Status Indians cannot pledge Reserve property as collateral for debt; attempt to structure same fails

Benedict v. Ohwistha Capital Corporation, 2014 ONCA 80:

[13]       Section 89 of the Act was enacted in the 1951 revision of the original Indian Act. The original Act contained a similar provision, s. 66, which read as follows:

66. No person shall take any security or otherwise obtain any lien or charge, whether by mortgage, judgment or otherwise, upon real or personal property of any Indian or non-treaty Indian within Canada, except on real or personal property subject to taxation under section sixty-four of this Act: Provided always, that any person selling any article to an Indian or non-treaty Indian may, notwithstanding this section, take security on such article for any price thereof which may be unpaid.

[14]       While the purpose of s. 89(1) was to protect all real and personal property on reserve from being used as collateral or security for a loan made by anyone other than an Indian, s. 89(2) allows aboriginals on reserve to purchase goods from sellers off the reserve and to do so on credit. This provision gives the seller the ability to repossess any goods sold to an Indian on reserve on default of payment.

[15]       In Mitchell v. Peguis Indian Band et al, [1990] 2 S.C.R. 85, at paras. 87-88 La Forest J. explained that the purpose of ss. 87-89 of the Act was to protect Indians from losing their land or their chattels on the reserve to non-Indians:

“…the Crown has always acknowledged that it is honour-bound to shield Indians from any efforts by non-natives to dispossess Indians of the property which they hold qua Indians, i.e., their land base and the chattels on that land base….An examination of the decisions bearing on these sections confirms that Indians who acquire and deal in property outside lands reserved for their use deal with it on the same basis as all other Canadians.” [paras. 87-88]

[16]       The Supreme Court again discussed the protective purpose of a number of provisions of the Indian Act as well as some of the consequences of those provisions in McDiarmid Lumber v. God’s Lake first Nation, 2006 SCC 58, [2006] 2 S.C.R. 846.

[17]       McLachlin C.J. explained how the paternalistic attitude of the federal government toward aboriginals in the 19th century was reflected in the protective policy of the Act, which placed restrictions on aboriginal economic activity with non-aboriginals that affected aboriginal lands and property. She stated at para. 50: “The 19th century exemption provisions were born of a fear that Indians and their lands and property were subject to exploitation by others.” However, by the 1930s and 1940s, “self-determination and self-government had emerged as an aspiration, if not a reality, and bands were beginning to embark on projects to improve their economic situation” (para. 51).

[18]       Nevertheless, as McLachlin C.J. stated at para. 55, the tension between the old and the new approaches continued to exist. This tension was reflected in the new Indian Act enacted in 1951, which continued to include provisions for the protection of aboriginals from exploitation by others. One such provision is s. 89(1).

[19]       In God’s Lake, the focus was not on s. 89 but on s. 90 of the Act, another protective section. In deciding that s. 90 should be given a narrow meaning, the court referred to the finding of the Royal Commission on Aboriginal Peoples in its 1996 report (“RCAP report”), which stated that s. 90 (as well as other sections including s. 89(1)) limits the ability of aboriginal peoples to access credit because it restricts the ability of lenders to secure loans using reserve lands or chattels located on reserve lands. The Royal Commission concluded that the Act’s restrictive provisions were “a significant deterrent to financing business activity on-reserve.”

[20]       The court in God’s Lake referred to the Royal Commission’s recommendations regarding overcoming the restrictions created by the Act, which included abolishing them. McLachlin C.J. observed that although the court could not abolish any provisions of the Act, it could give some provisions a narrow reading in order to help meet the concern about limited access to credit by aboriginals on reserve resulting from these restrictions (para. 42).

[21]       One of the steps that the federal government took to make funds available for aboriginal enterprise was the establishment of ACCs across the country in 1989. The ACCs were funded by the federal government, but were expected to become self-sufficient in terms of administration and operating costs from interest earned on loans; this, however, proved to be very difficult (RCAP report, vol. 2 at p.916-917). The Royal Commission made a number of recommendations to improve the financial viability of the ACCs, such as having the federal government provide a continuing operating subsidy (RCAP report, vol. 2 at p.917).

[22]       In its discussion of possible amendments to the Indian Act, the Royal Commission also raised the possibility of allowing Aboriginal financial institutions to seize Aboriginal lands or property but without the right to sell them outside the community (RCAP report, vol. 2 at p.927).

[23]       From this history emerges the backdrop to the issues that have arisen for decision in this case. To date, the Indian Act has not been repealed or amended to remove the restriction on using on-reserve chattels to secure new loans that is created by s. 89(1). This provision, intended to protect aboriginals from being exploited by non-aboriginals and losing their on-reserve property, is viewed on the one hand as paternalistic, but on the other hand as still possibly beneficial as a protective measure.

[24]       In the present case, the respondent, Ohwistha, an ACC with the mandate to lend funds to aboriginals for their business ventures, wanted to lend money to Mr. Benedict and sought to take some security in the event of default. In order to try to avoid the restriction in s. 89(1), Ohwistha attempted to structure the loan as a conditional sale of chattels that belonged to Mr. Benedict but which he first transferred to Ohwistha (through Mr. Oakes), in order to comply with and come within s. 89(2).

[25]       The debate before this court was whether the court should apply the approach of the Supreme Court in God’s Lake to ease restrictions on the ability of aboriginals to obtain credit by interpreting s. 89(2) in a way that allows loans to be made using on-reserve chattels as security, by the device of a two-step conditional sale transaction. Or, whether the court should ensure that the purpose of s. 89(1) is not undermined by transactions that are structured so as to circumvent it.