Case Studies in Aboriginal Business

Financing the Songhees Nation Wellness Centre Ken Medd

Purdy Crawford Chair in Aboriginal Business Studies Shannon School of Business Cape Breton University 1250 Grand Lake Rd, Box 5300 Sydney, NS B1P 6L2 ©2015

The Purdy Crawford Chair in Aboriginal Business Studies was established at Cape Breton University in 2010 in response to Aboriginal community leaders’ expression of the need for entrepreneurship, business investment, and corporate skills training for the purpose of creating a model of self-reliance. Named in honour of Canadian lawyer and corporate boardroom leader, the late Mr. Purdy Crawford, the Chair aims to promote interest among Canada’s Aboriginal people in the study of business at the post-secondary level. The Purdy Crawford Chair in Aboriginal Business Studies focuses its work in four areas: • Research on what “drives” success in Aboriginal Business • National student recruitment in the area of post-secondary Aboriginal business education • Enhancement of the post-secondary Aboriginal business curriculum • Mentorship at high school and post-secondary levels

“Meaningful self-government and economic self-sufficiency provide the cornerstone of sustainable communities. My wish is to enhance First Nations post-secondary education and research to allow for the promotion and development of national Aboriginal business practices and enterprises.” Purdy Crawford, C. C. (1931-2014)

www.cbu.ca/crawford

FINANCING THE SONGHEES NATION WELLNESS CENTRE In 2011, the Songhees Nation instructed its director of operations, Christina Clarke, to raise $24 million to construct the community’s new wellness centre. Christina secured $7 million, including $6 million from Songhees Nation, but still needed more. Later that year, having run out of options, she needed to decide whether to recommend that community members pay a tax to finance the construction. SONGHEES NATION The Songhees Nation is situated in Victoria, British Columbia. Four reserves, comprising 341 acres, had been set aside for its use and benefit. Early in the 20th century, the Songhees Nation was relocated from the area around Victoria’s harbour, in the centre of the city, to its current location on the city’s western edge. At the time, the new site was still forested and members who cleared lots for themselves were given that land by allotment. Under the Indian Act, a member of a First Nation can be given an allotment of reserve land. Usually, the allotments would be approved by the Aboriginal government and the Minister of Aboriginal Affairs and Northern Development Canada (AANDC). Once an allotment is approved, the member has lawful possession of a parcel of reserve land and a Certificate of Possession can be issued to the individual. A member can transfer his or her allotment to the First Nation or another member, lease the allotment to a third party, and even leave the allotment to another member in his or her will. Nonmembers are not able to hold lawful possession of reserve lands, but may obtain a right to use or occupy reserve land by entering into a lease. In the 1970s and 1980s, many of the lots held by members had been leased to nonmembers and subsequently developed into parks for mobile homes. By 2011, approximately 650 mobile homes were situated on the leased reserve lands. The mobile homes were occupied principally by retirees from Victoria. More than 300 Songhees members lived on reserve with approximately 1,600 non-members, who resided in the mobile home parks. There was not much undeveloped land remaining on the reserve. Songhees implemented a property tax under the Indian Act in 1995. Since 2008, it had been imposing its property tax under the First Nations Fiscal Management Act. The property tax could potentially generate about $1 million per year, but many of the mobile homes were owned by seniors and Songhees provided tax relief similar to the province’s home-owner grants, which reduced the amount of property tax that seniors paid on their principal residence. After the home-owner grants and costs of service

