MODERN TREATIES
Sources of funds, sources of frustration
Tom McCarthy
Photo credit: Diego Torres Silvestre
A
ll governments, whether federal, provincial,
municipal, or Aboriginal, provide services to
citizens. The provision of services — be it infrastructure, social programming, law-making, enforcement,
or any of the myriad responsibilities of government
ing, therefore, should decree that sources of funds
provided to each level of government should be sufrequired to provide.
nancing in Canada is much more complex than the
simple model set out above. The Constitution of
Canada, in sections 91 and 92, divides jurisdiction
between the federal and provincial governments.
However, the federal government has the ability
to raise more revenue than the provincial governments, while the provincial governments, responsible for expensive services such as primary health
care and education, cannot raise as much revenue
as they require for service provision. This has led
complex and constantly evolving. The federal government delegates some taxing power to provinces,
and provides additional funding in the form of subsidies and equalization payments. The federal government also uses its taxing power as incentive for
26 Northern Public Affairs, Spring 2013
services. The Canada Health Act is a good example
of this tactic; a more recent example is the federal-provincial infrastructure stimulus fund.
Similar to the arrangements described above,
Aboriginal self-government has revenue requirements based on the provision of services to citizens.
Except in a few cases, the core of modern Aboriginal self-government jurisdiction is not delegated,
but rather is established under section 35 of the
Constitution Act (1982) — giving Aboriginal self-governments powers and responsibilities which cannot
be removed unilaterally by a federal or provincial
government. These powers and responsibilities
carve deeply into the division of powers set out in
sections 91 and 92, extracting jurisdiction from the
provincial and federal government and assigning
it to the Aboriginal government. The most obvious extraction is the removal from federal jurisdiction of the section 91(24) power over “Indians, and
agreement, constitutionally protected jurisdiction
also usually includes core provincial services such as
education, social services, and health care; it almost
always includes the full range of municipal responsibilities, including utilities, zoning and development,
and bylaw enforcement; and it sometimes includes
ancillary federal responsibilities, such as administra-
tion of justice.
A problem, however, is that Aboriginal self-government has only been around since 1984 (in a delegated form, beginning with the Cree-Naskapi Act of
1984, which implemented provisions of the James
Bay and Northern Quebec Agreement (1975) and
the Northeastern Quebec Agreement (1978)) and in
a full and constitutionally protected sense, since the
Nisga’a Treaty of 2000. Aboriginal governments
weren’t invited to the meeting in 1867 when the
funding-source pie was divided. Therefore, while
they assume sovereign responsibility for the provision of programs and services through negotiated
agreements and treaties, they have also had to seek
sources of funds through those same agreements, to
words, they have had to seek access to pieces of a revenue pie that has already been divided up amongst
federal and provincial governments. This paper will
argue that the failure of federal and provincial governments to provide Aboriginal governments with
an adequate amount of funding, and with complete
control over that funding, forces the creation of an
on-going dependency relationship with the Crown.
This on-going dependency relationship, evidenced
threatens to derail self-government agreements and
erects major barriers in the way of economic devel-
Sources of funds for Aboriginal
self-government
Various agreements have attempted to address
the problem of the all-divided-up revenue pie. The
only manner in which true control over funding
could be transferred to a First Nation would be the
full transfer of the jurisdiction over that funding
source — not in a delegated way, but in a manner
so that the Aboriginal government exercises control
under its constitutionally protected rights. Generally speaking, the only major source of funds that
federal and provincial governments have been
prepared to transfer in this manner is the power
of direct taxation over citizens of the Aboriginal
government itself. This includes the power to tax
income, sales, businesses, and property. Any other
major funding source has been provided to Aboriginal governments in a delegated manner, through
various side agreements that are not constitutionally
protected. This means that the federal or provincial
government maintains a degree of control, or can
place parameters around, the revenue-raising power
of the Aboriginal government.
One example of this delegated transfer in B.C.
is the ability to administer property tax over non-citizens living within the taxing jurisdiction of the Aboriginal government. B.C. has chosen to transfer
this important revenue source through a ‘side agreement’, which sets parameters and requirements
around funding. That agreement could terminate
on non-performance by an Aboriginal government.
A second example is income and sales tax powers
over non-citizens within Aboriginal government jurisdiction. In these cases, the federal government
will negotiate — again through a separate agreement — the transfer of a portion of income and
sales tax (which remain administered and collected
by the federal government) back to the Aboriginal
government.
The problems with this ad-hoc revenue solution
can be highlighted by exploring two major sources
of funds — taxation and resource revenues.
