Transaction was effectively sham

EXEMPTION FROM TAXATION

Transaction was effectively sham

Lender was Aboriginal capital corporation, but was not Indian as defined by Indian Act (Can.). Lender loaned borrower, Indian on reserve, $125,000 for his fish hatchery business. Loan was structured as conditional sale of chattels. In effect, lender obtained some on-reserve chattels from borrower without paying for them and then secured its business loan on those on-reserve chattels. Borrower made four interest installments on loan and then stopped making payments and declared bankruptcy. Following borrower’s discharge from bankruptcy, lender seized chattels from borrower on reserve. Borrower sued lender for damages. Trial judge found that lender was liable for conversion. Trial judge held that lender’s seizure of chattels on reserve contravened s. 89(1) of Act and was not allowed under s. 89(2). Lender appealed. Appeal dismissed. Section 89(1) of Act prohibited Indian from granting security on any of his or her real or personal property on reserve except to another Indian. Section 89(2) of Act allowed person who had sold chattel to Indian, but retained title or right to possession to exercise rights against chattel even if chattel was on reserve. Purpose of provisions was to protect Indians from being exploited by non-Aboriginals and losing land or chattels on reserve to non-Indians. Transaction parties purported to enter into was merely notional because payment was notional. Transaction purported to be sale and repurchase of borrower’s equipment, as well as loan to him using same $125,000. Transaction could not come within s. 89(2) of Act because it was effectively sham.
Benedict v. Ohwistha Capital Corp. (Jan. 29, 2014, Ont. C.A., K. Feldman J.A., J. MacFarland J.A., and G.R. Strathy J.A., File No. CA C53282) Decision at 199 A.C.W.S. (3d) 1030 was affirmed.  237 A.C.W.S. (3d) 278.