Financing the Songhees Nation Wellness Centre by Ken Medd

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were deducted, the net amount of property tax revenue that was actually available for governance and infrastructure was about $100,000. CHRISTINA CLARKE Christina Clarke graduated from the University of Victoria with Bachelor of Arts. In 2011, she had worked for Songhees for more than 15 years. During the first nine years of her career there, she worked in the finance department and, in that role, she learned that some Aboriginal groups had implemented their own sales taxes. Later, as director of operations, she periodically mentioned to the Songhees Chief and Council that the First Nation might wish to consider implementing a sales tax like the First Nations Goods and Services Tax (FNGST). She thought the FNGST would be a good source of new revenue and that it might be appropriate for Songhees. The FNGST was a 5% sales tax that applied in respect of the consumption, on reserve, of goods and services that are taxable under the federal Goods and Services Tax (GST) or Harmonized Sales Tax. The Budget Implementation Act, 2003, was the enabling federal legislation that supported the FNGST. The FNGST was implemented when an Aboriginal government enacted a law imposing the FNGST and entered into a tax agreement with Canada concerning the administration and enforcement of the law and the collection of the FNGST. Usually, Christina’s suggestions about implementing the FNGST were met with some hesitancy because taxation, even self-taxation, was a highly sensitive matter for most First Nations. The circumstances in which Status persons are exempt from, or liable for, paying federal and provincial taxes generally were not well understood. Section 87 of the Indian Act exempted the property of Status persons and Indian Bands from taxation by external governments if the property was situated on a reserve. Federal and provincial taxes did apply on reserves in connection with the property of other persons. Federal and provincial taxes also applied to the property of Status persons and Indian bands if the property was not situated on a reserve. The federal government encouraged Aboriginal groups to exercise tax powers on reserve and to implement taxes like the FNGST. However, many Aboriginal persons wondered about the benefit of the section 87 exemption if their own governments taxed them on reserve. It was politically dangerous for any government to introduce a new tax and even more dangerous for Aboriginal governments to advocate taxation or introduce taxes on reserve. On one occasion, the chief told Christina that he did not have the right to take away the tax exemption that members enjoyed on reserve without their consent. He felt strongly that the community members would not agree to the council implementing a tax on reserve and he did not intend to raise the idea with them. Christina stopped advocating

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Purdy Crawford Chair in Aboriginal Business Studies

for the implementation of the FNGST, but she continued to believe that it would be a useful revenue source. THE SONGHEES NATION WELLNESS CENTRE In 2007, Songhees started developing ideas for a community wellness centre. A planning committee sought and carefully considered input from community members. Based on its deliberations and the community’s extensive input, the committee developed a concept for a 65,000 square foot multipurpose building. It also identified a suitable site for the centre on the reserve. The wellness centre would house the Songhees administration offices, health centre, and education centre. It would include classrooms, meeting rooms for community Elders and youth, a computer lab, a basketball court, a gymnasium that could also function as a conference centre, a gift shop, and displays of Aboriginal carvings and fine art. It would be a world-class building. Early estimates suggested it would cost approximately $18 million, but that number later increased to $24 million. The committee presented the concept for the wellness centre and made its recommendations to the Songhees Chief and Council, which accepted them. The committee then organized several meetings to present the concept to the community members, who also quickly accepted and supported the project. SEEKING GOVERNMENT SUPPORT In the years leading up to the 2010 Winter Olympics in Vancouver, the federal and provincial governments had both been providing capital funding for legacy infrastructure projects related to the games. At the time, Health Canada also was also making capital funding available for community health centres. Representatives from Health Canada came to Songhees and explained that they would consider providing up to $2.5 million for the construction of a community health centre. Initially, Christina was encouraged that Songhees might receive a significant amount of government funding for the wellness centre. By mid-2010, however, the Olympic Games were over and a global financial crisis was materializing. Economies around the world began to recede and governments in Canada reduced or withdrew offers of new capital funding. A delegation from Songhees travelled to Ottawa in 2011 to meet with the deputy minister of Health Canada and seek financial support for the wellness centre. The deputy minister agreed that the centre was a good idea. The $2.5 million was no longer available, but she committed $800,000 for the centre.

