Nault is right, the First Nations and Canada are at a crossroads; however, you have been at this juncture for decades, with little progress to show. Despite tens of billion of dollars in spending by INAC and other federal government departments over the past 50 years, there have been limited economic payoffs for Aboriginal peoples.

Although Canada is among the top countries in which to live according to the United Nations’ Human Development Index, Inuit and on-reserve Indians are ranked below many developing nations. Many First Nation and Inuit communities face housing shortages, as well as rates of unemployment, dependence on social assistance and youth suicide which are higher than the national average. Indeed, the United Nations Committee on Economic, Social and Cultural Rights has observed that there has been little or no progress in the alleviation of social and economic deprivation among the Aboriginal peoples.

Economic development for the First nations is imperative. Stephen Cornell and Joseph Kalt have stressed that sovereignty, nation-building, and economic development go hand in hand. Without sovereignty and nation-building, economic development is likely to remain a frustratingly elusive dream.

There is general agreement that the First Nations must be in control of their destiny, regain the rights to resources, expand their land bases and continue to receive reparations from the federal government to support economic development initiatives, including education, health care, infrastructure and social programs.

But what is the road ahead? What needs to be done?

We know the following:

One, that sovereignty is critical if the First Nations are to ever move beyond the state of dependency and revitalize their economies so as to narrow and eliminate the economic and social gaps their peoples have long endured.

Two, substantial economic gaps exist. John McCallum has summarized the socio-economic plight of Aboriginal peoples very succinctly and very well: "The statistics leave no doubt as to the very sad state of aboriginal economic and social development today."

Eliminating the gaps would produce sizable benefits for both the First Nations peoples and all peoples living in Canada. RCAP calculated an annual net benefit of $7.5 billion. Closing only the income gap between registered Indians and non-Aboriginals could lead to a net economic benefit of between $5.8 and $7.8 billion. These estimates do not include the additional savings that would result from lower health care costs, lower social assistance payments and lower costs for justice and correctional services. With conservative estimates for these additional savings, the net economic benefits could well exceed $9.0 billion annually.

Three, the federal government is not interested in spending any more money in total in dealing with the First Nations.

Four, the federal government wants new treaties to limit its financial exposure and risks. Canada’s continued refusal to respect the spirit and intent of the historic treaties, while they implement "modern day treaties", which are extinguishment agreements rather than treaties, are part of this strategy.

Five, paternalism has been and continues to be the basis for the relationship between the federal government (and provincial governments as well) and the First Nations. The Indian Act smacks of the worst excesses of colonial paternalism. The First Nations Governance Initiative is no better.

Six, the Chretien government’s ultimate goal still appears to be assimilation as originally spelled out in the 1969 "White Paper". The 2001-02 "White Paper" model is just more sophisticated and is being sold to the public more effectively than the original. It also builds upon the failure of 30 years of policies with the failures presented to give credence to the paternalistic view of Canada towards Aboriginal peoples.

Consequently, your goals must include:

• Getting rid of the Indian Act;
• Negotiating constitutionally entrenched and protected sovereignty, including appropriate compensation;
• Creating a First Nation government and economic development strategy.

What is the strategy to achieve your goals?

It must consist of several components.

One involves public education, especially of the history of the relationships between the First Nations and the white settlers. The Report of the Royal Commission on Aboriginal Peoples should become required readings in all Canadian History courses at all levels of education. It is also critically important that the public is made aware of the conclusive findings of the Harvard Research project on the need for sovereignty.

A second component involves attacking the federal government with its own words. There are numerous examples one could use.

The third component involves the international community. A road trip by the AFN leadership to meet with the major energy and forestry companies abroad with interests in Canada, major fund management companies and the three major credit rating agencies in the U.S. to spell out clearly the current situation regarding control/ownership of lands and resources in Canada and the potential liabilities of resource companies and governments in Canada should be a priority.

Tax policy should be viewed from the point of view of incentives than as a source of revenues for First Nation governments. This latter perspective plays into the hands of the federal government and runs counter to the view that the federal government should maintain, if not expand, its financial support of First Nations communities.

There are at least two lines of argument to support tax exemption for all First Nations peoples and their companies, whether they are collectively or individually owned.

One line of argument follows from the fact that the rights to set tax rates and formulate tax policy belong to a government and are important instruments for a sovereign nation to control. If First Nations are to have self-government and eventually be treated as equals, they alone must determine how their people should be governed, and this includes how they should be taxed. Indeed, the First Nations have every right to set tax rates at zero if they decide that this would be in the best long-term interests of their peoples.

The second line of argument follows from the fact that tax policies have long been considered and used for a wide range of economic and social objectives, and as such, they can play a key part of a First Nations economic development strategy. The current and former Ministers of Finance in the Chretien government have made tax cuts a major component in their economic growth strategies.

Further, the federal government continues to have in place a large number of tax incentives to stimulate economic growth and these measure cost the government billions of dollars annually in foregone revenues.

Thus, at a minimum, First Nations peoples should not be subject to an income tax since economic development is critical to reduce and eventually eliminate the income gaps that exist between the First Nations peoples and non-Aboriginal peoples in Canada.

Incentives do matter, regardless of cultural and historic differences. Higher after-tax incomes create the incentive to invest in education and training. A more highly education and skilled work force is essential for the First Nations to have the talent to govern themselves and to have the talent that will be necessary to drive their economies. Tax exemption produces higher after-tax incomes, as long as employers do not try to capture some or all of the tax benefits.

Small businesses generally rely on personal savings and those of family and friends, as well as on internally generated cash flows, to finance the early years of their start up and growth. Higher after-tax personal incomes provide the cushion for savings, which could be invested in small businesses. Higher after-tax business incomes translate into larger cash flows, which can be re-invested in the business. Tax exemption, especially when extended to companies and their profits, can play a major role in addressing the capital barrier faced by small business and especially those started by and owned by the First Nations peoples.

So, if tax cuts and tax incentives are considered important by the federal government and the Department of Finance, they are even more so important for First Nations trying to develop their economies. It makes no sense from an economic perspective, nor should it from a political perspective, to try to raise tax rates for First Nations peoples, many of whom fall below low-income cutoff levels, when the thrust of fiscal policy is to cut tax rates and when tax incentives continue to be integral to the federal government’s policies to make the country more competitive and wealthier.

Once the tax powers are fully transferred to the First Nations, a tax model based on "citizenship" should be chosen; that is, all registered Indians should be eligible, regardless of residence and this would include all companies owned and/or controlled by registered Indians, collectively or individually.

There are two global options available for the First Nations: constitutionally-entrenched First Nations’ governments with specific responsibilities similar to those enunciated in the BNA setting out provincial and federal responsibilities; or local/municipal type governments under the control of the provinces without any further protection of treaty and Aboriginal rights.

The path you take at the crossroads is yours to choose.

Robert Nault, the present Minister for Indian and Northern Affairs Canada (INAC), stated at a recent conference in Ottawa (April 18, 2002: Beyond the Indian Act):

Nault is right, the First Nations and Canada are at a crossroads; however, you have been at this juncture for decades, with little progress to show.

As several distinguished First nations people repeatedly have emphasized, there are two exits out of the Indian Act:

• One leads to assimilating lands and peoples under provincial laws and rules;
• The other exit leads to preserving and respecting a Nation-to-Nation relationship and non-interference in internal affairs.

Sovereignty is critical if the First Nations are to have a real opportunity to extricate themselves from a cycle of dependency and to create the economic development opportunities that will give hope to current and future generations.

Cornell and Kalt, the two leading researchers for the Harvard Research Project, have concluded that the most powerful arguments for tribal sovereignty is the simple fact that it works. Nothing else has provided as promising a set of political conditions for reservation economic development.

Their research provides overwhelming evidence to support the imperative of sovereignty: a Nation-to-Nation relationship. But the inherent right to self-government cannot be realized on a foundation of dependency and poverty. The Royal Commission on Aboriginal Peoples (RCAP) emphasized:

Economic development has to become the priority of all First Nations governments. This is an important step because, without an independent source of wealth, First Nations futures and self-government dreams are just that, dreams.

Jane Stewart, the former Minister for INAC, also highlighted the critical importance of economic development and pointed out several of the major impediments standing in the way of this development when she unveiled the federal government’s action plan for Aboriginal peoples ("Gathering Strength") on January 8, 1998:

Despite tens of billion of dollars in spending by INAC and other federal government departments over the past 50 years, there have been limited economic payoffs for Aboriginal peoples.

Although Canada is among the top countries in which to live according to the United Nations’ Human Development Index (based on income, education and life expectancy), Inuit and on-reserve Indians are ranked below many developing nations. Many First Nation and Inuit communities face housing shortages, as well as rates of unemployment, dependence on social assistance and youth suicide which are higher than the national average. Indeed, the United Nations Committee on Economic, Social and Cultural Rights has observed that there has been little or no progress in the alleviation of social and economic deprivation among the Aboriginal peoples.

When Jane Stewart was Minister for INAC, the department’s approach to economic development was to place a large emphasis on training for job. Some have suggested that the motive was to train the more promising residents for jobs off-reserve and use this "economic development" strategy to gradually depopulate these communities.

As Matthew Coon Come has pointed out:

Moreover, as Fred Wien noted in his contribution to the Royal Bank/Cando Symposium, governments in Canada continue to meet the economic distress of the Aboriginal peoples with income support payments rather than investing in the more difficult measures that would rebuild the Aboriginal economies.

A re-birth requires sovereignty, and sovereignty must lead to economic development.

Simply stated, the primary objectives are:

• To highlight the need for First Nations to take the initiative to tackle the barriers to economic development and accelerate the pace of economic development;
• To examine alternative strategies that might position the First Nations to break out of the current cycle of poverty and to decrease their dependence on government support; and
• To demonstrate the importance of tax exemption as an economic development policy lever and as a critical sign of independence.

The need to address the discrepancies in living standards between Aboriginal and non-Aboriginal peoples is compounded by the fact that the Aboriginal population is growing about twice as fast as the overall Canadian population. This increases the demand for school space, housing, public infrastructure, social services and jobs.

Hence, the challenges faced by the First Nations over the next 30 to 40 years will be to make measurable improvements in economic development, for this in turn, will generate the wealth required to improve education, housing, infrastructure, social programs and the self-sufficiency of governments. But the First Nations will find themselves facing a Catch-22 paradox: the improvements in education, housing, infrastructure, social programs and the self-sufficiency of governments will have to proceed in parallel with economic development; however, the First Nations may lack the wealth required to make all of the necessary investments. And a gap in one area may prevent progress in the other areas.

Consequently, sovereignty and the fiscal capacity to govern must go together. The fiscal capacity will enable economic development strategies which will provide the foundation for long-term prosperity and financial self-sufficiency.

While development must be compatible with the cultures and traditions of the First Nations and all initiatives should build upon on them, so too must development strategies consider the realities of today’s global economy. Innovation, the product of risk-taking and the creativity and talents of people, will drive economic performance and generate wealth. But innovation is not restricted to any one sector.

Tax policies play an important role in stimulating risk-taking, innovation and personal investments in human capital. So while the current tax exemption must be retained and expanded, it will be imperative that the First Nations, in negotiating new treaties and adherence by the federal government to the old treaties, do not sacrifice any of the sources of financing owing to them and fall into the trap of trading off one source (e.g. tax exemption) for a promise of an increment in another source.

Matthew Coon Come has asked: "Is it cheaper to reduce our poverty by enhancing our capacities and helping make markets work on our lands while helping First Nations to partake in the mainstream economy?"

The answer is obvious. The alternative strategy has failed. A dependent and welfare economy has provided a minimal level of income for its "beneficiaries" and a measure of economic security, but it has exacted an enormous cost in terms of individual self-esteem and family and community well-being.

In 1990, Employment and Immigration Canada commented that the "Social costs associated with high unemployment, impoverished living conditions, dependency on social assistance and low educational attainment are exceedingly high."

Six years later, RCAP highlighted the costs of a "business as usual" approach and the resulting potential benefits for both Aboriginal and non-Aboriginal peoples sharing this country. According to RCAP:

RCAP estimated the annual cost of the status quo at $7.5 billion in 1996. RCAP also assumed that all Aboriginal peoples would pay taxes on their higher incomes – an assumption at odds with one of the major themes of this report.

Furthermore, RCAP’s estimate of the potential aggregate, annual benefits of just bringing the living standards of all Aboriginal peoples to the average for Canada are probably on the low side. They do not factor in any multiplier effects of higher income levels for Aboriginal peoples. The multiplier effects – measuring the economic spillovers to the rest of the economy of higher income levels – could double the $5.8 billion estimate of foregone production. In addition, RCAP did not try to fully cost out the potential savings in health care costs (higher incomes and lower unemployment are associated with fewer health problems, likely induced by stress), law enforcement and corrections costs (again higher incomes and lower unemployment lead to lower crime rates) and administration costs (as staffing levels at INAC and other government departments would be sharply reduced).

Charles Coffey, the Executive Vice President for Business Banking at the Royal Bank of Canada, and John McCallum, then Chief Economist at the Bank and now Minister of Defence, agreed with RCAP that Aboriginal issues are a matter of concern for all Canadians and Aboriginal economic development can have a significant impact on the country as a whole.

McCallum added:

Even INAC seems to have recognized the importance of economic development for the First Nations and Canada as a whole, or at least they pay lip service to this. In its 2002-03 report on Plans and Priorities, INAC stated:

The path to follow is obvious. How to get onto to it and what to do once you are upon it are much less obvious.

