Frequently Asked Questions

1. What is Section 83 taxation under the Indian Act?

Section 83 of the Indian Act provides First Nations with bylaw making authority for real property taxation on reserve. First Nations exercising property taxation jurisdiction under section 83 must pass the following bylaws: Real Property Tax and Assessment Bylaw, Expenditure Bylaw, and the annual Rates Bylaw. All bylaws are subject to Ministerial approval upon the recommendation of the FNTC.

2. What is the purpose of real property taxation?

Property taxes are a major source of revenue for local governments. In fact, their single most important source of revenue is normally real property taxation, including special property-based taxes such as business taxes.

Other sources of local government revenue usually include licenses and permit fees, receipts from fines and penalties, investment income, grants and transfer payments. In most cases, property taxes in Canada are imposed to Cover the costs of local government that are not met from other revenue sources or transfers from federal and provincial governments.

Property taxes are the main source of funding for the provision of local services, such as roads, water, sewage, sanitation, snow removal, fire and police protection, building and plans inspection. As a result, property taxes commonly are perceived as taxes paid for the benefit of using local government services. These taxes represent "a way of proportioning the net costs of local government among all taxpayers on the basis of wealth as measured by their assessed property value".

For First Nations, property taxes provides an independent, stable and flexible source of revenue, which can be reinvested in the reserve to create jobs, finance programs, and help heal the social wounds that plague so many communities. Property taxation also establishes jurisdiction and provides First Nations with improved powers to control land development.

3. Why enact a property taxation bylaw?

1. Jurisdiction

By enacting a property taxation bylaw, a First Nation establishes jurisdiction over the territory to which the bylaw applies -- the property within the reserve boundaries. Some provincial and municipal governments tax non-Native businesses located on reserve. By enacting a property tax bylaw, the First Nation serves notice that it is exercising property tax jurisdiction over its territory. To avoid double taxation, the provincial or municipal governments would then cease levying its own property tax.

2. Revenue

Real property taxation provides First Nation communities an independent, stable and flexible source of revenue, which can be reinvested in the reserve to create jobs, finance economic programs, and help heal the social wounds that have plagued many communities. Improved community infrastructure and the provision of dependable services also attract commercial and residential development.

4. What are potential real property taxable interests on reserve?

Under a First Nation taxation bylaw, the following types of interests in reserve lands could be taxed:

Agricultural Permits and Leases

Leased agricultural and is subject to taxation. First Nations give leases to agricultural lands through ministerial leases or informal agreements often called "buckshee" leases. These latter are private agreements between the First Nation or an individual member and a non-member.

Oil, Gas, Timber and Resource Leases

Surface leases may be taxed as interests in reserve land.

Commercial Land Use Lease

Commercial leases or reserve land and facilities on those leases can be taxed. This is income for the First Nation over and above the lease payments.

Government Buildings

Federal and provincial government normally pay grants-in-lieu of taxes. The federal government pays grants to all taxing authorities, including First Nation governments.

Rental Leases

Rental leases can be subject to taxation. Tax revenues would be independent of any rental payments. However, the lease or rental agreement should provide for the condition of taxation.

Utilities

Utility companies which are not government corporations are taxable. Frequently, utilities involving power, telephone and natural gas lines are located on rights of way granted for public roads through a reserve.

Grants in lieu of Taxes

With tax legislation, First Nations can negotiate with both government agencies and utilities for grants-in-lieu of taxes.

5. How are property values assessed?

Assessment of property values is the heart of all property taxation systems. Without sound and reliable assessment procedures, a property taxation system is unlikely to be fair. Property tax is a tax on real value, and assessment determines the real properties value.

So, what is assessment? Assessment is the process whereby the local tax base, made up of real property and interests therein, is appraised for the purposes of local taxation. A leading Canadian tax expert has defined property assessment as follows: "It is the official act of discovering, listing and valuing property by appointed assessors or appraisers. The result of an assessment determines which properties will provide the base for local tax levies and the share of taxation that each property owner will bear."

The biggest problem facing local governments taxing real property is obtaining accurate assessments. To avoid uneven or unfair assessments, the assessment system used by a taxing government must be detailed and comprehensive, be applied uniformly, and be open and able to stand up to public scrutiny. In other words, "the purpose of an assessment process must be to provide an equitable means of valuing property, so that the resulting property taxes may be levied and distributed as fairly or evenly as possible". In referring to provincial/municipal property tax systems, some experts have proposed that the following criteria be adhered to in order to set up an equitable assessment system:

(a) real property must be assessed whether taxable or not [i.e., whether or not exempted from taxation];

(b) real property must be assessed at current market value;

(c) assessments should be made by trained, experienced personnel working for a central agency which has direct and complete responsibility for all assessment within a province;

(d) the assessment function must be organized in such a way that assessors become familiar with local real estate markets; and

(e) property owners must be given ready access to pertinent assessment information and appeal bodies.

It is also a general principle that all properties should be reassessed at regular intervals, preferably less than every five years.