Tax revenue powers in Aboriginal self-governments are split in two — the power to tax citizens
of the Aboriginal community itself, which is a constitutionally protected power, and the power to tax
non-Aboriginals living within Aboriginal jurisdiction — which is not constitutionally protected.
The taxation of Aboriginal citizens is important in principle but hardly worth the effort from a
practical perspective. The application of taxes to
Aboriginal citizens is highly controversial within
communities, as it represents a departure from the
section 87 Indian Act tax exemption. The removal
of the tax exemption is one of the biggest trade-offs
considered by Aboriginal citizens when deciding
whether or not to support entering into self-government. No citizens enjoy being taxed, but tax — i.e.
paying a government for services — helps to ensure
the accountability of that government to its citizens.
While this accountability argument is also valid for
Aboriginal citizens and their governments, the application of tax in the Aboriginal context is much
Further, revenues from direct taxation powers over
Aboriginal citizens raise (or will raise, when applied)
paltry funds. Citizens of Aboriginal governments
living within Aboriginal jurisdiction — whether
self-government or otherwise — are the poorest and
most economically depressed demographic in Canada. When an entire population is economically depressed, the small amount of taxes that are collected
Northern Public Affairs, Spring 2013
27
The sales tax burden will impose an additional hardship on a depressed population, and incomes will be
so low on average that income tax collection will be
close to zero.
The major source of tax growth in Aboriginal jurisdictions, at least in the near term, will be
through non-Aboriginal taxpayers. Taxing these
individuals remains a delegated authority from the
federal or provincial government, allowing the federal or provincial government to apply parameters
to Aboriginal taxation. These parameters can be destructive. For example, the federal government has
applied perverse rules to its tax-sharing agreements
that provide disincentives to development. Current
Department of Finance templates for income and
sales tax agreements, such as FNGST (First Nation
Goods and Services Tax) agreements, reimburse
smaller amounts of tax to the Aboriginal government as the level of non-Aboriginal investment or
consumption increases relative to the Aboriginal
citizen population. The taxation structure for Aboriginal self-government — certainly with respect
to income and sales — does little to encourage real
economic development efforts within Aboriginal jurisdiction. To increase any tax base, a government
must attract investment to its jurisdiction; in any other jurisdiction, increased investment is rewarded. In
Aboriginal communities, at least in some cases, it is
penalized.
Resource revenues could be an important source
of funds for Aboriginal self-governments. However, the federal and provincial governments have
steadfastly refused to negotiate the constitutionally
protected transfer of rights to resource revenues.
Federal and provincial governments generally only
transfer full ownership of land, including subsurface
resources, over smaller areas directly surrounding
Aboriginal communities. To date, federal and provincial governments have been reluctant to transfer
full subsurface resource control to larger areas of
territory, or to areas that contain proven resources.
B.C. has recently experimented with resource revenue-sharing, but again through agreements that do
not have constitutional protection. The result is that
Aboriginal governments are deprived of what could
be their most critical source of funds, given the remote yet resource-rich location of many Aboriginal
self-governments.
To put it simply, self-government agreements
involve the transfer of constitutionally protected jurisdiction to provide services. But the fundamental
issue is that they do not also transfer the jurisdiction to raise the funding to be able to provide those
services. Consequently, revenue sources are mostly
delegated, which could result in scenarios where major revenue sources are removed or cancelled due to
breaches of agreements. This is a major and on-going imbalance, where-in the federal and provincial
governments retain funding authority over Aboriginal self-governments, yet the Aboriginal government
becomes charged with a service obligation.
nal taxation both of citizens and non-citizens, the refusal to provide for resource royalty jurisdiction, and
the refusal to include sources of funds under s.35
protection — create major hurdles for an Aboriginal government’s ability to match its revenue-raising
capability with its expenditure requirements. This
reality is at least partially recognized by every level
al, provincial, and Aboriginal governments negotiate what is known as a Fiscal Financing Agreement
or, depending on the jurisdiction, a Fiscal Transfer
Agreement. These negotiated agreements generally
in accordance with a general set of principles, in rements. They also provide a one-time implementation payment, intended to assist a new Aboriginal
self-government with the costs of transitioning from
the Indian Act and establishing systems under its Final
Agreement.
But these agreements are not a solution. On
the contrary, they create many more problems that
destabilize governance within self-government communities and harm the relationship between the federal government and First Nations. The following
section explores these issues.
Fiscal Financing Agreements
Fiscal Financing Agreements (FFAs) are valuable
because they provide much-needed funding to allow
Aboriginal governments to meet basic needs, such
Aboriginal jurisdiction, including social assistance,
preventative health programs, education, and land
management. Aboriginal governments must rely on
FFAs, which immediately create a control-and-dependency relationship — the very relationship all
parties proclaim they are seeking to resolve through
the settling of self-government agreements. There
are three major problems with Fiscal Financing
enue, and the dependency and accountability struc
Continued on page 30.