Can you work with the federal government? Matthew Coon Come has observed that the Assembly of First Nations’ (AFN) suggestions have been ignored by the federal government and have been replaced by a series of unsubstantiated excuses of why First Nation priorities cannot be implemented.

• The Federal government already gives First Nations enough money.
• First Nations cannot be held to account for the funds provided.
• The Federal government knows what is best for First Nations
• First Nation governments are incapable of promoting economic development."

But do you have any choice? These issues will be addressed in section two of this report.

How far behind are the Aboriginal peoples in terms of socio-economic well-being? Section three will look at the economic and social data and examine the gaps.

What does economic development entail? What are the possible strategies to overcome the barriers and exploit the opportunities? Sections four to six will deal with the economic development issues.

Why does tax exemption matter? What role do tax policies have in stimulating economic development? These will be the subjects of section seven.

What is the path ahead – what are some strategic options to be considered by the First Nations? Sections eight and nine will focus on these and other questions.

The federal government has created a number of commissions and task forces to study self-government and other issues as they relate to Aboriginal peoples in Canada. For example, the 1983 report of the Special Committee on Indian Self-Government (the Penner Report) recommended that Aboriginal self-government should be enshrined in the constitution through recognition of Aboriginal title to land, waters and resources while calling for the establishment of a First Nations and federal relationship mediated by a Minister of State for First Nations

In 1985, the Oberle Report called for Treaty implementation with the rules of Treaty interpretation geared to restore inherent self-government powers and titles and re-establish nationhood with intergovernmental relationship with the Crown, and the Treaty and interpretation clauses to become part of the Constitution.

RCAP (1996) called for a restructuring of the relationship between Canada and Aboriginal Peoples through a change in policy from one of domination and assimilation to one of co-operation and co-existence. The RCAP Report also recommended the redistribution of lands and resources and the re-establishment of First Nation governments guided by an Aboriginal Parliament.

Sovereignty did not appear to be an issue in any of these reports. It was the logical consequence of treaties and their interpretation by Aboriginal peoples. And all of these reports supported the creation of self-government powers for all Aboriginal peoples with the provision of adequate financial resources to ensure the success of sovereignty.

Prior to re-gaining power in 1993, the Liberals appeared to be supportive of Aboriginal issues, including tax exemption. In the 1992 Liberal Party Convention, the following motion was passed: "therefore be it resolved that the federal Liberal Party categorically rejects the imposition of the GST to the First Nations and their citizens across Canada"

Chretien wrote to Chief Doxtator in 1993 stating:

Paul Martin wrote in 1991 to Don Mazankowski, the then Minister of Finance:

Even after they assumed power the Liberals continued to say the right things. The Gathering Strength initiative introduced in 1998 recognized that the vision of strong, healthy Aboriginal communities, peoples and economies depends upon a strong foundation of partnership and the building blocks of good governance and a new fiscal relationship. The priorities for this action plan included facilitating capacity development; strengthening governance; creating an Aboriginal economy; modernizing the Indian Act; and designing a modern treaty relationship.

The January 30, 2001 Throne Speech stated that "too many [Aboriginal people] continue to live in poverty, without the tools they need to build a better future for themselves or their communities". The Speech also contained several key commitments including:

• to ensure that basic needs are met for jobs, health, education, housing and infrastructure;
• to help strengthen Aboriginal entrepreneurial/business expertise; and
• to strengthen the relationship with Aboriginal peoples.

With regards to this latter commitment, the Throne Speech acknowledged that the federal government was committed to working out government-to-government relationships at an agreed-upon pace acceptable to the First Nations. These government-to-government relationships would be consistent with the treaties, the recognition of the inherent right of self-government, Aboriginal title, and Aboriginal and treaty rights under section 35 of the Constitution Act, 1982.

With regards to the Indian Act, Robert Nault admitted the following:

INAC as well has said the right things regarding self-government, treaties and the Indian Act.

In its 2001-02 Report on Plans and Priorities, INAC stated that the "Indian Act is an antiquated piece of legislation that has proven inadequate in supporting the aspirations of First nations communities to build and maintain healthy, vibrant communities."

A year later INAC observed that:

But do the Liberals and their advisors "walk the talk"?

In 1969, then Indian Affairs Minister Jean Chretien developed the "White Paper" which would terminate the rights of First Nations as Peoples, would make reserves municipalities under provincial jurisdiction and would assimilate all First Nations peoples into "White society".

Today, is the position of a Jean Chretien-lead government any different?

In December 1994, then Finance Minister Paul Martin stated that forcing Aboriginal peoples to pay income tax is part of the process towards self-government. Indian Affairs Minister Ron Irwin commented in May 1995 that Indians who strike costly land claims deals and form their own governments should eventually pay taxes back into Canadian society. According to Irwin, the removal of the Indian Act’s tax exemption would be part of a future federal policy. He also accepted the position of the British Columbia provincial government that Canadians would find it easier to accept self-government and land deals if Indians lost the tax exemption they get if they live and work on reserves.

The Gathering Strength plan called for financially viable Aboriginal governments able to generate their own revenues and able to operate with secure, predictable government transfers. In light of the fact that INAC has suggested in the past that due to federal fiscal constraints all federal funding for self-government would be achieved through the re-allocation of existing resources and that in a draft version of the "Financial Institutions Act", mention was made that this statute would introduce local taxation, the federal government appears to be setting the stage for canceling all tax immunity and shifting more of the financial burden for social and economic programs onto the First Nations and their people. Paul Martin and the Department of Finance still seem to be driving the agenda to force Aboriginal peoples to pay income tax as part of the process towards and to defray part of the costs of self-government.

In an October 1999 speech, XXX noted:

But to the federal government, good government and strong accountability means the First Nations Governance Initiative, which, according to Robert Nault, will supply the tools missing from the Indian Act and pave the way for greater self-reliance, economic development and hope among First Nations’ communities. In other words, the First Nations cannot be trusted to govern themselves, and so the federal government, following in the footsteps of the paternalistic Indian Act and general government policies towards all Aboriginal peoples, must dictate how the First nations are to conduct their affairs.

Yet, as I will argue later in this report, if good governance is in the interests of the First Nations and their governments, why would they not adopt the most appropriate practices compatible with their goals and cultures? Either you know what is best for you or if you do not know or do not want to adopt what is in your interests, then externally imposed rules will not work either. Curiously, the federal government does not make similar demands for good governance of all its co-members in international bodies such as the United Nations or the World Trade Organization.

With respect to land claims, INAC has pointed out that:

The failure largely can be placed upon the federal government. It has had no financial incentive to negotiate – the longer the process is drawn out, the more the federal government saves since interest costs are not included in any settlement and the more likely that the First Nations will agree to lower valued settlements as they become weary and frustrated by the process. The federal government also has no political incentive. Treaties and land settlements are not understood by the public, who also view Aboriginals as beneficiaries of unnecessarily extravagant government largesse. Aboriginal peoples as a whole do not have the same political influence as do the non-Aboriginals who would oppose the payment of reparations and fair settlements to the Aboriginal peoples.

Thus, the First Nations have every right to be wary when Robert Nault announces that:

A new Commission is not the solution. Commitment and goodwill on the part of the federal government are needed. A Commission protects the government from further criticism for dragging its feet.

So is the Jean Chretien government 2001-02 "White Paper" model fundamentally different from the original 1969 model? The current model is just more sophisticated and is being sold to the public more effectively than the original. It also builds upon the failure of 30 years of policies with the failures presented to give credence to the paternalistic view of Canada towards Aboriginal peoples.

The current model includes:

• A Governance Act;
• Land Management Act;
• A phase-out of federal spending via First Nations own source revenues and provincial funding;
• Financial Institutions Act;
• Certainty to Treaties as Extinguishment Agreements; and
• Certainty to Constitutional Rights once defining laws are passed.

Paternalism flourishes in the current model.

Own source revenues will lay the groundwork for the full taxation of Indians and the gradual reduction in federal spending on First Nations’ health, education, social assistance, economic development and infrastructure initiatives. In addition, the Financial Institutions Act is likely to introduce property and other forms of local taxation on reserves and end all tax immunity.

A unilateral declaration of independence is not a feasible option. Therefore, there is no alternative to negotiating with the federal government. But there are a number of strategies worth considering – they will be the subject of the final section of this report.

But as a starting point, it might be worthwhile throwing back the words of the Liberals into their faces and emphasizing the inconsistencies to the media.

For example, the words of Robert Nault:

Why not put forth such a proposal? Of course, before you would be in the position to do so, you would have to have all your positions worked out thoroughly and your arguments developed clearly. The principal goal of this report is to assist in this process.

As well, it is interesting to note that, in supporting his Governance Act, Nault referred to the Harvard Research Project and its finding that the U.S. tribes with good governance were the ones that were most successful. He failed to emphasize the major conclusion of the Project; namely, the most powerful arguments for tribal sovereignty is the simple fact that it works. Nothing else has provided as promising a set of political conditions for reservation economic development. This principal finding together with the obvious logic that, if good governance is a prerequisite for sovereignty to succeed, First Nations are wise enough to do what is in their best interests and adopt good governance practices would make clear the government’s real objective – assimilation as spelled out clearly in the 1969 White Paper.

Or the words of Nault’s predecessor at INAC, Jane Stewart:

Are these still the positions of the INAC bureaucrats? If not, why not? If so, why do they not also represent the views of the Minister and the government?

The federal government is sensitive to external views and pressures. For example, the federal government wants Canada to remain among the top-rated countries in the world. But to accomplish this goal, it will have to address the discrepancies in living standards between Aboriginal and non-Aboriginal peoples in Canada. Furthermore, in the international context, Canada supports the recognition of a right to self-determination for indigenous peoples, which respects the political, constitutional, and territorial integrity of democratic states.

So a multifaceted strategy is required for the First Nations to have a chance of achieving their goals of sovereignty and prosperity. And an economic development strategy must be part of the overall strategy.

3. THE RELATIVE SOCIO-ECONOMIC STATUS OF ABORIGINAL PEOPLES IN CANADA

The United Nations (UN) uses the following indicators to evaluate the economic well-being of the citizens of a country: average income per capita, life expectancy and education. As we will see, by all three measures, Aboriginal peoples rank poorly.

Jane Stewart has expanded upon the UN list. According to her, well-being is measured by the following variables: the physical environment – adequacy of housing and availability of clean water; access to education and training opportunities; the opportunity to participate in the economy and earn a meaningful livelihood; and access to the health, social and cultural supports needed to ensure that people can remain healthy. The expanded list only makes the comparison worse for Aboriginal peoples.

It is useful to put the area of the land set aside for reserves for the 600+ Indian bands into some context in order to gain a better understanding of the issues surrounding land claims. Canada has a land mass of 6.5 million square kilometers. Over 130,000 square kilometers have been set aside for National Parks (2% of the total land mass). There are currently only 26,300 square kilometers of reserve lands (0.4% of the total land mass).

The Indian population on reserves is distributed as follows in 1999:

• Urban: 35.7%
• Rural: 44.4%
• Remote: 1.8%
• Special access: 18.1%.

But even these numbers are misleading since they do not provide a good indication of the remoteness of reserves. For example, reserves defined as in urban centers bear little resemblance to our common perception of an urban center. According to INAC, an urban reserve is defined as a First nation reserve located within 50 km from the nearest service center having year-round road access. A service center in turn is defined as a community where the following services are available – supplies, material and equipment (for construction, office operations, etc.); pool of skilled or semi-skilled labour; at least one financial institution; provincial services; and federal services. Not an urban center by any stretch of the imagination.

A special access reserve is one that has no year-round road access to the nearest service center.

Thus, as noted by INAC, "(a) large portion of Indian reserves are considered rural or remote, as such it can be expected that these reserves experience unique social and economic characteristics which differ from Canada as a whole." Interestingly, the INAC study did not confirm "the universal assertion that marked differences found between the reserve population and the Canadian population as a whole can be attributed to community size and remoteness of location."

3.2 Labour Market Status

Tables 1 and 2 should be looked at together.

UR: Unemployment rate – total unemployed as a proportion of labour force

PR: Participation rate – labour force as a proportion of population 15+ years of age

ER: Employment-population ratio – total employed as a proportion of population 15+ years of age

Sources: 1991 and 1996 Census

It is apparent that on-reserve Indians fare poorest in the labour market. Not only are their unemployment rates much higher than the non-Aboriginal labour force – almost three times higher in 1996; but they are higher than each of the other distinct categories of Aboriginal peoples. Off-reserve Indians have the second highest levels of unemployment.

As well, the participation rates of on-reserve Indians are much lower than the non-Aboriginal labour force (21% lower in 1996) and each of the other Aboriginal labour forces. Once more, the off-reserve Indians have the second lowest participation rates.

A relatively lower participation rate goes hand-in-hand with higher unemployment rates. High unemployment rates tend to discourage active labour force participation and so this leads to lower labour force participation rates. The unemployment rates for registered Indians, both on and off reserve, do not measure the so-called hidden unemployed – those individuals who have dropped out of the labour force altogether because they could not find any jobs. Hence, the real unemployment rates for registered Indians are much higher than those recorded and measured in Table 1. If one includes the hidden unemployed, the unemployment rate for registered Indians would have stood at 40% in 1996 – compared to the 27% shown in Table 1.

Source: Table 1

The employment-population ratio, which the product of the employment rate (one minus the unemployment rate) and the participation rate also is lowest for the on-reserve Indians – approximately 37% below the employment rate for the non-Aboriginal labour force. The off-reserve registered Indians had the second lowest employment rate.