First Nation governments involved in developing a property assessment mechanism may find the above criteria useful as guidelines for establishing equitable systems. It may also be useful to compare the assessment procedures employed by other First Nations before establishing their own processes. The FNTC can put you in touch with those First Nations in your region.

First Nations governments may find it most cost effective to "buy" a tax assessment service from surrounding provincial or municipal systems. Or it may be possible to work out collaborative arrangements with these existing systems, for example, providing for training of Indian assessors, while using the basic approach of the existing assessment system.

Local governments in every province assess property at its “actual", "real", "fair" or "market" value. These terms all convey the same meaning: the amount that real estate might be expected to be sold for in the open market by a willing seller to a willing buyer, if it were sold at the date of assessment. However, the market value system is difficult to apply to unusual properties such as large factories or public utilities. Special assessment procedures have been developed for these situations.

Despite this uniform starting point, variations in the total taxable property will occur in different assessment areas depending on what specific types of property qualify for tax exemption under each system. Certain properties are exempted under almost all property taxation systems. They include property owned and occupied by: federal, provincial or local governments; schools, colleges and universities; churches and cemeteries; public hospitals; charitable organizations; and agricultural societies. It would be consistent with this approach, for example, for First Nations to also exempt property that belonged to the First Nation itself, or is held by members in common.

Differences in total taxable assessments also arise as a result of the following factors: varying statutory definitions of what constitutes "real property", differences in the time periods between assessments, and adherence to differing systems of valuation in each jurisdiction.

6. How are property tax rates determined?

The method normally used to calculate property tax rates differs from approaches used to set other tax rates.

To meet the goal of spending only what it has, a local government must set a suitable tax rate. First, it estimates the amount of tax revenue it requires to cover expenditures for the next fiscal year after subtracting all other sources of revenue.

Then, the total tax revenue required is divided by the total assessed value of taxable property in the tax area. The resulting figure is multiplied by 1,000 and is called the mill rate. The mill rate, simply put, is the amount of tax payable for each dollar of assessed value expressed to the third decimal place.

Translated into an equation, the mill rate calculation is as follows:

Total tax revenue required x 1,000 = Mill rate Total taxable assessment

Individual property taxes owing are arrived at by multiplying the assessed value of the taxpayer's real property by the mill rate. Expressed as an equation, the calculation reads as follows:

Assessed value x Mill rate = Tax owed

For example, on a property with an assessed value of $5,000.00, when the mill rate is 12 mills (i.e. $0.012 or 1.2 cents tax for each dollar of assessed value), the taxed owed is$60 ($5,000 x 0.012).

In some jurisdictions, tax rates are not determined using the mill rate formula. Instead, the tax rate is levied as a percentage of the assessed property value. The percentage is set out by statute and can vary for different types of real property. For example, rural and forest lands could be taxed at a rate of one per cent of their assessed value and farmlands at a rate of one-half per cent of their assessed value.

Councils electing to institute a property taxation system will have to decide what method they wish to employ to determine the property tax rates in their jurisdiction. In so doing, they may find it useful to study the methods used in neighboring jurisdictions and decide whether these approaches can be adopted.

Councils will also have to decide whether they wish to use a uniform rate for every type of property or a multiple rate that varies depending on the category of property assessed. A multiple rate would permit prescribed classes of property, such as residential, industrial and farmland, to be taxed at different rates. For example, the industrial rate could be higher than the residential rate, based on the theory that industry can afford a greater tax burden than an individual taxpayer. It is generally considered good practice to limit the different rate categories to a small number.
In making decisions on setting tax rates, councils may wish to consult the Commission and independent tax experts for advice.

7. How do you implement a taxation bylaw?

Basically, there are 6 stages to developing a taxation bylaw:

1. Decision to Tax

In making the decision to enact a real property taxation bylaw on reserve, a First Nation has considered how much revenue will likely be generated, as well as the estimated costs of implementation and administration. The FNTC has a number of software programs to help with these estimates.

2. Bylaw Development

At this stage, the First Nation has spoken with a FNTC representative, who has outlined the various requirements for developing a taxation bylaw.  To facilitate this stage, the FNTC has sample taxation, assessment, rates and expenditure bylaws available on diskette - free of charge.  A visit to your community by a FNTC representative can also be arranged.  The bylaw is then submitted to the FNTC for its review.

3. Communications

This stage is perhaps the most important. All affected parties must be informed of the First Nation's decision to tax in order to ensure a smooth transition. Affected parties include:

• the potential ratepayers;
• the municipality from which the First Nation is assuming tax jurisdiction;
• members of the First Nation wishing to enact a property tax bylaw;
• the MP and MLA for the riding in which the First Nation is located; and
• the provincial assessment office.

To assist in this stage, the FNTC can provide sample letters and general advice on the proper wording of the First Nation's correspondence to these parties.

4. Bylaw Analysis

Once the First Nation has submitted its bylaw to the FNTC, it is analyzed to ensure that it is legally sound. As such, revisions may be required. If so, the FNTC will provide to the First Nation its detailed analysis, which highlights any required changes. The bylaw is then formally passed by the First Nation council and submitted to the FNTC for recommendation to the Minister.

