Fact Sheet - Taxation by Aboriginal Governments

This information is current as of November 2011 and is provided for convenience.

Tax Powers of Aboriginal Governments

During the past twenty-five years, many Aboriginal governments in Canada have enacted laws imposing direct taxes within their reserves or settlement lands. Aboriginal government taxes may include real property tax, sales tax, income tax and certain provincial-type commodity taxes. The powers for enacting real property tax by-laws are contained in both the Indian Act and the First Nations Fiscal and Statistical Management Act (FNFSMA). Other tax powers are set out either in generic, enabling legislation, such as the First Nation Goods and Services Tax Act, or in the legislation that gives effect to modern treaties, comprehensive lands claims or self-government agreements.

The tax powers of an Aboriginal government apply within its reserves or settlement lands and operate concurrently with, and do not automatically displace, federal or provincial tax powers. Canada is prepared, however, to enter into an agreement with the government of an Aboriginal group under which federal taxes would be abated or cease to apply on the lands where the corresponding harmonized tax of the Aboriginal government applies. Many provinces and territories are also prepared to enter into similar agreements in respect of provincial or territorial taxes.

Specific questions regarding real property tax under the Indian Act or the FNSMA should be directed to the First Nations Tax Commission at (613) 789-5000. Questions about Aboriginal tax policy, the tax powers of self-governing Aboriginal groups, First Nations sales taxes and income tax should be directed to the Aboriginal Tax Policy Section of the Department of Finance Canada at (613) 992-3997.

Benefits of Taxation by Aboriginal Governments

Taxation is a characteristic feature of modern governments and the exercise of tax powers enhances Aboriginal self-government. Constituents of Aboriginal governments tend to be more interested in the expenditure decisions of their governments when expenditures involve locally generated revenues like tax rather than transfer revenues from other levels of government. Taxing governments tend to be more concerned about making the best possible expenditure decisions on behalf of their constituents.

The exercise of tax powers is also an important means for Aboriginal governments to generate their own, independent, revenues. Aboriginal government tax revenues are not federal transfer funds or "Indian monies" under the Indian Act. Accordingly, Aboriginal governments have wide discretion to apply tax revenues to their own priorities.

The Institute on Governance recently published a policy research paper     entitled: "In Praise of taxes: The Link Between Taxation and Good governance in the First Nations Context" which also discusses a number of benefits of taxation for Aboriginal governments. A shorter policy brief  , based on that paper, is also available.

Types of Aboriginal Government Taxes

First Nations Sales Tax (FNST) (Levied only by Indian Act bands)

The FNST is a tax that applies to on-reserve sales of alcoholic beverages, motor fuels or tobacco products. The FNST is imposed under the by-law of a taxing Indian Act band and is payable on all sales on reserve of the three types of taxed products. All persons, including status Indians and the general public, who purchase any of the taxed products from a business located on a reserve where the FNST applies, are liable for paying the tax. The rate of the FNST is the same as the rate of the federal Goods and Services Tax (GST) or the federal portion of the Harmonized Sales Tax (HST). The FNST is administered by the Canada Revenue Agency (CRA) on behalf of the taxing Indian Act band. The CRA acts as the agent of the taxing Indian Act band to collect and administer the tax and enforce the FNST by-law. As of November 2011, eight Indian Act bands are levying the FNST, which generates more than $6 million per year. Now that Indian Act bands are able to levy the FNGST, which is a similar tax that applies more broadly to the full range of products and services that are taxable under the GST, no new administration agreements for the FNST are being implemented.

First Nations Goods and Services Tax (FNGST) (Levied by Indian Act bands or Aboriginal Self-Governments)

The FNGST is a tax on the consumption that occurs within reserve or settlement lands. The FNGST is available for interested Indian Act bands and self-governing Aboriginal groups. The FNGST is imposed under the law of a taxing Aboriginal government and is payable on all the taxable supplies (sales and leases) that occur on the lands of the taxing Aboriginal group, including on supplies made to status Indians. The rate of the FNGST is the same as the rate of the GST or the federal portion of the HST. The CRA administers the FNGST on behalf of the taxing Aboriginal government and acts as the agent of the Aboriginal government for collecting and administering the tax and for enforcing the FNGST law. As of November 2011, a total of 23 Aboriginal governments have implemented the FNGST and additional agreements are currently being negotiated. As a group, the Aboriginal governments that have implemented the FNGST receive remittances that total approximately $12 million per year. In certain circumstances, remittances of FNGST may be subject to a revenue sharing mechanism.