The relative positions of all Aboriginal labour force groups did improve between 1991 and 1996. But despite the improvements, the relative positions of the total Aboriginal labour force and of registered Indians in particular are still abysmal. The unemployment rates for all registered Indians were 170% higher than those of the non-Aboriginal labour force; the participation rates were 18% lower (leading to an even larger unemployment gap when the hidden unemployed are included in the unemployment rate); and the employment rates were 32% lower.

The only Aboriginal group that compares reasonably well is the "other Aboriginal" labour force.

The unemployment rates for the Aboriginal labour force is consistently over twice the levels for non-Aboriginals in Canada in 1996, regardless of geographic location (Table 3). The Aboriginal labour force unemployment rates also were in excess of 21% in all geographic locations.

Source: 1996 Census

Source: 1996 Census

According to the INAC study, in 1991 only 1.2% of the gap between the unemployment rates experienced by registered Indians living on reserves and the unemployment rates of those living in Canada as a whole could be explained by community size and location. Assuming that INAC would find similar results in 1996 using its methodology, which is far from thorough, then it would appear that "remoteness" cannot explain the poorer labour force experiences of o-reserve registered Indians.

In all the major urban centers across Canada, the Aboriginal population fares much worse than their non-Aboriginal counterparts in the labour market – higher unemployment rates, lower participation rates (reflecting poorer job prospects) and lower employment rate (reflecting higher unemployment and lower participation rates) – Table 4. For example, the unemployment rates range from 50% higher in Halifax to 4.5 times (350%) higher in Regina.

RCAP pointed out:

Source: 1996 Census

The data in Table 5 confirm this position. Registered Indians, especially those living on reserves, are overwhelmingly employed in the public sector. They also are over-represented in the primary sector – a finding one would expect given the importance of the land and the customary occupations of hunting and fishing, and the proximity of reserves to the resource sectors and projects (forestry, mining and oil and gas).

Registered Indians in total, but especially those on reserve are very under-represented in other tertiary industries – financial services, transportation, retail and wholesale trade, business services, utilities, communications.

Poor labour force status translates into equally poor income status. Registered Indians in total and those on reserve in particular fare badly relative to the non-Aboriginal population in terms of median household income, average individual income, percentage of families below the low-income cutoff and the percentage of individuals with transfers as a major source of income. While income levels improved between 1990 and 1995, the incidence of low income and the importance of transfer payments as a major source of income actually increased during this time period.

1: Median household income – constant 1992 dollars

2: Average individual income – constant 1992 dollars

3: % of families at/below low-income cut-offs

4: % of individuals with transfers as major income source

Sources: 1991 and 1996 Census

The median household income of all registered Indians was 61% of the median income for non-Aboriginals in 1995 (Table 7). This represented a modest improvement from 1990. If we were to extrapolate this rate of improvement into the future, it could take almost 100 years for the gap in median household incomes to disappear.

Source: Table 6

The relative income status of Aboriginal peoples living in urban centers was better than those on reserve or in rural areas (Table 8). Nevertheless, even in the best case – the non-central metropolitan areas (non-CMAs) of urban centers, the Aboriginal populations’ average total income was only 73% of the average income for non-Aboriginals.

Source: 1996 Census

In 1996, in every major urban center across the country, the Aboriginal peoples had lower average total incomes and higher incidences of low income than non-Aboriginals (Table 9). In the cities Toronto and east, the average total income of Aboriginal peoples ranged between 70% and 77% of the income levels for non-Aboriginals. In the cities between Thunder Bay and Calgary, the average total incomes ranged between 55% and 65% of non-Aboriginals.

The incidence of low income ranged from a low of 28% in Halifax to a high of 64% in Saskatoon. Again, the incidences of low income among the Aboriginal peoples were higher in western Canada, including Thunder Bay, than in eastern Canada.

Source: 1996 Census

The INAC study found that in 1991, of the total difference in average individual total income of registered Indians on reserve and average individual total income for all Canadians, nearly 42% was explained by community size and remoteness of location.

Source: INAC Departmental Data, 2000

The incidence of low income and dependence on social assistance also are reflected in the large and increasing numbers of registered, on-reserve Indians, 15 years of age and older who received social assistance. The data in Table 10 together with the data in Table 5 support the contention that registered Indians living on reserves continue to be highly dependent on government transfers and jobs. This in turn reflects the serious underdevelopment of reserve economies and the failure of past government programs.

3.4 Education Status

Registered Indians are over-represented among those with less than a high school education – 22% of all registered Indians and 30% of on-reserve Indians had less than a grade nine education in 1995 compared to only 12% of non-Aboriginals – and under-represented among those with a university education or with some other post-secondary degree or certificate (Table 11). In 1995, only 6% of on-reserve Indians, 15 years or older were high school graduates and only another 2% had a university degree. 15% of non-Aboriginals had a high school degree and another 13% had a university degree.

Sources: 1991 and 1996 Census

While there has been some improvement in the educational attainment of registered Indians between 1991 and 1996. the improvements have been marginal for those with a high school degree, a post-secondary degree or certificate (university and other), or some post-secondary education other than university.

Source: INAC Departmental Data, 2000

The relative gap in full-time post-secondary enrollment rates for 17 to 34 year old registered Indians receiving INAC funding and all Canadians has not changed between fiscal year 1994-95 and 1998-99. The enrollment rates for the registered Indians also have not improved over this five-year period (Table 12).

Among urban populations, the Aboriginal peoples are over-represented among those with less than a high school education – an astonishing 48% had less than a high school education in 1995 (Table 13) – and under-represented among those with a university degree.

Educational attainment is positively correlated to labour force experience – the more educated experience lower rates of unemployment and are more likely to participate in the labour force because of the better job prospects, thus are likely to have higher participation rates. The Combination of lower unemployment rate (higher employment rates) and higher participation rates translate into higher employment-population ratios.

Source: 1996 Census

The data in Table 14 tend to show this positive correlation for both the Aboriginal and non-Aboriginal populations in 1996, although there appears to be a slight discrepancy for those with some post-secondary education. Perhaps, the failure to complete a post-secondary education is viewed negatively by prospective employers and thus hinders the job opportunities for all people – especially the Aboriginal peoples.

Source: 1996 Census

The relatively poorer labour force and income status of Aboriginal peoples, and in particular registered Indians, is in part a consequence of their relatively poorer education status. But there is a "chicken-and-egg" problem. The relatively poorer education status most likely reflects the relatively poorer employment and income opportunities available. So while a more educated work force could lead to higher income levels and lower unemployment rates, unless, there is an incentive to invest in education and training, there is likely to be little progress in improving the levels of educational attainment.

Expanding the scope of the current, but limited tax exemption, could serve as a powerful incentive for registered Indians, both on and off reserves to invest more in their education.

Registered Indians fare worse on several indicators of health status – life expectancy, infant mortality rates and age standardized TB incidence (Table 15). These findings are not surprising, since health status and labour force and income status are positively correlated. Individuals active in the labour market who earn above average income levels tend to be healthier and/or have better access to health care.

So the inferior health status of registered Indians is the mirror image on their relatively poorer labour force, income and education status. Economic development for the First Nations should improve the economic status of registered Indians and this should lead to improvements in their health. The status quo does have considerable hidden costs and the payoffs from economic development could be substantial not only for the Aboriginal peoples but for all other people in Canada.

Source: 1991 and 1996 Census

On a positive note, there does appear to be a steady increase in the life expectancy of registered Indians (Table 16). This might go hand-in-hand with the gradual improvements in income and education levels.

Source: INAC, Basic Departmental Data, 2000

There does appear to have been an improvement in housing conditions on reserves during the past decade (Table 17). But the percentage of housing units that are adequate; that is, they do not require minor or major renovations or replacements, is still an unacceptably high 57%.

Source: INAC, Basic Departmental Data, 2000

Housing on-reserves has improved. Between 1996 and 2000, the total number of houses on reserve has increased by more than 13%, from 78,187 to 88,570. In 1991 less than 80% of houses on reserve has basic water and sewer services. By 2000, this number increased to 94%. As of 2000, 90% of First Nations’ communities had access to electric services.

However, overall on-reserve housing is among the worst in Canada. In some First Nations communities, poor housing conditions threaten the health and safety of residents. The lack of adequate, affordable housing contributes to health and social problems.

Both the Indian Act and Crown ownership of reserve lands has restricted private capital investment. Reliance on federal subsidies as the primary source of construction capital and the lack of private financing have resulted in the construction of smaller houses. Often these houses were built to minimal standards and were not able to withstand severe weather conditions.

The cost of on-reserve housing is also affected by practical and geographical considerations (such as costs involved in getting building materials on site, and the winter freeze which impedes water transportation). Most reserve communities are in rural or remote areas. As well, many communities have little employment and significant percentages of reserve households depend on social assistance. Lower household income contributes to a greater dependency on social housing.

Once more, it is apparent that economic development would have beneficial impacts beyond the higher incomes that would be generated and the benefits would exceed the direct income gains.

John McCallum comments summarize the socio-economic status of Aboriginal peoples very succinctly and very well.

Does he still agree with this position today, now that he is an integral part of the Chretien government?

Economic development is a process that leads to a continuous improvement in a country’s standard of living. The standard of living is usually measured in terms of per capita real income and per capita wealth. These two variables are easily measured and less subjective than other variables which may be considered to impact the standard of living. But it is important to keep in mind that there is more to the standard of living than income and wealth – peace and security, clean environment, job satisfaction, family, honour, etc.

Productivity is the key to the traditional concept of the standard of living. Higher per capita income levels stem from higher productivity levels. And higher productivity growth rates produce higher growth rates in real per capita income.

Productivity is measured as the value of output per unit of input. Thus, productivity can increase if the value of the outputs increases. Improvement in quality and/or enhancement in the perceived or actual value of the product for customers will result in customers paying higher prices to reflect the greater value inherent in the product.

Productivity also can increase if more output can be produced with less input. This requires improvements in the efficiency of production; adoption of new organization, production, logistics and/or distribution technologies; and/or improvements in the quality of the inputs.

At an economy-wide level, productivity can increase if inputs are transferred from lower productivity activities to higher productivity activities.

In all cases, innovation is critical. Innovation requires risk-taking and risk-taking in turn requires entrepreneurship. While entrepreneurship can set the stage for innovative activities, excellent management is needed to ensure that the innovation strategies are well executed.

The people that create new ideas, the people that translate these ideas into products and companies and the people that organize and run these companies are the key to generating high levels of productivity and higher productivity growth rates.

Economic development requires producing the foundation for entrepreneurship, creativity and innovation to flourish.

But there is more to economic development and prosperity than the purely materialistic view offered by economists. For example, as a special survey conducted by OI shows, indicators of economic success in First Nations’ communities include – community pride, strong family units, healthy communities, higher confidence and self-esteem, social success.

RCAP pointed out:

This same view was echoed by Stephen Cornell and Joseph Kalt:

Thus, while an appropriate and holistic approach must be adopted by the First Nations as they create the framework for sustainable, broad-based economic development, productivity growth and higher incomes and wealth must be the primary outcomes. Productivity is the fundamental longer-term driver of differences in living standards across nations and across regions within a country. Improvements in productivity are critical for raising living standards and the quality of life because they provide the economic base for investments in education, health, environmental improvements, infrastructure, poverty reduction and social security.

Success in achieving higher productivity growth rates will provide the jobs and income required to generate confidence and esteem, to achieve self sufficiency and independence from federal government handouts, to create healthy communities, to reduce poverty and dependence on transfer payments, to produce stronger family units, to instill community pride, to provide the financial resources for capacity and nation building.

Over the years, economists in Canada have spelled out a number of different requirements to spur productivity growth in order to enhance our standard of living and close the gap with the United States.

Starting in the 1950s, the small size of our domestic market and the legacy of trade barriers were singled out as the primary reasons for the productivity underperformance of the Canadian economy relative to the U.S. Free trade with the U.S. was advocated as the solution to our problem.

By the early 1980s, privatization and deregulation were added to the policy mix. In the 1990s, the following suggestions have been put forth for improving our productivity performance – the elimination of government deficits, reduction in government debt, lower tax rates, increased funding of education and training and more incentives for R&D.

Decades of government intervention, free trade agreements initially with the U.S. and then with Mexico, deregulation, the elimination of government deficits and hundreds of billions of dollars in government spending and tax incentives for research and development, job training, small business, venture capital and industrial subsidies have not enhanced the productivity performance of the Canadian economy, at least relative to that of the U.S.

The October 1999 Throne Speech highlighted that:

The January 2001 Throne Speech emphasized that: "Countries that succeed in the 21st century will be those with citizens who are creative, adaptable and skilled. Our people - their skills, talents, knowledge and creativity - are the key to our future success."

And more recently, the new Minister of Finance, John Manley, stressed that his goal is to turn the Canadian economy into an economic "tiger" in order to accelerate the growth in the standard of living in Canada and close the gap with the U.S. He wants Canadians’ incomes to become comparable with those in the United States. In order to achieve this goal, he intends to improve Canada’s lagging productivity by cutting taxes, spending strategically and have government departments and agencies cut spending in low priority areas; that is, every government policy will be assessed with a "productivity lens".

According to Manley, Canada has to be better than the United States in terms of taxes, investments in human skills and educational quality, and in other areas including a quality health care system. The federal government will concentrate on investing in research and development (R&D) incentives and social programs such as health care. But the key to productivity gains includes lowering corporate and personal income tax levels and deregulating key sectors of the economy – telecommunications, banking, cultural industries.

Productivity stems from competitiveness, and competitiveness stems from the actions of the key decision-making individuals in companies. Their decisions in turn are influenced by incentives – and making and keeping money is the greatest incentive. Taxes play a key role in this process.

