Federal Security Interests Research Study and Report 2000


A. Current Statutory/Regulatory Scheme

The underlying goal of the personal property provisions of the Indian Act is to ensure that status Indians are protected from any efforts by non-Indians to dispossess them of the property they hold.; A summary of the relevant legislative and regulatory provisions is provided in Appendix G.

The personal property scheme is primarily governed by section 89 of the Indian Act which prohibits the “real and personal property of an Indian or a band situated on a reserve” from being subject to a “charge, pledge, mortgage, attachment, levy, seizure, distress or execution in favour or at the instance of any person other than an Indian or a band.”; In short, personal property located on a reserve is exempt from seizure and execution by a creditor.; Two exceptions to this rule are outlined in sections 89(1.1) and 89(2) respectively:; a “leasehold interest in designated lands”; and agreements whereby the right of property or right of possession thereto remains wholly or in part in the seller.

Section 55 of the Indian Act establishes a land registration system, the “Surrendered and Designated Lands Register”, whereby the registration of any “instrument that grants or claims a right, interest or charge in, or transfers, encumbers or affects Indian reserve, designated or surrendered lands” is effected.; As well, section 21 of the Indian Act establishes a “Reserve Register” by which certificates of possession or allotments to individual natives are registered.; Together, these two sections are capable of registering the following instruments:; certificates of possession or occupation, permits, relinquishments, sales, surrenders, cancellations, caveats, leases and mortgages.

Section 28 of the Indian Act provides that any attempt to permit an individual, other than a band member, to occupy or use a reserve land or to exercise any rights on that reserve land (by deed, lease, contract, document or agreement) is void.; Section 28(2) permits the Minister to grant an exception (for a period of one year) for a non-band individual to occupy or use reserve land, or to exercise any interest in the reserve land.

Section 58(3) of the Indian Act provides that the Minister may lease for the benefit of any Indian (on the Indian’s application), the land of which the Indian is lawfully in possession.

B. Constitutional Jurisdiction

Under the Constitution, the provincial governments have exclusive jurisdiction over the property and civil rights of non-Indians.; The Constitution, however, grants Parliament jurisdiction over “Indians and lands reserved for Indians”.; At first glance, the Constitution is unclear as to whether this Parliamentary jurisdiction should take the place of provincial personal property control.; The courts have resolved this issue in Attorney General of Canada v. Canard, when the Supreme Court of Canada decided that Parliament has jurisdiction over the personal property of Indians.;; In general, Parliament has limited its legislative control to property located on reserves, while provinces are free to develop legislation that applies to Indian property located off reserves.

C. Problems and Issues With the Current Regime

1. Difficulties in Obtaining Valid Security

Two essential components of a successful business relationship are certainty and simplicity.; Unfortunately, the current personal property regime under the Indian Act often provides neither for the native businessperson. Thus, banks and financial institutions, facing the possibility of not being able to obtain good security for loans, may hesitate to provide much needed financing to a native business or businessperson.; As a result, economic growth and development on the reserve may be prevented.

2. Security Over Land

The current legislative scheme makes conventional mortgages and the use of reserve land as collateral extremely difficult to obtain.; Section 89 of the Indian Act permits a non-native to take security over a leasehold interest in designated lands.; Unfortunately, however, the mortgage of a leasehold interest is often more complex than that of a freehold interest, and because it provides less security to the mortgagee, a leasehold interest is often less desirable.; As well, according to s. 89(1.1) of the Indian Act, in order for the security to be effective, the reserve lands must be “designated”.; This necessitates a careful search by the mortgagee to ensure that the lands are “designated” as required.; Once again, this requirement adds complexity to the transaction and may discourage institutions from lending to a project located on a reserve.

Once a leasehold interest has been mortgaged to a non-native, the mortgagee will want to register the interest to protect its claim.; Section 55 of the Indian Act creates a federal Surrendered and Designated Lands Register under which the interest must be registered in order to preserve the claim.; Once again, critics have identified this registration scheme as a weakness of the regime.; First of all, when compared to the breadth of legislation governing provincial registration schemes, section 55 provides a bare framework for registration.; Secondly, the “rudimentary structure” of the system provides little assurance that the registered interests are valid, and it provides no ability to guarantee the priority of the registrations.; As well, the registry is based in Ottawa - a fact that makes searches or registering interests costly and time consuming to perform.; This disadvantage could be alleviated to some extent by establishing local Registries, organized on a regional basis.; Finally, mortgagees will often insist that their interests be registered in the provincial land registry systems as well.; Unfortunately, the federal government has often refused to allow title to reserve land to be raised in the provincial land registry system and the provincial law itself may prevent title from being obtained.; These factors may discourage banks and financial institutions from granting financing to projects located on reserves.