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AANDC was also supportive of the Songhees proposal. Officials from AANDC arranged a meeting in Vancouver that was attended by representatives from 17 government departments and agencies. Songhees made its presentation about the wellness centre and everyone agreed that it would be an excellent project. However, none of them offered any capital funding. One of the departments offered some funding for a feasibility study. Overall, however, the Songhees representatives left the meeting feeling somewhat dejected. ARRANGING THE FINANCING Early in 2011, the project committee organized another community meeting to explain to the membership that external governments would not provide the capital needed for building the wellness centre. The community members remained strongly supportive of the project and their response came quickly and clearly. If other governments would not help, the community would build the wellness centre itself. Christina was tasked with finding the financing required for constructing the centre – $24 million. Fortunately, a few things came together relatively quickly. Public Works and Government Services Canada (PWGSC) had a property adjacent to Songhees, where it operated a dockyard. PWGSC needed a new industrial marine training centre and leased four acres from Songhees for that purpose. Songhees had developed its own land code in 2010 and its reserve lands were no longer being managed under the Indian Act. As a result, Songhees was able to negotiate and finalize the lease relatively quickly in 2011. The lease generated $400,000 per year, which represented $8 million over its twenty-year term. At roughly the same time when the lease was being negotiated with PWGSC, Christina approached a number of banks about financing for the wellness centre. The banks tended to regard Songhees as a commercial entity and their analyses were based on commercial lending rates and amortization periods of 20 to 25 years. The Songhees wellness centre project was not viable under that model. One of the banks, however, regarded Songhees as a government rather than a business. It told Christina that it would lend the money to build the wellness centre if Songhees could demonstrate that it had a strong financial management system and stable revenue streams for servicing the debt. Given that Songhees had implemented property taxes, developed a land code, and been certified by the Financial Management Board as having strong financial systems, the bank’s analysis was favourable. The bank was impressed with the Songhees Nation’s financial management and it supported the purpose for which the funding was intended. The Songhees Nation’s property taxes just covered the costs of providing municipal services to tenants and the associated administrative overhead. The net property tax revenue stream was not sufficient for securitizing the loan for the wellness centre. 4

Purdy Crawford Chair in Aboriginal Business Studies

Songhees, however, had identified about $6 million dollars that it could put toward the cost of the centre. It had about $1 million from a railway spur line that had been built on Songhees reserve. The members voted to contribute about $3 million from one of their trust funds. Songhees also paid about $2 million from a capital projects fund that it created for its property tax system. However, even with the $1 million from the federal government, the $6 million of equity from Songhees, and the ongoing revenue stream from the PWGSC lease, Christina still had a funding gap. She needed to find another stable revenue stream to securitize the bank loan. THE FNGST Christina organized preliminary talks with the federal Department of Finance about Songhees hypothetically implementing the FNGST. The FNGST operated like the federal GST, but it would be imposed under the laws of the Songhees Nation rather than federal law. All persons on the Songhees Nation’s reserves, including Status members who lived there, would have to pay the FNGST. The Canada Revenue Agency (CRA) would act as an agent for the Songhees government. The CRA would administer and enforce the Songhees FNGST law and collect the FNGST for Songhees. Canada, rather than Songhees, would accept the risk associated with taxpayers not complying with the tax. The CRA and the Department of Finance knew how much net GST was associated with each province or territory for any given year. Given that the Songhees FNGST would operate exactly like the GST (e.g., same tax base, same tax rate, and same rules of application and interpretation), the Songhees Nation’s tax attributable for a year could be estimated by formula as a share of the known amount of net GST for British Columbia for the year. The formula calculated the Songhees Nation’s share by multiplying the net amount of GST for BC for the year by other terms, including terms representing the Songhees Nation’s population and mean income expressed as proportions of the province’s population and mean income for the year. The early federal estimates indicated that the net amount of FNGST that would be remitted to Songhees would exceed $1 million per year, which was more than enough revenue to fill Christina’s funding gap. Christina went to the Songhees Chief and Council and told them it was time to implement the FNGST. There was an uneasy and occasionally heated discussion. Some of the elected councillors were very concerned and one of them said he would never be elected again if he went before the membership and recommended the implementation of the FNGST. It became clear that the council would not go before the community members to recommend that Songhees implement the FNGST. Christina was the director of operations, not a politician. Her job was to implement the decisions of the council, not to go before the community members and seek Financing the Songhees Nation Wellness Centre by Ken Medd

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agreement for the council to implement a tax. She knew, however, that the wellness centre project would fail without the bank loan and to obtain the loan Songhees needed to demonstrate that it had more ongoing, stable revenue. CONCLUSION Christina Clarke secured $7 million of the $24 million that would be required for building the Songhees Nation Wellness Centre. A bank was willing to finance the remainder if Songhees securitized the loan with ongoing revenue. The council would not advocate a tax to the membership, but something had to be done or the project would die. Christina had to decide how to proceed.

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Purdy Crawford Chair in Aboriginal Business Studies