RCAP argued:

In other words, First Nations must assume complete responsibility and control for their economic development. This requires sovereignty.

Stephen Cornell and Joseph Kalt have stressed that sovereignty, nation-building, and economic development go hand in hand. Without sovereignty and nation-building, economic development is likely to remain a frustratingly elusive dream.

Doug Cuthand also has argued that in order for reserve economies to flourish, care must be taken to prepare the proper groundwork, which includes strong self-government for First Nations.

According to Cornell and Kalt, economic development requires a nation-building approach.

But for sovereignty and nation-building to succeed in creating economic development, good governance is necessary. Harvard Project research indicates that good governance, which will provide the credibility needed to attract investors and entrepreneurs, must be built upon the following:

• Stable institutions and policies.
• Fair and effective dispute resolution.
• Separation of politics from business management.
• A competent bureaucracy.
• Cultural "match".

Thus, it is in the self-interest of the First Nations to put in place the basis for good governance and there is no need for this to be dictated from the outside. Consequently, it is obvious that there is no need for Nault’s proposed Governance Act and that its sole justification is to perpetuate the paternalism of the federal government towards First Nations Peoples in order to legitimize their eventual assimilation into white society.

Cornell and Kalt also have commented:

As noted in section 4.1 above, the federal government has relied on the following policies to spur economic development and productivity growth in Canada during the past two decades:

• Free trade – e.g., U.S.-Canada Free Trade Agreement, North American Free Trade Agreement
• Privatization – e.g., Canadian National Railways, Air Canada
• Deregulation – airline and telecommunication industries
• Elimination of budgetary deficit and reduction of national debt
• Reductions in personal and corporate income tax rates
• Investments in R&D and human capital.

It should be noted that the introduction of the GST was intended to be a crucial part of the government’s policies to stimulate savings and investment and thus generate higher rates of growth. The rationale was simple. Taxes on income discourage hard work and effort. They also penalize savings since savings are limited to after-tax income.

To encourage work and effort and savings and thus stimulate entrepreneurship and risk-taking and increase the availability of funds for investment, the income tax should be replaced with a tax on consumption – the GST.

The RRSP and registered pension plan (RPP) tax deferrals in the existing income tax system were introduced to encourage Canadians to save throughout their working lives in order to avoid a serious disruption of their living standards upon retirement. So even though there is a paternalistic undertone to these tax measures – government has no confidence in the common sense on Canadians to save for their retirement – they do provide a basis for limiting the negative incentive effects on an income tax and creating an incentive for savings. The Department of Finance has estimated the current present value of the tax assistance for RRSPs and RPPs at about $7.2 billion.

But the failure to sell the idea to Canadians prevented the government from replacing the income tax with a consumption tax.

Nevertheless, tax cuts have been at the top of the list of recent government initiatives to stimulate productivity growth. In the 1999 Throne Speech, the government stated:

In his last budget as Finance Minister, Paul Martin reiterated his commitment to implementing the $100 billion in tax cuts announced in the 2000 budget. He also emphasized the need to make investments in infrastructure, R&D and education, and at the same time continue to reduce the debt.

The importance of tax cuts and debt reduction as cornerstones of the government’s economic development policy has been adopted by the new Minister of Finance, John Manley.

The annual budgets and expenditure estimates provide an excellent guide for the policy direction of the federal government. A review of past budgets reveals that R&D, small and medium size enterprises, job training, agriculture, and regional economic development and diversification have consistently been high policy priorities.

A cursory examination of current expenditure estimates highlights the major programs supported by the government in the area of economic development. The following data are derived from the Public Accounts of Canada 2001, V. II, Part 1.

The Department of Industry provided almost $700 million in transfer payments and subsidies to support programs such as Technology Partnerships Canada program ($263 million); Genome Canada ($140 million); Small Business Loans Act ($77 million); School/Net Community access program ($50 million); Aboriginal Business Canada program ($32 million); and Northern Ontario Development Fund ($31 million).

In addition, the Department of Industry provided the following financial assistance:

• Atlantic Canada Opportunities Agency – transfer payments and subsidies ($221 million)
• Canadian Space Agency ($319 million)
• Economic Development Agency of Canada for Quebec – transfer payments ($197 million)
• Enterprise Cape Breton Corporation – subsidies ($34 million)
• National Research Council of Canada ($591 million)
• NSERC – transfer payments ($539 million)
• SSHRC – transfer payments ($129 million)
• Western Economic Diversification – transfer payments ($168 million)

The department’s mandate is to promote international competitiveness and excellence in industry, science and technology in all parts of Canada; promote regional economic development in Ontario; and assist Aboriginal people realize their economic potential.

There are several agencies and councils under the auspices of this department:

• Atlantic Canada Opportunities Agency – support and promote new opportunities for economic development in Atlantic Canada with emphasis on small and medium sized enterprises
• Business Development Bank of Canada – support Canadian entrepreneurship by providing financial and management services
• Economic Development Agency of Canada for Quebec – promote economic development in areas of Quebec with low incomes, slow economic growth or inadequate opportunities for productive employment; emphasize long-term economic development and sustainable employment and income creation; focus on the development and enhancement of entrepreneurship
• National Research Council of Canada – enhance national capability and stimulate investment in R&D for the economic and social benefit of Canada
• Natural Sciences and Engineering Research Council – strengthen Canada’s economy and quality of life by the support of high quality of basic research in Canada’s universities and encouragement and facilitation of links between universities and the private sector
• Western Economic Diversification – promote economic diversification in Western Canada

The Department of Natural Resources provided $128 million in transfer payments and subsidies for economic and social benefits, environmental protection and mitigation and other programs; as well as giving the AECL $121 million in subsidies and the Cape Breton Development Corporation $65 million in subsidies. The role of this corporation is to rehabilitate and re-organize the coal mining industry on Cape Breton so that it can become economically viable. Money is still being poured into reviving the economy of this region even though billions of dollars of spending over the past several decades have failed to do this.

The Department of Transport provided $232 million in financial support to VIA Rail and another $232 million in transfer payments and subsidies for several programs.

In addition to direct expenditures, there are many valuable tax incentives directed towards economic development objectives. These so-called tax expenditures reduce government revenues and are not as visible as direct expenditures.

The following are based on the estimates in the Department of Finance’s "Tax Expenditures and Evaluations 2001 (the values in brackets indicate the tax costs of the incentives):

• Farming and fishing: $500,000 lifetime capital gains exemption for farm property ($225 million);
• General business and investment: partial inclusion of capital gains ($2.3 billion);
• $500,000 lifetime capital gains exemption for small business ($380 million) – bolsters risk taking and investment in small business by allowing owners to accumulate funds for retirement;
• Labour-sponsored venture capital corporations credit ($260 million) – fosters entrepreneurship by encouraging investments by individuals in labour-sponsored venture capital organizations that are set up to create jobs and stimulate economic growth;
• Low corporate tax rate for small businesses ($3.5 billion) – provides small corporations with more after-tax income fore reinvestment and expansion;
• Low corporate tax for manufacturing and processing ($1.4 billion) – enhances the international competitiveness of the manufacturing sector;
• Scientific research investment tax credit ($1.3 billion) – provides incentives to invest in scientific research ad experimental development;
• Atlantic Canada investment tax credit ($125 million) – promotes economic development in the Atlantic provinces and the Gaspe region of Quebec;
• Partial inclusion of capital gains ($2.1 billion) – provides incentives to Canadians to save and invest.

The foregone revenues of just these measures totals $11.6 billion.

INAC claims that it tries to facilitate on-reserve economic development through various programs that assist Aboriginal peopls in finding and developing economic opportunities. The goal of these programs is to increase the number of business opportunities and jobs, while decreasing social assistance dependency. Among the major program initiatives are the following.

The Community Economic Development Program provides funding to First Nations, Inuit and Innu so that they might have the capacity (through Community Economic Development Organizations – CEDOs) to plan and pursue economic development opportunities. CEDOs operate in 437 communities.

The Opportunity Fund provides financial assistance to First Nations, Inuit and Innu to establish viable business enterprises and assists Aboriginal businesses attract joint venture partners or secure conventional debt financing. This program is delivered through CEDOs.

The Procurement Strategy for Aboriginal Businesses aims to increase the number of Aboriginal businesses doing firms with the federal government. The government also is trying to engage the private sector, the provinces and municipalities in joint initiatives and in sharing best practices to increase Aboriginal business success in their procurement markets. The government also is committed to develop opportunities with international agencies such as the Inter-American Development Bank, and the Latin America Fund for the Development of the Indigenous Peoples of the Americas and the Caribbean.

The Resources Acquisition Initiative assists First Nations and Inuit businesses through matching equity to acquire natural resource permits and licenses and to finance business start-ups and expansions in the resource sectors.

Aboriginal Business Canada (within Industry Canada) provides a range of services and support to Aboriginal individuals and organizations engaged in entrepreneurship. Under direction from the private sector National Aboriginal Economic Development Board, the program focuses on strategic priority areas of innovation and technology development, trade and market expansion, tourism and youth entrepreneurship.

INAC stated in its 2002-03 Report on Plans and Priorities:

Obviously, sovereignty is not one of the options being considered by INAC; neither is any expansion of tax immunity. Instead, it appears that INAC is following the old, paternalistic, business as usual model in attempt to create some new economic opportunities on reserves and in the North.

Critics of the tax exemption status of on-reserve registered Indians point to the billions of dollars spent annually by INAC and other federal government departments as signs that registered Indians already receive more than enough and do not need any additional assistance in the form of tax immunity. They also point to these expenditures as indicating that the economic and social problems faced by the First Nations cannot be solved by money alone, suggesting that the fault lies largely with the peoples themselves. These large expenditures also have helped the government "justify" its position that the First Nations must be subject to strict governance and financial disclosure rules.

Setting aside history – RCAP provided an excellent summary of the relationship between First Nations and white European society – it is useful to place the expenditures into some context.

INAC is one of 12 federal departments and agencies that offer programs for Aboriginal peoples. Most funding is directed toward basic services comparable to those that other Canadians receive through provincial, territorial and municipal governments. Four departments (INAC, Health Canada, Canada Mortgage and Housing Corporation, and Human Resources Development Canada) are collectively responsible for approximately 97% of total federal funding directed to Aboriginal peoples. INAC’s expenditures represent 70% of all federal funding. The focus of INAC’s funding is almost exclusively the Registered Indian population on reserves and Inuit.

INAC’s expenditures for fiscal year 2001-02 consisted of the following:

(i) Grants

• Claims ($367 million)
• Indian and Inuit Programming ($240 million) – Indian bands, district councils and Inuit settlements to support administration ($122 million); Mi’kmaq education in Nova Scotia ($25 million); Self-governing aboriginal organizations ($31 million)

(ii) Contributions

• Claims ($55 million)
• Indian and Inuit Programming ($3.7 billion) – Economic development ($109 million); Education ($1.2 billion); Social development ($1.1 billion); Capital facilities maintenance ($1.0 billion); Indian government support ($169 million); Consultation and policy development ($58 million); Support building of strong governance, administrative and accountability systems ($21)
• Northern Affairs Programming ($62 million) – Governments of NWT and Nunavut for health care for Indians and Inuit ($40 million).

Of the almost $4.5 billion in spending on these programs, direct economic development initiatives accounted for less than 2.5% of the total. In addition, INAC spends approximately $650 million on administration.

The following departments also incurred expenditures on behalf of all Aboriginal peoples (2002-03):

• Health ($1.4 billion)
• CMHC ($305 million)
• Human Resources Development Canada ($343 million)
• Canadian Heritage ($66 million)
• Fisheries and Oceans ($35 million)
• Industry ($33 million)
• Natural Resources ($16 million)

As can be seen, most of the money is spent on education, health, housing and social programs. While all are important in creating the foundation for strong communities, they all involve services which are provided to all people in Canada. Moreover, these levels of expenditures only have kept the economic opportunities gap from widening. Either not enough is being spent or it is not being spent wisely or there is insufficient flexibility in designing the programs and spending the money.

In comparison, the federal government spends tens of billions of dollars annually on various income support programs as well as health and education initiatives (based on 2001-02 expenditures: Public Accounts of Canada 2001):

(i) Agriculture and Agri-Foods

• Department – transfer payments and subsidies ($1.8 billion) – Farm Income Protection Act ($1.3 billion); farm income assistance ($357 million)

More is spent annually to prop up the incomes of farmers than is spent on education for Aboriginal children. The farm income assistance program spending swamps the spending on direct economic development initiatives for all First Nations. These and other spending discrepancies reflect political priorities – farmers control more seats in Parliament than do the Aboriginal peoples.

A review of budgets since 1970 indicates that almost every federal government put in place the same mix of programs to support farmers – price supports, income insurance, organized marketing, long and short-term credit, favourable tax treatment, and production develop aid – and provided large sums of direct financial assistance to them as well.

When one adds in provincial government financial assistance and the value of price supports provided by marketing boards, the agriculture sector of the economy has received scores of billions of dollars in assistance over the past quarter century. Despite the massive aid, the agriculture industry does not appear to have fared well over this period and the federal government recently announced another massive infusion of financial assistance.

(ii) Canadian Heritage

• Department – transfer payments and subsidies ($771 million) – grants to eligible Canadian periodical publishers ($42 million); contributions to Canadian magazine publishing industry ($26 million); contributions to book publishing industry ($32 million); contributions to Canadian Television Fund ($100 million)
• Canada Council – subsidies ($127 million)
• CBC – subsidies ($902 million)
• Canadian Film Development Corporation – subsidies ($93 million)
• National Capital Commission – subsidies ($97 million)
• National Film Board ($63 million.