28 Northern Public Affairs, Spring 2013
GLOSSARY
AANDC: Aboriginal Affairs and Northern Development Canada, formerly INAC (Indian
and Northern Affairs Canada) — the federal department charged with responsibility for
Aboriginal people.
Fiscal Financing Agreement: These agreements are sometimes called Fiscal Transfer
self-governing entity. They are intended to bridge the gap between the signing of a self-govoriginal self-government relationships with Canada. FFAs are not included under the ‘constitutionally protected’ components of a self-government agreement.
Fiscal Harmonization: A recent proposal by the Government of Canada to reform Fiscal
approval. The proposal has been rejected by all self-governing Aboriginal groups, and there
Own-Source Revenue Agreement: These agreements accompany Fiscal Financing
Agreements. They provide a mechanism to reduce the federal transfer to Aboriginal groups
as they develop their own sources of revenue.
Section 35: Section 35, or s.35, is a component of the Constitution Act (1982). Subsection
35(1) states that “the existing Aboriginal and treaty rights of the Aboriginal peoples of Canthat “For greater certainty, in subsection (1) ‘treaty rights’ includes rights that now exist by
Sections 91 and 92: These are the sections of the British North America Act (1867), later renamed the Constitution Act (1867), which set out the core federal and provincial powers. These
sections have been subject to much interpretation since Confederation, and the federal and
provincial governments overlap in areas such as environmental management, which were not
contemplated in these sections.
‘Section 35-Protected’ and ‘Constitutionally Protected’: The reference to ‘protected’ sources of funds is intended to refer to revenue-raising powers that have been included in
self-government agreements. If they have been included in the actual agreement itself, they
recognition means that federal or provincial governments cannot unilaterally withdraw the
right without breaching the Constitution.
Sources of Funds: The term ‘sources of funds’ refers to a revenue stream. It can include
property tax, sales tax, income tax, resource revenues, forestry rents, or any other fee, charge,
or royalty collected by any level of government on an on-going basis.
Northern Public Affairs, Spring 2013
29
ture they create.
Federal funding under Self-Government FFAs is
initially calculated on the basis of the funding provided to Indian Bands still under the Indian Act, along
sponsibilities. Funding provided to non-self-governing First Nations (“Indian Act
of service to Indian Bands. This paucity of funds
was a major reason for Chief Teresa Spence’s hunger strike. However, Aboriginal self-governments are
no longer Indian Bands, which are only responsible
for actual program delivery and administration, and
for reporting to Aboriginal Affairs and Northern
Development Canada (AANDC) and Health Canada (which set and evaluate policy and make most
major decisions for Indian Band programming). Aboriginal self-governments have responsibility for the
full range of government functions, beginning with
legislative jurisdiction, and continuing on to regulatory frameworks, policy development and design,
decision-making, program delivery, administration,
appeals and reviews, and program evaluation. The
additional costs of jurisdiction and liability must be
reality. Under current FFA regimes, any additional
service or any service improvement innovation has
to be funded through funds raised by the Aboriginal
government itself — the FFA will not help. These
funding issues have exposed deep and fundamental
disagreements and misunderstandings between the
Aboriginal government and the federal government,
which has led to chronic delays in the successful renegotiation of FFAs. In fact, no FFA to date has
successfully been renegotiated within the timeframe
intended in proposed renegotiation clauses. These
disagreements and misunderstandings are related to
different interpretations of what was negotiated in
the original agreements.
