels of government. Although taxation is a not well liked word on the reserve, the demands of modern government will eventually require the creation of a tax base (i.e. an independent or private economy) and a taxation scheme to allow the government programs to be funded. Just as we built the railroads and the irrigation works to facilitate the development of the private economy in the larger society, we will have to help create the infrastructure necessary to allow Aboriginal citizens similar opportunity in their local economies.

But that's another column.