Canadian Heritage spends on subsidies for the cultural industries about 50% of what health Canada spends annually on health care for Aboriginal peoples. The Canadian Film development Corporation receives almost as much as is spent on direct economic development programs for the First Nations.

(iii) Finance

• Department – transfer payments and subsidies ($27.6 billion) – fiscal equalization (($11.0 billion); Canada Health and Social Transfer ($14.5 billion); IMF poverty reduction and growth facility ($521 million); International Development Association ($366 million).

Total expenditures on international agencies run about $100 million below the annual expenditures by INAC on capital facilities maintenance on reserves and in the North.

(iv) Foreign Affairs and International Trade

• Department – transfer payments and subsidies ($393 million)
• CIDA – transfer payments and subsidies ($2.0 billion)

CIDA’s annual budget almost exceeds total INAC spending on education and social programs for Aboriginal peoples.

(v) Human Resources Development

• Department – transfer payments and subsidies ($26.2 billion) – OAS ($19.2 billion); GIS ($5.1 billion); Canada Student Financial Assistance Act ($716 million); RESP grants ($435 million); Canada Student Loans Act ($96 million)

The financial assistance provided by Human Resources Development through subsidies for post-secondary education is equal to the total spending on education by INAC for all Aboriginal peoples.

In addition to the direct expenditures, there are tens of billions of dollars in tax expenditures.

As noted above, the current present value of the tax assistance for RRSPs and RPPs is estimated at $7.2 billion. The foregone tax revenues for personal expenditures for education (tuition fee credit, education credit, transferred credits, carry-forward of credits, student loan interest credit, RESPs, partial exemption of scholarship, fellowship and bursary income) are $1.4 billion – an amount well in excess of INAC’s annual expenditures for education.

The non-taxation of business-paid health and dental benefits costs governments $1.6 billion annually exceeding Health Canada’s expenditures of $1.4 billion for health care for Aboriginal peoples.

The charitable donations credit produces an additional cost of $1.3 billion. Compare this to INAC’s expenditure of $1.0 billion for social programs for Registered Indians and Inuit.

Interestingly, the Department of Finance could not provide an estimate of the foregone revenues from the non-taxation of Indians on reserves, even though this tax expenditure was included in its list of all tax expenditures.

As noted by RCAP, regional economic disparities across Canada have persisted despite considerable efforts by the federal government over several decades to reduce them. The federal government has run the gamut of acronyms for regional economic development agencies – from ARDA to WD – during the past 40 years and has spent tens of billions of dollars on regional development policies and hundreds of billions on equalization payments. Yet there is no apparent economic payoff to these massive efforts.

As I have previously argued:

The dismal track records in regional economic development and First Nations economic development do not provide any comfort in believing that the federal government is capable of dealing with these problems. Money alone is not sufficient. In the case of the First Nations, self-government and the financial capacity to govern are the pre-requisites for development.

We start this section by summarizing the answers to one of the questions posed by OI in its survey; namely, "If you were developing our community economically, what commercial/ business activities would you pursue?"

The answers are not surprising, and as a result, they do highlight another barrier to economic development for the First Nations peoples wherever they reside across Canada.

The overwhelming majority of answers can be categorized into two groups: tourism and resources. Tourism did include gaming. Resources included fishing, agriculture, forestry, oil and gas, mining, horticulture and hunting. Beyond these two categories, few other areas were identified as providing opportunities for economic/business development for the First Nations. There was almost a total absence of anything resembling high technology or sophisticated financial or business services.

On the one hand, the nature of the responses are not surprising. People see opportunities most readily in areas with which they are familiar. Rare is the person who looks beyond the horizon. On the other hand, they indicate a lack of familiarity with the knowledge economy. However, the more traditional sectors such as tourism and resources can be just as sophisticated as any other sector of the economy in the use of technology, knowledge and skilled labour.

Perhaps, if the survey covered more of the people living off reserves, the opportunities might have included other sectors. The opportunities probably differ for those who live on or adjacent to reserves and those who live off reserves in any one of the major urban centers. Experience and environment influence one’s perception of realistic opportunities.

Moreover, a significant number of the respondents saw small business as the route to development and prosperity. This suggests both a realistic view of opportunities and an entrepreneurial bent. Large corporations are a rarity on reserves, but this does not mean that there are not First Nations peoples capable of building up their companies into a large corporation that transcends the First Nations.

Furthermore, it has largely been through collectively owned enterprises that First Nations have become significant players in regional economies and industrial sectors. So there is an important role for community or nation enterprises to play alongside small businesses.

There is little value in trying to pick "winners". Creating the environment supportive of economic development and providing the assistance necessary for risk-taking and building up businesses will enable people to seize the opportunities with which they are most comfortable and succeed. Of course, not all ventures will succeed. Failure rates will be high, as the case with new ventures and small businesses in general. But failure must be seen positively – as the flip side of risk taking. In the U.S., financial institutions are much less likely to stigmatize and shun entrepreneurs who fail. It is not uncommon for an entrepreneur to fail several times before his or her initial success. In Canada, not only do we look down upon failure, but we also tend to downplay success. We lack the mindset, except out West, to nurture entrepreneurship. The First nations must avoid this pitfall.

6.2 Barriers to Development

Heading the list is the Indian Act, since all barriers seem to flow from it. This Act not only has usurped autonomy from the First Nations but also has imposed numerous restrictions on the economic and business activities of First Nations peoples.

The Indian Act restricts access to capital, both equity and debt. This problem is compounded by the high rates of unemployment and poverty and low income levels which preclude the First Nations from generating pools of savings that could be used to finance their own businesses and development projects. Personal savings and borrowings from family and friends have generally been the prime sources of risk capital for small business start-ups.

RCAP commented that:

"access to capital is a problem for small businesses in Canada, especially those located in less developed regions of the country. In Aboriginal communities, the lack of capital is often cited as the principal constraint facing those who wish to establish or expand business ventures….the Commission’s community case studies reveal the frustration of on-reserve business people with the restrictions imposed by the Indian Act."

Community size and remoteness are two other barriers, particularly for those living on reserves. There are 612 First Nations communities. Approximately 61% of these communities have fewer than 500 residents; 6% have more than 2,000. Even though 35% of on-reserve status Indians live in "urban" areas, the definition of an urban area implies a rural community by more common standards. Remoteness also limits the ability to access critical business services such as financial, marketing, training, consulting.

Exacerbating the problem of small communities is that most First Nations businesses serve only the local community. This reflects the fact that there are over 50 distinct nations or cultural groups, the natural north-south links have been restricted and each nation has been dispersed over a larger area into smaller groups. To create jobs and increase incomes, First Nations businesses need to expand into regional, national and international markets. Canada entered into a free trade agreement with the U.S. in order to expand the size of the market for Canadian companies. At the same time, the Canadian government prevents First Nations from expanding their market opportunities by trading with their brothers in the United States. And judicial interpretation of the tax exemption has further restricted the market opportunities for First Nations businesses by eliminating the tax exemption for "commercial mainstream" activities.

RCAP has noted that:

The lack of development and economic opportunities on reserves have pushed many of the more highly educated and possibly more of the risk takers off the reserves in search of better prospects elsewhere; and have created a culture of dependency on reserves. A welfare economy is both seductive and destructive. And the loss of many of the "brightest and the best" erodes the human capital and dynamism of the First Nations communities, discouraging others to leave as well. This produces a vicious cycle that threatens the long-term viability of these communities.

Section 9 of the British North America Act transferred ownership of natural resources to Quebec, Ontario, New Brunswick and Nova Scotia in 1867. The Natural resources Transfer Act, 1930 did the same for the Western provinces. Resource revenues for the First Nations were not entrenched in either piece of legislation and so the First Nations have never had control over resource revenues rightfully owing to them.

Contrast the position of the First nations with one of the fundamental principls of the constitution; namely, that to finance and exercise power of self-government, an adequate resource base is essential.

All in all, it is the combination of the Indian Act, the absence of self-government and the lack of an adequate land base and financial resources which create the greatest barriers for the First nations. "Self-government without a significant economic base would be an exercise in illusion and futility."

As emphasized by Cornell and Kalt, sustained development requires the recognition and effective exercise of tribal sovereignty. Sovereignty is one of the primary development resources any First Nation must have.

RCAP’s position is straightforward – sovereignty, resources and money from the federal government are essential. For example:

RCAP recommended that the federal government increase its expenditures for economic development initiatives by $350 million over the next five years. The additional expenditures would pay for small business advisory services, equity capital and small business loans; a 10-year special training and employment initiative; and more active use of social assistance for economic and social development in Aboriginal communities.

A major initiative to upgrade housing and community infrastructure also would support the transition to self-government and enhance economic development.

In addition, RCAP proposed that equity capital be made available from federal and provincial governments through long-term development agreements with regional Aboriginal organizations, nations and confederacies, through a National Aboriginal Development Bank, and through private investments.

Finally, with regards to taxation, RCAP argued:

The tax system proposed by RCAP would be structured as follows:

• The First Nations would have control over the full range of direct taxes and other revenue sources. This would include personal income tax; corporate income tax; sales taxes; property taxes and lease fees; gaming revenues; resource royalties; licenses and fees; and user fees;
• Taxes would be residency based. First Nations would receive some of the taxes from non-Aboriginal people on First Nations land. They would not receive taxes from purchases made by First Nations persons outside their own jurisdictions, or income earned by First Nations persons residing outside their jurisdiction;
• First Nations would set tax policy on their lands, subject to Canada’s international treaty obligations and a provision that they would not establish tax havens on their territory.

The bottom line for RCAP was that "Given a growing land base and more investment funds from further claims settlements, coupled with self-government, a better-educated work force and healthy communities, there is a potential for a major turnaround in the economic fortunes of Aboriginal people."

According to Matthew Coon Come: "We don’t wish to go on being a burden in any way, but without adequate access to lands and resources, and without the jurisdiction required to benefit meaningfully and substantially from them, we are being given no choice."

In his pre-budget submission in October 2001, Matthew Coon Come highlighted the following:

The Agenda required the following initiatives:

• Canada must honour its commitments to provide social and economic benefits to First Nations under Treaties and Canada must calculate what it owes to First Nations under treaties and provide those benefits to First Nations;
• First Nation government at the nation level would promote greater service efficiencies, promote standardization, and allow greater information coordination;
• Economic development in each community would be a priority;
• First nations would regain ownership of their resources;
• Trade between First Nations communities should be developed;
• An Aboriginal Investment Fund should be established, from settlements such as lands claims, to invest in economic development opportunities;
• Tax immunity both on and off reserve would remain in place until the First Nations peoples attained economic parity with Canada;
• Transfer payments from Canada would be part of the social union agreement to ensure equal access to resources similar to federal-provincial transfer payments.

The AFN’s economic development strategy would have both short term and long term components. Short-term elements would include investments in a business development fund, seed capital to support entrepreneurs and support for improvements in physical infrastructure. The long term components would include training the next generation of business persons; a regulatory reform strategy; improvements in the system of land management; improvements in access to natural resources through resolution of Aboriginal rights and title; improvement in access to capital through reform of the fiscal relationship; and, the development of a sound investment climate through institutional development.

Matthew Coon Come stated that:

Fred Wien, building upon the work of Cornell and Kalt, set out four dimensions that are important for economic development the First Nations peoples:

• Political sovereignty;
• Market opportunity;
• Access to financial capital; and
• Distance from markets.

He also set out nine steps that in his opinion are needed to rebuild Aboriginal economies. They include:

• Regaining control;
• Rebuilding Aboriginal nations;
• Building institutional capacity;
• Expanding lands and resources;
• Recognizing Aboriginal and Treaty Rights;
• Building Aboriginal businesses by improving access to capital, supporting entrepreneurship and improving and expanding access to markets;
• Supporting traditional economies;
• Overcoming barriers to employment; and
• New approaches to income support.

There is general agreement that the First Nations must be in control of their destiny, regain the rights to resources, expand their land bases and continue to receive reparations from the federal government to support economic development initiatives, including education, health care, infrastructure and social programs. There is also agreement that economic development is necessary if the First Nations are to take advantage of their sovereignty and their peoples are to flourish.

However, the role and critical importance of tax immunity are largely overlooked. RCAP sees taxation as a means to generate funds to finance First Nation governments and policy initiatives. Indeed, RCAP advocated harmonization of the tax systems with Canada. The AFN wants to retain the immunity status until economic parity is reached. But neither has recommended using tax immunity as a policy lever for stimulating economic growth and development, despite the widespread and costly use of tax incentives by the Government of Canada to achieve various economic and social objectives. However, the AFN has called for the expansion of tax immunity beyond the boundaries of the reserves, even though for only a period of time.

Incentives are critical for encouraging entrepreneurs and innovation. Entrepreneurship cannot thrive without a dynamic venture capital market. Real venture capitalists have the talents and the networks to provide entrepreneurs whom they back financially with the management skills and supports needed to succeed. Venture capitalists take an active role in the companies in which they invest.

Venture capitalists and entrepreneurs are motivated by the profit potential for their investments. They do not base their investment decisions on up-front tax credits or write-offs which may reduce their investment risks. Low capital gains tax rates are much more valuable for venture capitalists. Rewarding success is critical for the creation of a vibrant venture capital market and the right mix of tax incentives are critical.

Moreover, a dearth of savings among the First Nations inhibits the number of and growth of start-ups that depend upon personal savings and those of families and friends to get the seed capital to get started in business. Taxing the profits of successful start-ups further starves then for capital since internally generated cash flows are crucial during the growth phase.