Probably the biggest conceptual disagreement is
related to comparability, a principle which is set out
in Self-Government Final Agreements and which
states, with minor variations in language across
agreements, that the Aboriginal government should
be provided with resources to enable the government to provide public services at levels reasonably
comparable to those generally prevailing in nearby
jurisdictions. Aboriginal governments point to lower funding levels for Aboriginal self-governments as
compared to municipal and provincial services, particularly with respect to education, early childhood
education, health care spending, and critical public
infrastructure. The Yukon Gross Expenditure Base
(Yukon GEB) exercise, concluded in 2008, was a
30 Northern Public Affairs, Spring 2013
productive, trilateral, federally commissioned and
ity and adequate funding for the purpose of Fiscal
Finance Agreements. The federal government did
not like the results, apparently, as it never published
the report, did not endorse it, and refuses to refer to
The question of comparability of service provision between Aboriginal and non-Aboriginal
governments is also being challenged by Indian Act
Bands through the court system.2 Unless court decisions place legal pressures on the federal government
to comply, the principle of comparability will likely
never be honoured. This is in part due to the fedAANDC to adopt harsh mandates: federal funding
for AANDC’s program spending has been locked at
real terms) since 1996-97, while other federal program spending has increased well above the rate of
inherent in Fiscal Financing Agreements. The second is another federal government mandate, OwnSource Revenue (OSR) Agreements, which have
proved one of the most controversial measures of
any self-government agreement. Every Fiscal Financing Agreement signed in the past ten years has
been accompanied by an OSR Agreement, resolutely required by the federal government as a companion to a Fiscal Financing Agreement. OSR agreements provide that as an Aboriginal government
develops its own revenue streams, through economic
development, taxes, or any other type of revenue,
those ‘own-source’ revenues will reduce the amount
of funding transferred through the Fiscal Financing Agreement. This clawback, which the federal
government prefers to call an ‘inclusion amount’, is
implemented over 20 years. In the sixth year of an
agreement, the clawback rate is 3.3 per cent, and it
increases by that same amount annually until after
20 years the clawback rate is 50 per cent. For example, at a full clawback of 50 per cent, if the federal
government was scheduled to transfer $2 million to
an Aboriginal government under an FFA, but that
government generated $1 million in own-source revenue 50 per cent of the $1 million in own-source
revenue would be ‘clawed back’ against the $2 million transfer, for a total transfer of $1.5 million.
Generally speaking, most Aboriginal self-governments agree with the intent of the policy, which
is that as Aboriginal governments succeed, they
should take on more responsibility for the provision
of services. Indeed, most Aboriginal governments
Photo credit: Northern Public Affairs
would love nothing more than to receive no funding from the federal government, and to instead be
implementation; no matter what the reality is within
the Aboriginal self-government, the clawback rate
starts at year 5 and applies an ever-increasing tax on
an Aboriginal government’s success that reaches an
effective tax rate of 50 per cent in 20 years.
To date, the federal government has been unwilling to contemplate structures that might better
no shortage of good policy ideas. Clawbacks could
and development, were met, thereby leaving investment in the community itself. Graduated clawback
rates could be considered at different levels of revenue generation, similar to our progressive income
tax structure. The federal government could provide clawback exclusions (or credits) for investments
in actions they support or desire (e.g. education or
nomic activity that the current policy is forcing on
many Aboriginal governments.
Finally, the third important problem with Fiscal
Financing Agreements is that they return Aboriginal self-government entities to the same dependency relationship that the self-government agreement
was intended to get away from. By refusing to provide constitutionally protected sources of funds to
Aboriginal governments, the federal government
retains real control over funding and dictates the
terms of FFAs, making the Aboriginal government
funding provided for in FFAs, Aboriginal self-governments are forced to remain focused on negotiating and arguing with the federal government for
nal leaders will be more concerned with making the
case for funding to federal bureaucrats, rather than
to their own citizens. This activity maintains the primary accountability relationship as that between the
federal and Aboriginal government, rather than creating an accountability relationship between citizen
and government, which drives proper governance
outcomes.
federal governments’ commitment to a harsh ownto the disincentives to revenue generation and eco-
the direction of accountability is toward the service
recipient, who as the taxpayer is the ultimate source
View of Jolliffe Island, Yellowknife, Northwest Territoires, 2012.
of funds. Property taxes paid by municipal residents
fund the municipal services they demand, and federal and provincial sales and income taxes paid by
federal and provincial residents provide for federal
and provincial services. Though a complex and inexact equation, the basic contract between citizen
and government remains intact. But the same can
never be the case in an Aboriginal government situation if tax-related sources of funds are not fully
transferred, and if the primary funder of the Aboriginal government is the federal government. If
full control over revenue sources is transferred, revenues in economically marginal communities may
lem, one which argues for the application of similar
principles as with the federal-provincial relationship,
including equalization. But these principles cannot
be contemplated under the current situation; the
federal government retains real control if Aboriginal
governments must continue to rely on FFAs.
Fiscal harmonization and
the control relationship
The control relationship — and the helplessness
of Aboriginal self-governments who are forced to remain reliant on the FFA as a source of funds — is perFiscal Harmonization. The federal government
remains in the consultation stages of this proposal,
but has issued policy papers providing a high-level
description of the program and its purpose, stated
as creating consistency, timeliness, transparency and
fairness in funding for Aboriginal self-governments.3
ernments through an advisory process, which would
purport to aggregate all distinct and unique Aboriginal self-government entities across Canada — entities used to negotiating their own levels of funding,
one common voice. Negotiation would be entirely
replaced by this ‘advisory process.’ The federal government is also proposing more detailed reporting
requirements than those currently in FFAs in order
to capture the data required of the formulas, and
would issue a ‘public national report’ showing these
amounts and statements.