First Nations Personal Income Tax (FNPIT) (Levied only by Aboriginal Self-Governments)

To date, 12 self-governing Aboriginal groups have enacted personal income tax laws and concluded related tax administration agreements with Canada. Where an administration agreement for personal income tax is in place, the income tax of the Aboriginal government is payable by Aboriginal and non-Aboriginal residents within the lands where the law applies. An abatement of federal income tax is provided under federal law. As a group, the Aboriginal governments that have implemented personal income taxes receive approximately $13 million per year. In certain circumstances, remittances of FNPIT may be subject to a revenue sharing mechanism.

Some provincial and territorial governments share a portion of their personal income tax room with Aboriginal governments, either by providing a tax abatement which creates tax room for the imposition of an aboriginal tax, similar to Canada’s approach, or by directly sharing a portion of tax revenues.

The FNST, FNGST and FNPIT agreements are negotiated and implemented by the Department of Finance and administered by the Canada Revenue Agency. Specific questions regarding the FNST, FNGST and FNPIT should be directed to the Aboriginal Tax Policy section at the Department of Finance Canada.

Real Property Tax under the Indian Act or the First Nations Fiscal and Statistical Management Act

Section 83 of the Indian Act provides a power for Indian Act bands to make by-laws for the taxation of land or interest in land in the reserve. Real property tax by-laws, enacted pursuant to section 83 of the Indian Act, are submitted for review to the First Nations Tax Commission (FNTC)  , which may recommend them to the Minister of Aboriginal Affairs and Northern Development for approval.

First Nations also have the ability to exercise real property tax powers pursuant to the 2005 First Nations Fiscal and Statistical Management Act (FNFSMA).  In addition, the FNFSMA established the FNTC, the successor institution to the Indian Taxation Advisory Board. The FNTC became operational in July 2007 and assumed the Minister's by-law approval authority under a more transparent and accountable system for Indian Act bands that choose to exercise real property tax powers pursuant to the FNFSMA.

A total of 134 First Nations currently have enacted by-laws under section 83 of the Indian Act, while another 60 bands have enacted by-laws under the FSMA. Annual revenues from real property taxes exceeded $70 million in 2010-11.

Self-Government Agreements

The area of tax powers is also generally one of the subject matters addressed in self-government negotiations. Following the conclusion of self-government negotiations, many final agreements provide the Aboriginal government with the authority to impose direct taxes (e.g. real property tax, sales tax) on their citizens/members within their reserves or settlement lands. This tax authority is concurrent with the continuing tax authority of Canada and the province or territory. The final agreement also contemplates that the parties may negotiate agreements to extend the Aboriginal government's tax authority to "other persons" within its reserves or settlement lands, such as non-member residents. Thus, a number of Aboriginal self-governing groups have continued to exercise real property taxation powers following the conclusion of a self-government agreement but under the authority of their new self-government arrangement.  

General questions about Aboriginal tax policy or the tax powers of self-governing Aboriginal groups should be directed to the Aboriginal Tax Policy section at the Department of Finance Canada.

Provincial-type Taxes (Indian Act bands or Aboriginal Self-Governments)

The federal government has repeatedly expressed its willingness to facilitate tax administration agreements between Indian Act bands and provinces or territories. In 2006, the First Nations Goods and Services Tax Act was amended to include Part 2, which enables the council of an Indian Act band that is listed in Schedule 2 to that act to enact a law that imposes a direct tax like a particular provincial tax, if the particular province agrees and is also listed in the Schedule. A number of Indian Act bands and Provinces have concluded such agreements.

In some provinces, the Aboriginal tax imposed under such an agreement displaces the provincial tax, and applies to all persons making a purchase on the reserve of the taxing Indian Act band. In other provinces, the Aboriginal tax applies only to status Indians, while the non-displaced provincial tax continues to apply to persons who are not status Indians. In all cases, however, all persons who purchase taxable supplies are taxed at the same rate.

In addition to these arrangements which are facilitated through the First Nations Goods and Services Tax Act, some other arrangements can exist between provinces or territories and Indian Act bands and Aboriginal self-governing groups. For example, the Government of Newfoundland and Labrador shares with the Nunatsiavut Government part of the provincial portion of the HST that is collected within the lands and communities of the Nunatsiavut Government.

Annex

(Note – The information contained in this annex is current as of October 2011)

*Self-governing.

Revised November 14, 2011