Tax immunity increases the pool of community savings. Tax immunity increases the cash flows of successful companies. Tax immunity provides an incentive to invest in one’s own human capital.

Tax policy should be viewed more from the point of view of incentives than as a source of revenues for First Nation governments. This latter perspective plays into the hands of the federal government – remember the position of Paul Martin and the Department of Finance – and runs counter to the view that the federal government should maintain, if not expand, its financial support of First Nations communities.

There is also the matter of income leakages from First Nation communities if tax immunity is abandoned. RCAP was aware of the negative consequences of leakages:

But this same concern was not extended to issue of tax immunity.

There are several sources of tax exemption. These include:

• Sections 87 and 90 of the Indian Act;
• Paragraphs 149(1)(c), 149 (1)(d) and 149(1)(l) of the Income Tax Act; and
• Sections 187 and 188 of the Cree-Naskapi (of Quebec) Act.

It also has been argued that there may be an inherent right of Aboriginal peoples and their governments to exemption from taxation by another government. This argument has merit since the exemption in section 87 of the Indian Act has existed since before Confederation. It reflects the unique constitutional and historic place of Aboriginal peopls in Canada.

Tax exemption under the Indian Act and the Cree-Naskapi (of Quebec) Act covers income and sales taxes, both provincial and federal.

Registered Indians also may be exempt from other taxes levied on income such as employment insurance, CPP premiums, Workplace Safety and Insurance Board premiums and provincial health taxes (e.g. Ontario’s Employer Health Tax). Employers are not required to contribute to the Employer Health Tax in Ontario for status employees when these employees are receiving tax exempt income under S. 87.

Status individuals are eligible for both the refundable GST tax credit and the Child Tax Benefit even though their income is tax exempt.

RCAP commented:

RCAP is absolutely right in stating that the exclusion of the tax exemption for First Nations companies takes away an important advantage that would enable them to lessen their dependency on external sources of capital. But this highlights the very narrow interpretation given by the Courts to the legal basis for the tax exemption, and their inability or unwillingness to tread into fundamental policy issues dealing with economic development, treaty rights and sovereignty. Thus, the Courts might not be the best option for extending the scope and value of tax exemption for all First Nations peoples, not just those living on reserves.

It is interesting to note that section125 of the Constitution Act, 1867, provides that "no land or property belonging to Canada or any province shall be liable to taxation." This means that neither the federal nor the provincial governments (or their Crown agents) are liable to taxation by the other. By virtue of section 125, provincial governments and Crown agents are not liable to pay the GST/HST on their purchases. However, the federal government and most provinces have entered into reciprocal tax agreements. These agreements specify situations in which each level of government agrees to pay the sales taxes of the other. However, unlike provincial governments, municipalities are liable to pay the GST/HST.

In addition, the Tax Court of Canada has determined that a band (a First Nation) that is exercising powers of self-government and is providing the types of services that municipalities typically provide can be considered a Canadian municipality for income tax purposes. The Income Tax Act exempts a Canadian municipality from income tax. Certain municipal-owned entities; thus, certain entities owned by First Nations that are viewed as municipalities are exempt from income tax.

As pointed out in a briefing note for the Assembly of Manitoba Chiefs, "the trend in the case law suggests that the section 87 tax exemption for Indian employment income is becoming more difficult to establish.

Supreme Court formulated the "connecting factors" test in Williams v. Her Majesty the Queen [92 DTC 6320 (SCC)] to assist in determining the situs of intangible property (in particular, where employment income is located) for the purpose of section 87 of the Indian Act.

The Supreme Court ruled that:

All the cases concerning section 87 since the Williams case have applied the connecting factors test. However, while the Supreme Court provided the analytical framework, the lower courts have been struggling with the development of the connecting factors in employment income cases.

The Williams case emphasized that the purpose of the exemption provided by section 87 should be the paramount consideration in determining the weight to be attached to the connecting factors identified in any particular case. But the Court did not provide any further guidance other than reiterate the argument of Justice La Forest in the Mitchell v. Peguis Indian Band case [(1990) 2 S.C.R. 85]. In that case, the Supreme Court held that the purpose of the exemption was:

• To preserve entitlements of Indians to reserve lands;
• To ensure that Indians’ use of their property on their reserve lands is not eroded by taxation;
• not to remedy the economically disadvantaged position of Indians; and
• not to permit Indians to deal with property in the "commercial mainstream" on different terms than their fellow citizens.

In effect, the Court ruled out the possibility that tax exemption could play an important economic development role for the First Nations and lead to a higher standard of living and a greater value for their property, both tangible and intangible. Moreover, this decision ruled out the possibility that tax exemption was a treaty or Aboriginal right or part of the compensation package owing to the First nations for the expropriation of their lands.

In the Desnomie case, the Federal Court of Appeal further noted that the purpose of the exemption as stated in Williams and affirmed in Union of New Brunswick Indians was not to provide a general economic benefit for registered Indians on reserves, let alnoe for those living off reserve.

Donald Biberdorf has pointed out that per the Mitchell case, the precise meaning of "commercial mainstream" is far from clear. Nevertheless, "it is clear that it seeks to differentiate those Native business activities that deal with people mainly off the Reserve, not on it. It seeks to isolate those business activities that benefit the individual Native rather than his community as a whole".

A close reading of the section 87 employment income cases decided by the Federal Court of Appeal reveals that the Court, while professing a case by case approach based on the Williams analytical framework, has reduced the core connecting factors to living and working on (or near) a reserve. So what remains of the exemption in its current form leaves little scope for its use as an economic development policy lever.

In 1994, Revenue Canada prescribed the following guidelines for the Indian Act exemption based on its interpretation of the connecting factors test as expounded in the Williams case:

• When at least 90% of the duties of an employment are performed on a reserve, all of the income of an Indian from that employment will usually be exempt from income tax;

• When the employer is resident on a reserve, and the Indian lives on a reserve, all of the income of an Indian from an employment will usually be exempt from income tax; and

• When more than 50% of the duties of an employment are performed on a reserve and the employer is resident on a reserve, or the Indian lives on a reserved, all of the income of an Indian from employment will usually be exempt from income tax

An employer is a resident on a reserve when the reserve is the place where the central management and control over the employer organization is actually located.

These guidelines are department policy – they do not have any legal standing. To be consistent with anti-avoidance rules, the guidelines do not apply when it can be reasonably be considered that one of the main purposes for the existence of the employment relationship is to establish a connecting factor between the income in question and a reserve.

The case Benoit v. Canada [2002 FCT 243] and the appeal of the Shilling case offer some potential for expanding the scope of the tax exemption. The Benoit case was based on tax exemption as a treaty right and the Shilling is intended to compel the Supreme Court to clarify its interpretation of the conditions for the applicability of the tax exemption under section 87.

In March 2002, the Federal Court, Trial Division held that Treaty 8 provided to those entitled to the Treaty the rights to claim the benefit of a complete exemption from every kind of tax, whether federal, provincial or municipal. The Court found that the Income Tax Act could not be applied to those entitled to the benefit of Treaty 8 because such application would be an unjustified infringement of a Treaty right constitutionally protected by section 35 of the Constitution Act 1982.

In its analysis, the Court reviewed the principles articulated by the Supreme Court of Canada which apply to the interpretation of treaties between the Crown and Indian people.

The Court rejected the Crown’s argument that "considerations of economic and regional fairness are a valid ground justifying the breach of a treaty right. It is manifestly unfair that those from the Treaty 8 region and in the Canadian mainstream, uniquely among Canadians, pay nothing in support of the fisc that provides them with services in that Canadian mainstream. Such a situation has nothing to do with property held qua Indian, or Indian status and clearly amounts to after the fact largesse." (para 347)

The Court also disagreed with the Crown and the intervener, Canadian Taxpayers Federation, who asked the Court to reject the claim to a broad tax exemption because it would go beyond the scope of the entitlements which the people held "qua Indian", and would give a special advantage with respect to property and activities conducted in the "commercial mainstream".

In effect, the Court did not diminish the potential value of tax exemption as an economic development tool as advocated by the Crown and the Canadian Taxpayers federation. Instead the Court stressed the importance of Canada abiding to treaty promises in order to maintain the "honour of the Crown".

This case opens another avenue, based on treaty and Aboriginal rights, for maintaining and expanding the scope of tax exemption. It also allows for a liberal interpretation so that First Nation corporations and individual businesses can finally benefit as well.

The Shilling appeal is requesting clarification from the Supreme Court on the following issues:

• whether the employer being located on reserve is the most significant connecting factor;
• whether living off reserve can ever be relevant to an entitlement to the section 87 tax exemption particularly in light of Corbiere v. Canada (Minister of Indian and Northern Affairs [(1999) 2 SCR 203], which decided that aboriginality-residence is always a suspect distinction;
• whether working in the "commercial mainstream" is relevant to an entitlement to the section 87 tax exemption and, if so, whether Indians who work off-reserve are, ipso facto working in the "commercial mainstream"

Even with clarification, the section 87 basis for tax exemption will still be too limited for tax exemption to be used for economic development purposes. The Benoit case is much more important in this regard, but at the end of the day, this matter cannot be left to the courts.

7.5 The Case for Tax Exemption

There are at least two lines of argument to support tax exemption for all First Nations peoples and their companies, whether they are collectively or individually owned.

One line of argument follows from the fact the rights to set tax rates and formulate tax policy belong to a government and are important instruments for a sovereign nation to control. If First Nations are to have self-government and eventually be treated as equals, they alone must determine how their people should be governed, and this includes how they should be taxed. Indeed, the First Nations have every right to set tax rates at zero if they decide that this would be in the best long-term interests of their peoples.

Consequently, until all tax powers are transferred to the First Nations, their peoples, both on and off reserve should not be obligated to pay income taxes – individual and corporate – and those on reserve should be exempt from sales taxes. When the powers are transferred, and they should be long before even a majority of treaty negotiations are completed, then the First Nations can decide on the appropriate tax system for their peoples and whether taxes, even if the rates are set at zero, should be based on residency (i.e. applicable to all residents, both First Nations peoples and non-Aboriginal peoples, living on reserves) or citizenship (i.e. applicable only to First Nations peoples regardless of their residency across Canada).

The second line of argument follows from the fact that tax policies have long been considered and used for a wide range of economic and social objectives, and as such, they can play a key part of a First Nations economic development strategy. The current and former Ministers of Finance in the Chretien government have made tax cuts a major component in their economic growth strategies.

Further, as noted in section 5.3 above, the federal government continues to have in place a large number of tax incentives to stimulate economic growth and these measure cost the government billions of dollars annually in foregone revenues. Among the major tax expenditures whose objective it is to spur economic growth, enhance the competitiveness of the Canadian economy and generate continuous improvements in standards of living are the following:

• Tax deferment for RRSPs and RRPs;

• Partial inclusion of capital gains;
• $500,000 lifetime capital gains exemption for small business;
• Labour-sponsored venture capital corporations credit;
• Low corporate tax rate for small businesses;
• Low corporate tax for manufacturing and;
• Scientific research investment tax credit;
• Atlantic Canada investment tax credit.

Moreover, the debate that preceded the introduction of the GST focused on the disincentive effects of an income tax on work and effort, savings and investment. Thus, at a minimum and setting aside the key questions of treaty and Aboriginal rights and sovereignty, First Nations peoples should not be subject to an income tax since economic development is critical to reduce and eventually eliminate the income gaps that exist between the First Nations peoples and non-Aboriginal peoples in Canada. Using the income data for 1995, the total income gap for registered Indians alone totals $3.8 billion. So there is a long way to go before the gap is eliminated and economic development, which must go hand-in-hand with sovereignty, as the extensive work of the Harvard Research project has demonstrated, is critical. So every policy tool must be available and properly used if First Nations peoples are to ever achieve economic equality and real economic independence.

Finally, incentives do matter, regardless of cultural and historic differences. Higher after-tax incomes create the incentive to invest in education and training. A more highly education and skilled work force is essential for the First Nations to have the talent to govern themselves and to have the talent that will be necessary to drive their economies. Tax exemption produces higher after-tax incomes, as long as employers do not try to capture some or all of the tax benefits.

Small businesses generally rely on personal savings and those of family and friends, as well as on internally generated cash flows, to finance the early years of their start up and growth. Higher after-tax personal incomes provide the cushion for savings, which could be invested in small businesses. Higher after-tax business incomes translate into larger cash flows, which can be re-invested in the business. Tax exemption, especially when extended to companies and their profits, can play a major role in addressing the capital barrier faced by small business and especially those started by and owned by the First Nations peoples.

So, if tax cuts and tax incentives are considered important by the federal government and the Department of Finance, they are even more so important for First Nations trying to develop their economies. It makes no sense from an economic perspective, nor should it from a political perspective, to try to raise tax rates for First Nations peoples, many of whom fall below low-income cutoff levels, when the thrust of fiscal policy is to cut tax rates and when tax incentives continue to be integral to the federal government’s policies to make the country more competitive and wealthier.

The Department of Finance prepared a working paper on "Indian Government Taxation" in 1993. It is not likely that the position of this department on this issue has changed in any significant way since the completion of this working paper. There is no reason to suspect that the current Finance Minister, John Manley, would have difficulty with any of the positions and arguments presented in this document. As a result, it provides a good road map for seeing where the department might want taxation by and of First Nations to go.