;Section 58(3) of the Indian Act permits the lease of an Indian’s land (“locatee leases”).; These leases, however, cannot be granted as good and clear security.; Section 28(2) also requires a Minister’s permit before a lease can be mortgaged.; These restrictions may contribute to delay and complication in the security process.;

A number of changes could be made to the legislation to reduce complexity and streamline the security process.; First sections 29 and 89(1.1) could be amended to provide that mortgages of lease leases are an exception to the rule in 89(1).; As well, the legislation could be amended to provide that mortgages of leases under section 58(3) of the Indian Act and of designated lands should be automatically transferable or assignable from one creditor to another without requiring the Minister’s consent (as long as the assignment of the security corresponds with the designated form).; The process could be further simplified by eliminating the requirement for a section 28(2) Minister’s permit to accompany the mortgage of a lease.; Leases of reserve lands could also automatically include a right of way or easement to the property under the lease, and a legislative provision which declared that common law rights of prescription, rights of way or easement applied for leaseholders would accomplish this objective.; Bands or band members could also be granted the ability to lease their own reserves.; Certainty could be added to the registration system under the Indian Act by providing that registration of instruments under the Registers would provide indefeasible interests.; Band by-laws and certain reserve land band council resolutions could also be published under a Gazette,; in order to provide access to all potential secured creditors.; These changes would streamline and simplify the process of obtaining security over Indian land.

3. Security Over Personal Property

Once again, the Indian Act makes it difficult for a lender to obtain security over personal property.; Section 89(1) of the Indian Act prohibits the taking of security in personal property “situated on a reserve” by any person “other than an Indian or a band”.; For further clarification, section 90(1) of the Indian Act states that any personal property purchased by the Crown with Indian money or money appointed for that purpose, or property given to the band or band members, is deemed to be “situated on a reserve”.; For example, money given to a band member by the Crown and placed in a bank account located off a reserve is deemed to be “situated on a reserve” and therefore exempt from seizure or security.

Unfortunately, there is no definitive answer regarding when property is considered to be “situated on a reserve”.;; Case law has attempted to resolve this issue.; Most cases that examine this question have been decided in the taxation context under s. 87 of the Indian Act, although the same principles have been applied in the personal property context as well.; Generally speaking, the location of personal property is its “actual location”.; As well, a bank account is deemed to be situated in the location where it is payable.; A bank account is payable where “in the ordinary course of business it would be paid and where the holder would seek payment, and that is the branch where he or she deals”.; As well, the “paramount location test”, propounded in Leighton v. B.C. and approved in Mitchell confirms that the mere fact that property physically moves off the reserve does not mean that the property is not still protected by s. 89 of the Indian Act.; As long as a “discernible nexus [remains] between the property concerned and the occupancy of the reserve”, the property is deemed to be situated on a reserve.; For example, in Kingsclear Indian Band v. J.E. Brooks & Assoc. Ltd., the Court determined that parking a bus on a reserve when not in use was enough to give the bus a sufficient “nexus” with the reserve in order to bring it under the protections offered by s. 89.

Nevertheless, under s. 89(2) if a seller retains the right to possess the property, the property is not protected from seizure by s. 89(1).; Thus, property purchased under a conditional sales contract is available for seizure by the seller whether or not the property is located on the reserve.

Furthermore, section 89 of the Indian Act does not protect a limited company from seizure, nor does the Indian Act protect the personal property of a tribal council if the council is a corporation.; The corporation is not protected because it is not an “Indian” or a “band” within the meaning of section 89.; Conversely, the property of an unincorporated band council is exempt from seizure and garnishment.

A number of these problems may be solved by permitting an Indian or a band, upon receiving independent legal advice, to contract out of section 89 of the Indian Act for financing purposes.