Unsurprisingly, Aboriginal self-government
groups are furious at this proposal, and have reacted with strong letters and representations at various consultation forums. But because Aboriginal
self-governments remain reliant on FFAs, there is
little that can truly be done beyond raising all the
strong, logical arguments for why the Fiscal Harmonization proposal is further injurious to Aboriginal
self-government. These include concerns around
the loss of any existing Aboriginal control by replacing negotiation with federal formulas; the reduction
of input from individual Aboriginal groups, forcing
them into one national advisory process; and ultimately, increased dependence on unilateral federal
decisions, rather than negotiations. In the end, however, the federal government — still the holder of
the purse-strings — will do as it pleases with this
proposal, and Aboriginal self-governments — who
sources of funds — will complain, but may ultimately be forced to accept.
Conclusion
clearly a predictable mistake: As agreements continue to be settled, AANDC simply does not have the
Despite all the lofty words and statements, the
promises of a new relationship, and the hope by all
variety of agreements. As a result, they now want to
way to succeed on their own, the structure of the
funding, as well as the own-source revenue mandate
not part of the federal proposal. The substance of
the change is process-oriented.
The heart of the proposal involves replacing
negotiated, individual Fiscal Financing Agreements
with a formula that will determine annual funding
amounts for each Aboriginal government. This for4
factors have not yet been determined. Input into
the formula would be provided by Aboriginal gov32 Northern Public Affairs, Spring 2013
roadblock. Virtually every problem described above
tiating positions. At their very core, these positions
relate to an unwillingness to give away that which
has been so hard-fought by these governments over
so many years: authority over sources of funds. Neither the provincial nor the federal government wants
to relinquish control over property taxes, income
taxes, sales taxes, royalty revenues, or other major
sources of federal and provincial revenues. The provision of services is transferred and constitutionally
protected under self-government agreements, but
sources of funds to provide those services are not
transferred, and the consequences of this current
policy approach are forcing continued dependence
and muzzling economic development.
There are policy solutions, but each requires a
change to an existing federal or provincial mandate.
These solutions include: provide for the complete
transfer of substantive sources of funds to Aboriginal self-governments, including resource royalty
revenues and full property, income, and sales tax
transfers including from non-Aboriginal citizens,
and protect those sources of funds under the s.35
umbrella; under transitional FFAs (which will truly
be temporary if other changes are made), provide
funding adequate to provide services comparable
to those enjoyed by other Canadians; and change
OSR mandates to provide for more forgiving structures that correspond to economic reality and that
encourage investment in goods and services in areas
(e.g. education and health) that have suffered from
years of underfunding. Taxation can and should be
applied to citizens of Aboriginal self-governments,
above changes. Those changes, if brought about,
will create an environment for real investment and
wealth generation.
If most of the above steps are not implemented,
Aboriginal self-government entities will continue to
-
cial sustainability. Those who do succeed will do so
due to a combination of extraordinary leadership,
good location, and a healthy dose of good fortune,
while those who fail will cost federal and provincial
governments much more than the revenue they are
seeking to protect.
Tom McCarthy is Public Services Director with Tsawwassen
First Nation. He lives in Vancouver.
Footnotes
1. A disclaimer: every Aboriginal self-government arrangement is
ties across Canada. The author has generalized to a ‘common model’
(to the extent there is one) currently in place in Canadian self-government negotiations. This model may be best represented by B.C. and
Yukon treaties; other self-government agreements, including Sechelt
and Westbank, have unique aspects that are outside the scope of this
paper. The author has the perspective of his experience, which is based
on the B.C. treaty model, and his general knowledge of treaties and Aboriginal self-government in the rest of Canada. The author apologizes
to the extent that a description or critique is inapplicable to a particular Aboriginal self-government. The author is grateful to those who
provided thoughtful input, editing, and corrections to this paper: Kim
Baird, Doug McArthur, Jim McCarthy, Colin Ward, Erica McCollum,
and Russell Banta.
2. See the Canadian Human Rights Tribunal’s re-hearing of First Nations Child and Family Caring Society of Canada v. Attorney General
of Canada, an ongoing legal drama that is a worthy subject for a different article.
3. AANDC’s stated purpose as per the following FAQ document on Fiscal Harmonization: http://www.aadnc-aandc.gc.ca/
eng/1309196759102/1309196933550
the website of the Land Claims Agreements Coalition, at: http://www.
landclaimscoalition.ca/assets/120906_Fiscal_Harmonization_Initiative_Background_Brief.pdf
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