The working paper outlined the position of the department as follows:

• The First Nation government’s tax power is to be geographically based and the tax powers are to operate concurrently with federal and provincial taxation authority within reserve lands.
• The federal government will consider administering harmonized taxes within the federal system, provided administrative costs are not too high;
• Indirect taxation is to remain strictly a federal power – the federal government will consider giving First Nations authority to levy all direct taxes;
• Tax relationships must be consistent with increased autonomy and self-sufficiency for First Nations;
• The First Nation government must coordinate any taxation authority over previously non-exempt sources with federal and provincial powers so as to maintain similar tax rates, and prevent tax avoidance and unintended over-taxation and finally to minimize compliance and administrative costs;
• There is to be no point of sale GST exemption for individual Indians.

In addition:

• The property of Indians which is situated on reserves should remain exempt from non-Indian government taxation;
• Indian governments and their institutions will be exempt from taxation by other governments;
• Own source revenues are not to be used as a rationale for replacing existing funding arrangements unless the institutional infrastructure and level of service provision of a given First Nation government is reasonably equivalent to that of surrounding communities;
• The extent to which non-First Nation members living on First nation land will pay taxes to the Indian government will be negotiated.

While the Department of Finance did not appear to be hesitant to transfer direct taxation powers to the First Nations, the department did reserve the right for both federal and provincial governments to tax First Nation companies headquartered on reserves and non-First Nation peoples on living on reserves, and to negotiate and set royalty rates, license fees and other taxes with resource companies operating on reserve lands. In other words, the current restricted view of tax exemption would prevail and provide the basis for a transfer of tax powers to the First Nations.

The First Nations would establish their own tax regime on a residency basis rather on the basis of citizenship. This would be consistent with Canada’s tax system, but differ from that of the U.S., which is based on citizenship and not residency. As well, the tax regime would have to be harmonized with that of the federal and provincial governments. In effect, the tax regime would be established by Ottawa and the provinces with little room for autonomy and experimentation by the First Nations. The department made it clear in this document that the development of a First Nation tax authority must be subordinate to maintaining the integrity of the Canadian tax system.

Off-reserve First Nations peoples would continue to be taxed by the federal and provincial governments. That is, they would not be eligible for any form of tax exemption and they would not be subject to the tax rules established by their own First Nation governments.

Finally, it appears that the department did not look upon the development for the First Nations of own source revenues via taxation as a reason to cut back on other existing transfers from the federal government to First Nations peoples and their bands. ("Own source revenues are not to be used as a rationale for replacing existing funding arrangements".) However, the proviso "unless the institutional infrastructure and level of service provision of a given First Nation government is reasonably equivalent to that of surrounding communities" and the fact that income levels, institutional infrastructure and level of service provision in surrounding communities are likely to be below the national averages open the door for federal government cut-backs in transfers for infrastructure and services.

This working paper did not highlight the role tax policy has played in economic growth strategies and so did not address the possibility that granting the First Nations more autonomy in establishing their tax systems might provide them with a major policy tool for their economic development.

Within the current system of taxation responsibilities and powers – First Nations have limited powers other than with property taxes and some indirect taxes – the tax exemption of First Nations peoples should be greatly expanded. Tax exemption should be based on entirely on historic treaty and Aboriginal rights. Section 87 of the Indian Act should be relegated to a trivial supporting role at best.

Income tax exemption should be based on "citizenship"; that is, all registered Indians should be eligible, regardless of residence and this would include all companies owned and/or controlled by registered Indians, collectively or individually. Sales tax exemption could continue to be based on residency; that is, only on-reserve First Nations peoples would be eligible.

The income tax exemption would cover all sources of income including returns on investments (mutual funds, deposits with financial institutions, direct equity and debt investments, real estate), regardless of the location of the investments. A citizenship-based income tax exemption also would eliminate the need for any "connecting factors" test. Where First Nations peoples are employed, by whom they are employed and the nature of the business of their employers would no longer matter. The tax exemption rules should be as encompassing and as simple as possible.

On-reserve First Nations peoples also would be exempt from all other forms of taxation by both the federal and provincial governments. However, since there are economies of scale in administration, registered Indians, regardless of the degree of their tax-exempt status, should have the option to contribute to the CPP and EI programs in order to receive future benefits.

The changes, implicit in this proposal, from the current regime would require new legislation. The legislation preferably should take the form of stipulating that tax exemption is now based on treaty and Aboriginal rights and then it should define the scope of the exemption. Alternatively, and this is a very distant second choice, sections 87 and 90 of the Indian Act could be amended along the lines proposed.

In addition, all beneficiaries of the tax exemption should contribute 5% of their incomes in excess of $20,000 to a fund to be administered by a small group designated/selected by the First Nations. This fund should be used to finance economic development initiatives, including venture capital investments in start-ups and growing companies owned and controlled by First Nations peoples.

Control over income and sales taxes and resource royalties and license fees should be transferred to the First Nations. The transfer of tax powers can precede the formal recognition by the Government of Canada of the sovereignty of the First Nations, whether through individual treaties or through some more comprehensive agreement. The transfer should be accompanied by the signing of a tax treaty modeled after the international tax treaties to which Canada is a party (see the Appendix for a brief outline of a model draft treaty prepared by the OECD Fiscal Committee).

The general objectives of international tax treaties are avoidance of double taxation and tax avoidance/evasion. Nevertheless, they are entrenched in law and govern the tax relationships between countries and their citizens. Moreover, the provisions of a tax agreement prevail over the Income Tax Act in Canada.

The First Nations should opt for the U.S. model of taxation based on citizenship. This would extend the control over taxation to all First Nations peoples and would ensure that even those living off reserve would be entitled to the same treatment as those living on reserves. A model based on residency could lead to the First Nations peoples and companies off reserve being subject to taxation and so could create an artificial barrier inhibiting the movement of people and companies on and off reserves. The First Nations peoples should have as much flexibility in making their residency decisions for such decisions could be crucial in providing the right incentives to invest in education and training and to create companies that compete beyond the borders of reserves and serve more than just the First Nations peoples.

A citizenship based tax model contrasts with the vision articulated by RCAP:

RCAP had many good recommendations. Unfortunately, RCAP’s contribution to the subject of tax exemption and the right of First Nations to develop the tax policies, which best suited their needs, especially in the area of economic development, was not among them. A residency based tax system would be detrimental to the needs of all First Nations peoples. Even though this is the model in Canada; it is not the model that has been adopted by all countries.

Tax rates should be the sole purview of the First Nations. While there is no need to harmonize tax rates and the tax system with that of Canada, harmonization among all First Nations is imperative. Otherwise, unnecessary tax distortions will be created. These distortions could lead to perverse incentives, which diminish the potential for tax policies for economic development goals and create artificial mobility barriers for First Nations peoples.

As for tax rates, and here I restrict my comments to income taxes, the starting point should be a zero rate. Once more, I take issue with RCAP on this subject.

A citizenship-based tax system eliminates most of the potential for the creation of tax havens for and tax avoidance by non-citizens. Gaining control over the income tax system must be seen, aside as an important sign of sovereignty, from the perspective of economic development. It should not be viewed as own-source revenues for First Nations governments or as a means for replicating the Canadian tax system.

A zero tax rate provides the strongest incentives for economic growth and lessens the likelihood that the federal government will begin to slash its current transfers to the First Nations. Own source revenues are a buzz-word for reducing transfer payments for education, health, infrastructure, government and social assistance.

As will be argued in the last section of this report, sovereign First Nations governments should continue to be financed by transfers from the federal government. This should not be seen as dependency, but rather as reparations fro the wealth created for Canada from the unilateral expropriation of lands and resources. The magnitude of this wealth transfer is in the trillions of dollars in present value terms, and greatly exceeds the present value of past and future transfer payments, even if the current levels of transfer payments increase annually at the rate of inflation and are made in perpetuity.

In lieu of income taxes, all First nations peoples should contribute, as above, 5% of their incomes in excess of $20,000 to a fund to be used to finance economic development initiatives.

The recently negotiated Nsiga’a and Yukon treaties provide examples of what not to do in the realm of tax exemption and sovereignty over taxation. These two treaties followed the wrong path, playing directly into the hands of federal negotiators who wanted to reduce their current net contributions in return for paying a lump sum payment.

In the Nisga’a Agreement-in-Principle, Nisga’a taxes will be coordinated with the federal and provincial systems. And the agreement includes the provision that possible reductions in transfers from other governments will be negotiated as the Nisga’a collect own source revenues. Whatever will be negotiated will be less than a one for one reduction in transfers versus new own source revenues. But the end to sales tax exemption in eight years and income tax exemption in 12 years will further reduce the financial payments to be received.

The statutory exemption under section 87 will expire three years after the date of signing of the final Council of Yukon Indians Umbrella Agreement. Moreover, the Government of Canada will negotiate a self-government financial transfer agreement with the First Nations. This agreement is intended to ensure that the First Nations provide services reasonably equivalent to those prevailing in the Yukon, provided the First Nations are imposing reasonably comparable levels of taxation. The service agreement will consider the First Nations’ own source revenue potential, differences in service costs owing to the scale and location of the First Nations.

First Nation revenues from a given tax base will be considered in determining transfer entitlements two years after the First Nation gain access to that tax base. The formula will be negotiated, however this formula will reduce transfer entitlements by an amount lower than the new revenues which have been generated.

Here too, the federal government is giving on the one hand and taking away on two hands.

Following is a brief summary of some of the more important articles included in this model treaty.

Article 1 defines the personal scope of the Convention, applying it to persons who are residents – residence deemed preferable to nationality or citizenship.

Article 2 defines the taxes covered. They include income and capital taxes levied by political subdivisions or local authorities

Article 5 defines permanent establishment, which is important for the taxation of business profits.

Article 7 restricts the right of a Contracting State to tax profits of an enterprise to cases where these profits are attributable to a permanent establishment situated in that state.

Article 10 deals with the taxation of dividends. Dividends may be taxed in the country of source; the tax not to exceed 15% of the gross dividend and not to exceed 5% if the recipient is a company holding at least 25% of the capital of the company distributing the dividends

Article 12 provides for the taxation of royalties only in the Contracting State in which the beneficial owner resides. The country of source may tax royalties if they are connected with a permanent establishment in that country

Article 14 provides that remuneration for personal or professional services earned in one country by resident of other country will be exempt from tax in the former country unless the income is attributable to fixed base in that country.

Article 15 provides that salaries, wages in respect of an employment are taxable in the recipient’s country of residence if the recipient is present in the other country for 183 days or less in fiscal year; the remuneration is paid by or on behalf of an employer who is not resident in that country and the remuneration is not borne by a permanent establishment which the employer has in that country.

One, that sovereignty is critical if the First Nations are to ever move beyond the state of dependency and revitalize their economies so as to narrow and eliminate the economic and social gaps their peoples have long endured. Sovereignty is a fundamental requirement for creating the economic development opportunities that will give hope to current and future generations.

As emphasized earlier in the report, Cornell and have concluded that the most powerful arguments for sovereignty is the simple fact that it works. Nothing else has provided as promising a set of political conditions for the economic development of First Nations. And economic development has to become the priority of all First Nations governments. This is an important step because, without an independent source of wealth, First Nations futures and self-government dreams are just that, dreams.

Two, substantial economic gaps exist. John McCallum has summarized the socio-economic plight of Aboriginal peoples very succinctly and very well: "The statistics leave no doubt as to the very sad state of aboriginal economic and social development today."

The data presented in section three above showed that on-reserve Indians fare poorest in the labour market. Their unemployment rates almost three times higher in 1996 than the rates for the non-Aboriginal labour force. As well, their participation rates also were much lower producing an unemployment rate in 1996, adjusted to include the hidden unemployed, of 44% -- making the recorded rate of 29% appear to be a modest success.

Poor labour force status translates into equally poor income status. Registered Indians in total and those on reserve in particular fare badly relative to the non-Aboriginal population in terms of median household income, average individual income, percentage of families below the low-income cutoff and the percentage of individuals with transfers as a major source of income. The median household income of all registered Indians was 61% of the median income for non-Aboriginals in 1995. This represented a modest improvement from 1990. But if we extrapolate the rate of improvement over this five year period into the future, it could take almost 100 years for the gap in median household incomes to disappear.

As well, the data in Tables 5 and 10 in section three support the contention that registered Indians living on reserves continue to be highly dependent on government transfers and jobs. This in turn reflects the serious underdevelopment of reserve economies and the failure of past government programs.

Eliminating the gaps would produce sizable benefits for both the First Nations peoples and all peoples living in Canada. RCAP calculated an annual net benefit of $7.5 billion. Closing only the income gap between registered Indians and non-Aboriginals could lead to a net economic benefit of between $5.8 and $7.8 billion. These estimates do not include the additional savings that would result from lower health care costs, lower social assistance payments and lower costs for justice and correctional services. With conservative estimates for these additional savings, the net economic benefits could well exceed $9.0 billion annually.

Three, the federal government is not interested in spending any more money in total in dealing with all First Nations.

INAC has made it clear that all federal funding for self-government would be achieved through the re-allocation of existing resources and not from new money. Furthermore, the federal government is setting the stage for canceling all tax immunity and shifting more of the financial burden for social and economic programs onto the First Nations and their people. Own source revenues will lay the groundwork for the full taxation of Indians and the gradual reduction in federal spending on First Nations’ health, education, social assistance, economic development and infrastructure initiatives.

The Nisga'a Treaty has been hailed by the federal government as the first modern treaty of the 21^st century. The "modernness" of this treaty lies largely in the acceptance by the Nisga’a of an end to tax immunity and of future reductions in transfers from both the federal and provincial governments as they rely more on their own-source revenues.

A study commissioned by the federal government was even clearer on the government’s objective to reduce its financial obligations to the First Nations. According to this study, even though low levels of economic activity on First Nations lands reduce the revenue potential of taxes:

As a result, the study concluded that taxation can lead First Nations out of poverty, allow the federal government to accommodate self-government, without creating substantial costs, and even reduce costs for provincial governments.