5. Recommendation / Ministerial Approval

The FNTC makes its recommendation to the Minister whether to approve the First Nation's bylaw or not. A favourable recommendation means that the bylaw complies with the Canadian Charter of Rights and Freedoms, conforms to the principles of natural justice and is not ultra vires the Indian Act. Based largely on the FNTC's recommendation, the Minister will approve, or not approve, the proposed bylaw. The First Nation will be immediately notified of the Minister's decision.

6. Bylaw Implementation/Administration

Once the bylaw is in force, the First Nation begins administering its own property tax laws.

8. What are the FNTC bylaw approval criteria?

In reviewing a bylaw for ministerial approval, the FNTC ensures that it meets certain legal and technical criteria. The FNTC also considers external criteria to ensure fairness to ratepayers and affected parties and to facilitate the transition to First Nation taxation.

I. Legal and Technical Criteria

(a) The bylaw can apply only to real property interests within the physical boundaries of the reserve and within the authority conferred by the Indian Act.

(b) Enforcement provisions must be reasonable and necessary for the purposes of taxation. In the absence of explicit enforcement mechanisms normally available to taxing authorities, reasonable enforcement powers are implied in the enabling legislation. The power to tax includes the power to enforce.

(c) The bylaw must comply with the guarantees set out in the Canadian Charter of Rights and Freedoms.

(d) A bylaw must include an assessment appeal mechanism. The procedures for initiating an appeal should be set out in the bylaw with sufficient certainty that ratepayers can reasonably determine how to appeal their assessments.

(e) Amendments to a bylaw can only be made by bylaw.

(f) The bylaw cannot attract Crown liability.

(g) The basis for assessment must be set in the bylaw along with a valuation date. Ratepayers should know how their interests are assessed. The valuation date sets a specific point when the value of the interests is determined.

(h) Tax rates should be comparable to the rates of neighbouring jurisdictions. The FNTC also considers the rates proposed by the First Nation on an individual basis to ensure that interests are protected.

(i) Taxation bylaws should not discriminate. Each class of property should be treated equally. A First Nation may determine what classes of property will be exempt from taxation for the promotion of economic development and set tax rates based on the category of property.

(j) The bylaw should comply with the principles of natural justice.

(k) The bylaw should not contain discretionary power (eg. through a band council resolution or giving the administrator discretion). Functions should be set out with specific criteria to be administrative.

(l) Bylaws should be clearly drafted.

II. External Criteria

The FNTC considers whether the First Nation has adequately notified affected parties, the status of service agreement negotiations (if necessary) and whether the First Nation has made arrangements for the assessment of the interests on reserve subject to taxation.

All potential ratepayers and affected parties should be given sufficient notice of the First Nation's intention to assume tax jurisdiction on reserve lands. This could include:
• First Nation members;
• potential ratepayers;
• appropriate MP's and MLA's;
• appropriate provincial and municipal governments; and
• other affected parties.

In the year preceding the targeted commencement date of taxation, the First Nation should initiate service agreement discussions with any local jurisdictions that will be providing services on reserve. The FNTC is to be advised as to the services to be provided and the status of negotiations.

The FNTC encourages First Nations to try to coincide their tax calendar with that of the province. This provides continuity and is most familiar to taxpayers.

Bill 64, the Indian Self Government Enabling Act, requires that other taxing authorities vacate the tax field on reserve once a First Nation asserts tax jurisdiction. The First Nation provides notice of its intention to enact a tax bylaw to the provincial Ministry of Aboriginal Affairs. The ministry issues a certificate to the First Nation. A copy of the First Nation's notice and the certificate are delivered to the appropriate provincial taxing authorities. The FNTC ensures this procedure has been followed.

BC First Nations should commence service agreement negotiations with the appropriate local governments by May 31st of the year preceding the taxation year.

The FNTC provides an opportunity for a person affected by a proposed bylaw to be heard. The FNTC should be notified, verbally or in writing, at least 10 days preceding the Commission’s next scheduled quarterly meeting and advised that the person will be attending or making a written submission. The person will be contacted by the FNTC to set a specific time for the hearing.

The affected person should notify the First Nation taxing authority of the request to be heard by the FNTC in order to ensure the First Nation also has an opportunity to make representations to the Commission.

9. Are there any other types of taxes?

Another special, property-based local tax is the business tax. Business taxes are not levied in all provinces, but where they are they constitute the second largest source of tax revenue for local governments.

Business taxes are levied on the occupier of property rather than on the owner. Therefore, taxes are related to the use or occupation of the property for business purposes. Also, they are normally a personal tax, meaning that every occupier assessed for business taxes is personally liable for the payment of the tax and the assessed tax does not constitute a charge upon the land occupied or used for the business.

The property base upon which business values are assessed varies from province to province, but generally the business value assessment is derived either from a percentage of the assessed value of the property occupied by the business or from a percentage of the gross annual rental value of the business property. A tax rate is then applied to the assessed business value to arrive at the amount of business tax owed by the occupant. In Ontario, for example, the business tax rate used is the same rate that is used to calculate commercial property taxation.