4. Provision of Guarantees

Due to the lack of traditional security available to lenders, banks and financial institutions, a guarantee of the investment may be required.; Often the provincial or federal governments are asked to provide guarantees or letters of comfort.; As well, the Indian band and its members may also be asked to provide guarantees, although the enforceability of this guarantee is questionable in that enforcement is subject to the limitations of the Indian Act and the personal property regime.

5. Garnishment

Section 89 of the Indian Act prohibits a non-Indian from garnishing an Indian’s personal property that is situated on a reserve.; On the other hand, garnishment legislation may be used between Indians in order to obtain execution against assets which are otherwise protected under section 89 of the Indian Act.; In addition, the courts have held that garnishment against a band may be more difficult, while garnishment of a tribal council’s account is not protected.; A tribal council is a corporation and not an “Indian” or a “band” as defined in the Indian Act and so is therefore not protected under section 89 and 90.

To determine whether personal property of a status Indian is subject to garnishment, the courts have also applied the “connecting factors test” as laid down in Williams v. Canada.; In Williams, the Court determined that, a number of relevant connecting factors must be taken into account, when deciding whether or not unemployment insurance benefits received by a status Indian were subject to taxation.; These factors included (1) the residence of the debtor; (2) the residence of the person receiving benefits; (3) the place where the benefits are paid; and (4) the location of the employment income.; The courts have recently applied this approach to determine whether or not wages paid to a status Indian are subject to garnishment.

6. Application of s. 89 of the Indian Act to land

Section 29 of the Indian Act provides that reserve lands “are not subject to seizure under legal process”.; Thus, given the protection offered by section 29, section 89 is somewhat redundant.; It is unknown, however, whether the protection offered by section 29 is intended to address the same issues covered under section 89. although section 29 appears to offer greater protection in that it contains no exception allowing for the seizure of lands by other Indians.

7. Ability of Band Councils to Bind Subsequent Band Councils

Of concern to the secured lender will be the legal status of a band under the Indian Act.; Under section 2 of the Indian Act, an Indian band consists of “a body of Indians” and is not an incorporated entity.; Thus, the band council’s ability to enter into legally binding agreements on behalf of the band is uncertain.; As well, a lender may want assurance that a subsequent band council will honour the contractual obligations arranged by the previous band council.; The legal status of the band and its council make this outcome uncertain as well.

Some recent court decisions have held that a band has the capacity to sue and be sued, while other decisions have held that a band is not a person, does not hold corporate status, and is unable to hold real estate.; Although it could be argued that because bands and band councils are exercising certain contractual powers and should therefore incur corresponding obligations, the uncertainty surrounding this issue may discourage lenders from financing worthwhile developments by bands and band councils.;

There are a number of changes that could be made to the Indian Act to resolve the uncertainties of this issue.; First, the Indian Act requires a much clearer definition of a “band” and the band’s legal capacity must be clearly identified.; As well, the band’s legal capacity should be that of a “natural person”, including the ability to sue and be sued.

D. Attempts to Obtain Valid Security

Several steps can be taken in order to avoid the restrictions created by the Indian Act’s personal property regime.

1. Federal Government to grant exemption under s. 4(2) of the Indian Act

Although s. 4(2) gives the Department of Indian and Northern Affairs the ability to grant exemptions from the personal property regime, the Department’s policy is to refuse all exemptions.; This policy imposes additional hardships on natives, as a status Indian remains a status Indian for life, regardless of whether the native resides on or off the reserve.; For example, money in a bank account that was given to a status Indian pursuant to an agreement to which the Federal government was a party, is deemed to be “situated on a reserve”, regardless of where the bank account is located.; Thus an off-reserve status Indian may have difficulty obtaining financing as the money in the bank account will always be deemed to be “on-reserve”, and therefore exempt from seizure.; Political and legal challenges may be required to change the status quo.

2. Structure of the transaction

The restrictions imposed by s. 89 can be successfully avoided by structuring all transactions such that the vendor retains a right of possession in the property.; For example, the vendor of a vehicle may sell the vehicle to an Indian under a conditional sales contract such that the vendor may take possession of the vehicle if the Indian fails to make payment on the contract.; Unfortunately, this structure may not be practical for all transactions.

3. Allow for seizure by a status Indian

Under the Indian Act, a status Indian is permitted to seize the property of a fellow status Indian or band.; Thus, one solution is for the lender to have a status Indian on its Board and to make the Board Member a party to the contract.; Thus, because the status Indian is a party to the contract, the lender will be able to realize on its security.