Four, the federal government wants to treaties to limit its financial exposure and risks. Canada’s continued refusal to respect the spirit and intent of the historic treaties, while they implement "modern day treaties", which are extinguishment agreements rather than treaties, are part of this strategy.

Following the Guerin case, hundreds of lawsuits have been filed against the federal government for past oil and gas mismanagement by Department of Indian Affairs. Consequently, the federal government has a vested interest to ensure that any of its future interventions in the life of the First Nations do not incur new liabilities. The government’s interest in disengagement/ devolution/off-loading can be understood in this context as a means to reduce its future liabilities, rather than a strong commitment to self-government for the First Nations. But the federal government might still be held accountable by the courts for mismanagement of devolved responsibilities if it did not first establish the financial capacity of a Band to properly fulfill its additional duties.

Five, paternalism has been and continues to be the basis for the relationship between the federal government (and provincial governments as well) and the First Nations. The Indian Act smacks of the worst excesses of colonial paternalism. The First Nations Governance Initiative is no better.

According to Robert Nault, this Initiative will supply the tools missing from the Indian Act and pave the way for greater self-reliance and economic development for the First Nations’ communities. In reality, the Minister is saying that the First Nations cannot be trusted to govern themselves, and so the federal government must continue to dictate how the First Nations are to conduct their affairs.

The Minister and his government fail to understand or accept that if good governance is in the interests of the First Nations and their governments, they will adopt the most appropriate practices compatible with their goals and cultures on their own. They do not need outsiders telling them what is in their best interests. The First Nations are not a society of dependent children.

Six, the Chretien government’s ultimate goal still appears to be assimilation as originally spelled out in the 1969 "White Paper". The 2001-02 "White Paper" model is just more sophisticated and is being sold to the public more effectively than the original. It also builds upon the failure of 30 years of policies with the failures presented to give credence to the paternalistic view of Canada towards Aboriginal peoples.

Finally, there are two global options available: constitutionally-entrenched First Nations’ governments with specific responsibilities similar to those enunciated in the BNA setting out provincial and federal responsibilities; or local/municipal type governments under the control of the provinces without any further protection of treaty and Aboriginal rights.

There are at least two major barriers in your struggle to realize your goal of sovereignty and equality. One is the general public antipathy towards all Aboriginals and their ignorance of history. The British Columbia referendum exploited these to produce predictable results. One should never confuse referendums based on ignorance and fraudulent questions with democracy.

And at the national level, the First Nations just do not have the votes and hence, the political influence to matter to the party in power.

The second major barrier is the Indian Act.

Speaking at a conference in April 2001, Warren Johnson, an Assistant Deputy Minister within INAC, stated:

More recently, even Nault has admitted to the many serious shortcoming of this Act:

The Act treated the First Nations worse than children who are wards of the state and always envisioned assimilation as the end game. Section after section of this Act emphasizes the second class or worse status of the First Nations and their dependence upon the federal government and its agents.

The First Nations and Canada are at a crossroads, but they have been here for generations. What needs to be done is obvious.

RCAP proposed three key elements as the basic requirements for the future relationship between Aboriginal and non-Aboriginal peoples:

• "Aboriginal self-government based on a recognition of the right of self-determination and the inherent right of self-government for Aboriginal peoples;
• A relationship between Aboriginal and non-Aboriginal people and their governments that takes the form of a nation-to-nation relationship;
• Recognition of Aboriginal governments as one of three constitutionally recognized orders of government in Canada."

The attendees at the B.C. region "Governance Discussion Group" (December 12, 2001) concluded that the federal government must give control over land to First Nation governments; ensure that they have adequate financial capacity prior to the transfer of self-government rights; with bands on a nation-to-nation basis.

In summary, your goals must include:

• Getting rid of the Indian Act;
• Negotiating constitutionally entrenched and protected sovereignty, including appropriate compensation;
• Creating a First Nation government and economic development strategy.

Generalized tax immunity and zero or very low income tax rates are part of this agenda.

How do you get from here to there?

This will require a multi-faceted strategy.

The First Nations must recognize that they are entitled to multiple income streams from the federal government and they should not compromise on this in their negotiations.

First Nations and their peoples receive some or all of the following sources of money from the federal government:

• Grants/transfers for education, health, social services, housing, cultural activities, infrastructure, "economic development";
• Cash payments (one-time or spread out over period of years) for land settlement claims or extinguishment of treaty rights;
• Resource revenues (royalties, etc.); and
• Tax exemption.

The First Nations entitled to all four sources. There should not be any trade-offs made in negotiations. That is, First nations should not be willing to take a little bit more of one type of payment in return for reducing the amount of another type. This type of trade-off will never work to your advantage. The federal government always does its homework and when it appears to offer a monetary concession, you can be certain that it is planning to take away more in some other form. There is the tendency for the Government of Canada to dangle the prospect of a large one-time payment in return for extinguishing tax exemption rights and/or reducing the size of its annual grants/transfers.

But as economists are fond of saying: "There is no free lunch". Or, you do not get something for nothing.

Grants/transfers are required to fund the basic foundation required for sustained economic development. The First Nations should conduct an inventory of minimal acceptable requirements for education, health care, housing, government services, communications/transportation/ environmental infrastructure, and determine the current financial gaps to meet these minimal standards. The federal government should then commit to top up the existing transfers so as to finance the minimal standards. The transfers should be maintained indefinitely in real per capita terms. The transfers also should be unconditional – how they are spent should be determined entirely by the First Nations governments. The federal government could increase the transfers in part by greatly reducing the current administration expenses of INAC that are in the range of $600 to $650 million.

This source of money should be viewed as partial reparations to compensate for the wealth taken from the First Nations. As argued earlier in this report, these transfers, even if provided indefinitely, would represent but a fraction of the trillions of dollars in income and wealth generated from the resources and the lands that should have been shared between the First Nations peoples and the immigrants to this country.

The one-time cash payments generally attached to a land claims or treaty settlement represents an arbitrary value. It does not represent compensation for past damages. The grants/transfers should be viewed in this way.

These one-time payments, even if spread out over a number of years, provide a trust fund that can be used either to provide pension benefits to your people or to finance economic development initiatives. The transfer payments should be used for either of these purposes.

Resource revenues are compensation for development by non-Aboriginal companies of resource wealth located on reserves. These revenues could be used to augment the services provided by First Nations governments. As well, they could be put into trust to pay future pension benefits.

Tax exemption is an Aboriginal or treaty right or both and as argued above, is critical for economic development and integral for the sovereignty of First Nations.

First Nations should have the sovereign authority to decide to implement a tax system to fund services on reserves and/or support specific economic development initiatives and/or for redistribution purposes. If taxes are to be imposed, any revenues raised should not lead to any reduction in the annual transfers.

The recently negotiated Nsiga’a and Yukon treaties provide examples of what not to do in the realm of tax exemption and sovereignty over taxation.

The external component of the strategy consists of at least four parts.

One involves public education, especially of the history of the relationships between the First Nations and the white settlers. The RCAP Report should become required readings in all Canadian History courses at all levels of education.

It is also critically important that the public is made aware of the conclusive findings of the Harvard Research project on the need for sovereignty.

To counter the critics of any or all government support of First Nations peoples, it is necessary to place spending on First Nations peoples into the proper fiscal context. These critics point to the billions of dollars spent annually by INAC and other federal government departments as signs that registered Indians already receive more than enough and do not need any additional assistance in the form of tax immunity. They also point to these expenditures as indicating that the economic and social problems faced by the First Nations cannot be solved by money alone, suggesting that the fault lies largely with the peoples themselves.

Of the almost $4.5 billion in annual spending on these programs, direct economic development initiatives accounted for less than 2.5% of the total or about $100 million. INAC, on the other hand, spends approximately six times as much each year on its administration.

Most of the money is spent on education, health, housing and social programs. While all are important in creating the foundation for strong communities, they all involve services which are provided to all people in Canada. Moreover, these levels of expenditures only have kept the economic opportunities gap from widening.

In comparison, the federal government spends tens of billions of dollars annually on various income support programs as well as health and education initiatives.

• More is spent annually to prop up the incomes of farmers than is spent on education for Aboriginal children. The farm income assistance program spending swamps the spending on direct economic development initiatives for all First Nations.

• Canadian Heritage spends on subsidies for the cultural industries about 50% of what Health Canada spends annually on health care for Aboriginal peoples. The Canadian Film Development Corporation receives almost as much as is spent on direct economic development programs for the First Nations.

• Total expenditures on international agencies run about $100 million below the annual expenditures by INAC on capital facilities maintenance on reserves and in the North.

• CIDA’s annual budget almost exceeds total INAC spending on education and social programs for Aboriginal peoples.

• The financial assistance provided by Human Resources Development through subsidies for post-secondary education is equal to the total spending on education by INAC for all Aboriginal peoples.

In addition to the direct expenditures, there are tens of billions of dollars in tax expenditures.

• The current present value of the tax assistance for RRSPs and RPPs is estimated at $7.2 billion.

• The foregone tax revenues for personal expenditures for education (tuition fee credit, education credit, transferred credits, carry-forward of credits, student loan interest credit, RESPs, partial exemption of scholarship, fellowship and bursary income) are $1.4 billion – an amount well in excess of INAC’s annual expenditures for education.

• The non-taxation of business-paid health and dental benefits costs governments $1.6 billion annually exceeding Health Canada’s expenditures of $1.4 billion for health care for Aboriginal peoples.

• The charitable donations credit produces an additional cost of $1.3 billion. Compare this to INAC’s expenditure of $1.0 billion for social programs for Registered Indians and Inuit.

Finally, the arguments put forth by the Court in the Benoit case should be highlighted for the public, particularly, the importance of Canada abiding to treaty promises in order to maintain the "honour of the Crown".

A second component of the "externally-oriented" part of the overall strategy involves attacking the federal government with its own words. There are numerous examples one could use. You could start with the recommendations of the Penner, Oberle or RCAP reports. Paul Martin’s letter as a member of the opposition in 1991 also would be useful. John McCallum’s comments, while the chief economist at the Royal Bank, offer another example.

So too do Jane Stewart’s comments, when she was Minister for INAC in January 1998, regarding recognizing the inherent right of self-government for Aboriginal peoples:

In its 2001-02 Report on Plans and Priorities, INAC stated that the "Indian Act is an antiquated piece of legislation that has proven inadequate in supporting the aspirations of First nations communities to build and maintain healthy, vibrant communities."

In its 2002-03 Report, INAC observed that:

The one question, the First Nations must repeatedly ask the government and in the media spotlight, is does it stand by its words?

The third component involves the international community. In this time of financial market uncertainties and fragile economic recovery, international investors and credit rating agencies could serve as powerful, if unknowing, allies.

Matthew Coon Come, pointed out in his 2001 pre-budget submission to the House of Commons Standing Committee on Finance, that the Delgamuukw case stated that Aboriginal title means resource development that infringes upon title requires compensation and consent. This opens a very wide door to create confusion and uncertainty in the minds of investors, especially those in the resource sectors and government (federal and provincial) bonds. A road trip by the AFN leadership to meet with the major energy and forestry companies abroad with interests in Canada, major fund management companies and the three major credit rating agencies in the U.S. to spell out clearly the current situation regarding control/ownership of lands and resources in Canada and the potential liabilities of resource companies and governments in Canada should be a priority.

The federal government is sensitive to external views and pressures, particularly of those with financial clout. As well, the Chretien Government wants Canada to remain among the top-rated countries in the world. But to accomplish this goal, it will have to address the discrepancies in living standards between Aboriginal and non-Aboriginal peoples in Canada. The dismal economic and social status of Aboriginal peoples and the hypocrisy of the government should be brought to the attention of major international agencies and bodies. This will come back to haunt the federal government.

Finally, in pursuing court cases involving section 87 tax exemption, the strategy should include the following. Use the Benoit case to place the Indian Act into the proper historic context and make its place alongside treaty and Aboriginal rights clearer. In other words, tax exemption should be argued to be a much broader based concept and right.

In addition, the concept of property should be greatly expanded so as to argue for an extension of tax exemption to businesses owned by First Nations peoples and to registered Indians living and working off reserve. Property includes the entire wealth of a person. The wealth consists of tangible assets such as land, but also ownership stakes in businesses, and intangible asset such human capital. Restricting the tax exemption to employment income earned on reserves, greatly reduces the returns and thus the value of human capital.

Disallowing the tax exemption to businesses owned and managed by First Nations peoples otherwise eligible for tax exemption reduces the cash flows of these companies, thus greatly reducing the value of the equity stake in these companies. It is a very simple and straightforward matter for the Courts to pierce the corporate veil and recognize that such businesses are in fact the property of First Nations peoples and the tax exemption should automatically flow through to them.

And the commercial mainstream argument also is flawed because this too diminishes the value of the property of First Nations, whether it is their human capital or their ownership stakes in wholly owned and controlled businesses. Ownership and control rules are available that could be modified very easily to lessen the likelihood of tax avoidance by non-Aboriginals.

Tax exemption can be very useful for the economic development of the First Nations. Control over taxation should not be sacrificed. Neither should there be any trade-off of one form of financial transfers from the federal government for another type of transfer.

Sovereignty is imperative, as is economic development, and the time has long past for the First Nations to gain their full rights. You can continue to play the government’s game, abiding by its rules and timetable. Or, you can change the rules and create the external pressures which will be essential if you are ever to get your full rights.

The path you take at the crossroads is yours to choose.