E. First Nations Land Management Act

The FNLMA came into force on June 17, 1999 and ratified the Framework Agreement on First Nations Land Management Act (the “Framework Agreement”).; The FNLMA applies to the fourteen First Nations that developed the legislation and signed the Framework Agreement in February of 1996.; Its inception will thus affect the Indian Act’s land registration system in a number of ways.

The FNLMA permits the signatory First Nations to develop their own reserve land and resource management regimes.; In essence, the participating First Nations are able to opt out of the Indian Act’s relevant land management sections.; Each of the First Nations may develop and adopt a “land code” that addresses the use, possession and occupancy of the First Nations’ lands, as well as the division of land upon the breakdown of a marriage.; Once certified, a copy of a First Nation’s land code must be available for public inspection.

The relevant sections of the FNLMA permit the First Nations to establish unique land registration regimes.; For example, the First Nations are granted the authority to enact laws in relation to “interests in and licenses in relation to first nation land” (s. 20(1)(a)) and the “creation, acquisition and granting of interests in and licenses in relation to first nation land and prohibitions in relation thereto” (s. 20(2)(b)).; In addition, section 25 of the FNLMA grants the Governor in Council, on the recommendation of the Minister, power to establish a “First Nation Land Register” that is similar to the Register established under section 21 of the Indian Act.; The FNLMA provides for the making of regulations with respect to the administration of the First Nation Land Register, the effects of registering interests, including priorities, and the payment of fees for registration (s. 25(3)).

F. The Impact of the FNLMA on the Indian Act Registration Regime

The FNLMA only applies to First Nation land and thus the regime established by the Indian Act; in relation to personal property is not affected by the FNLMA.; Currently, the FNLMA only applies to the fourteen First Nations listed in Schedule I of the FNLMA.; Additional First Nations may become signatories if they wish.

Once a First Nation land code is brought into existence, certain sections of the Indian Act’s land registration regime cease to apply to the First Nation’s land and members.; For example, section 55 of the Indian Act, which establishes a “Surrendered and Designated Lands Register”, ceases to apply.; Instead, the FNLMA creates a new register, similar to the section 21 Register created by the Indian Act, but broader in scope.; As well, the ability to secure a leasehold interest on First Nation land under section 89(1.1) of the Indian Act remains - the FNLMA even permits the land code to extend the application of section 89(1.1) to “other leasehold interests in first nation land” (s. 38 of the FNLMA).; The general security regime comprised of sections 89(1) and 89(2) of the Indian Act; remains intact.

The FNLMA also clarifies the legal capacity of First Nations and grants to a First Nation, for purposes related to First Nation land, the legal capacity to borrow, contract, acquire real and personal property, expend and invest money, and be a party to legal proceeding.; As well, any body created by the First Nation in order to manage the First Nation land would have the legal status of a person.; In contrast, the Indian Act provides no specific provision in regards to the legal status of Indian bands.; As previously discussed, this omission creates uncertainty for lenders.; The FNLMA’s clarity on this issue would provide greater certainty for secured lenders.

Unfortunately, the land regime created by the FNLMA fails to produce a simplified registration regime.; In fact, numerous land codes will only increase the complexity surrounding the taking of security in First Nation land.; Two national Registries will now be established - each performing essentially the same functions, but adding complexity to the system.; Registration and searching will be time consuming and expensive to perform.; As well, the FNLMA merely gives the Governor in Council the ability to make regulations relating to “priorities” of interests.; As no regulations have been passed to date, this issue remains unresolved.

G. Intellectual Property in Cultural and Artisan Rights

Section 91 of the Indian Act prohibits the sale of certain artifacts situated on reserves.; These artifacts include: Indian grave house poles, carved grave poles, totem poles, carved house poles and rocks embellished with paintings or carvings.; This section also appears to apply to reserve land held under a certificate of possession.; Obviously, this section limits the ability of Indians to use artifacts as security.

The imposition of common trademark and copyright structures on the native culture is somewhat difficult to achieve.; Native traditions do not easily lend themselves to the protections established under intellectual property law.; As well, it is unclear whether the personal property provisions of the Indian Act apply to intellectual property of natives.; Thus, it is uncertain whether a creditor would be able to take effective security in the “intellectual property” of a native band or individual.

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