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									                         October 2006

 Pre-Budget Submission
                      Prepared by
the Indian Taxation Advisory Board
                                                    Table of Contents
Introduction: ............................................................................................................................... 1

The First Nations Fiscal Imbalance........................................................................................... 4

Market Failure on First Nation Lands...................................................................................... 6

ITAB 2006 Pre-Budget Proposals............................................................................................ 10

   A Specialized First Nations Infrastructure Program ............................................................ 11
   Supporting First Nations in implementing the First Nation GST........................................ 13
   Encouraging First Nation Home Ownership ........................................................................ 14
   First Nation Land Title Legislation ....................................................................................... 16
   Summary and Costing of ITAB 2006 PBS proposal ............................................................. 18
Appendix How to implement Market Orientated First Nation Policy Changes ................. 19

     Pre-Budget Submission                                                                                                                   i
The issue of a fiscal imbalance is nothing new to First Nations. First Nation governments have
experienced the most extreme fiscal imbalance within the Canadian federation for their entire existence.
The issues that arise from a fiscal imbalance are very familiar to me. In fact, the Indian Taxation
Advisory Board (ITAB) was created almost 20 years ago to address these very issues.

ITAB was created to help First Nations assert property tax jurisdiction over their own lands. Prior to
ITAB, local and provincial governments were collecting property tax revenues from First Nation lands
and assuming none of the local expenditure responsibilities that would normally be associated with
those revenues. Instead, those responsibilities were seen as federal responsibilities. However, the
federal government assumed responsibility only for Status Indians on reserve. The responsibility for
delivering other services fell to the First Nation government which simply had no revenues to do this

This was the worst of all worlds. Taxpayers and service recipients were two different groups of people.
Some people received no services for their taxes. Others received services but from a centralized
bureaucracy which simply did not have the capacity to adapt to the hundreds of different circumstances
pertaining to First Nations across the country. The results were poor. First, we were under funded.
Second, we were actually subsidizing services elsewhere, despite the fact they had better services than
we did. Third, our land was not developed even close to its full potential. We did not have the means o
build infrastructure and were dependent on a government that had other priorities and was too far
removed to see the opportunities that were apparent at the local level. Not surprisingly, people were
unhappy and lacked confidence in government in general. Most First Nations did the only thing they
could do. They adopted a strategy of always looking to the federal government for more money as a
solution. We simply had no ability to build our own economies and the resulting tax revenues would
simply flow to another government in any case.

       Pre-Budget Submission                                                                              1
Our situation was an extreme example. However, it shows, in a nutshell is what happens when there is a
big discrepancy between who pays taxes and who pays for services. In the federal-provincial context it
is called a “fiscal imbalance” and I am not going to even venture an opinion about whether or not it
warrants a reassignment of revenue authorities between the federal and provincial government.
However, I recognize it as the same issue that ITAB has been working to change since its inception. I
would also like to say that addressing the First Nations fiscal imbalance would go a long way towards
correcting some of the federal-provincial issues that are your main focus.

The good news is that in the 1980s, we began to address the fiscal imbalance in the late 1980s. Since
the 1980s First Nations’ right to collect property taxes was recognized by the federal government.
Provincial governments, in some cases through legislation, agreed that they would vacate property tax
room whenever a First Nation chose to occupy it.

The results have been quite good. First Nations participating in property tax now collect more than $50
million per year and this continues to grow. Most of these First Nations have seen significant service
and infrastructure improvements, particularly with respect to water, sewer and roads. Many of these
First Nations have attracted significant investment. Most importantly, there has been a real sea change
in their thinking. Since, we began to correct the fiscal imbalance, First Nation tax administrations see
economic development as their route to better lives and not simply increased transfers. First Nation tax
administrations have a stake in the economic success of their regions. They have a stake in policies that
support investment.

However, the recognition of First Nation property tax authority was really only a start. We need to
consider the following facts. DIAND transferred about $5.7 billion to First Nation governments
in 2006. Other federal departments transferred roughly $2.8 billion on behalf of First Nations. By
contrast, First Nation governments collected about $50 million in property tax, $4 million in sales tax,
$200 million in resource royalties and approximately $250 million in other revenues, such as casino
revenues, lease revenues and the proceeds of First Nation government enterprises. This implies a
transfer dependency of over 90 per cent. That is a “fiscal imbalance” that far exceeds even the poorest
province in the country.

    Pre-Budget Submission                                                                                  2
We can correct this. We can work to extend the benefits of property tax so that more First Nations are
willing to collect it. We can work to expand First Nations’ revenue jurisdictions. Finally, we can work
to expand First Nations authorities and expenditure responsibilities in lock step with our assumption of
new revenue jurisdictions. This would allow us to take the blurring out of some of the financial
responsibilities on First Nation lands. It would create a connection between taxpayers and service
recipients that is the bedrock of good government and good accountability.

However, this is no easy task. Our fiscal imbalance was over a hundred years in the making. It was
created when legislation effectively removed First Nations from the economy and made us wards of the
state. A hundred years of transfer dependency has created a culture within First Nations and also the
Department of Indian Affairs that must both change.

The federal government recently passed the First Nations Fiscal and Statistical Management Act
(FSMA) with all party support. This will allow participating First Nations to collectively seek a credit
rating and access capital for building infrastructure. These First Nations will be able to provide their
own water, sewer and roads. In support of this, we are working diligently to help First Nations do what
is necessary to receive a good credit rating. We are working with First Nations to help set up regimes
that would attract investment after the infrastructure is upgraded. We are working to help First Nations
establish a private housing market and a better system for providing land title certainty. Most
importantly, we are giving First Nations people a sense that the solution to our disparities lies in
economic development and not government transfers.

The 2006 Pre-Budget Submission outlines how we can build on this work and further reduce our fiscal
imbalance. It outlines measures that will allow First Nations to develop their economies and revenue
bases and move away from transfer dependency and towards taking authorities and responsibilities into
our own hands.

    Pre-Budget Submission                                                                                  3
                        The First Nations Fiscal Imbalance
The issue of the fiscal imbalance in Canada is generally framed as a debate around the assignment of
revenue room between the federal and provincial governments. Some argue that the federal government
controls more revenues than is appropriate given its expenditure responsibilities. Demand for provincial
expenditures such as health and education may be growing more rapidly than for federal expenditure
responsibilities and so the assignment of revenue authority must change to reflect this. Because of the
current assignment of revenues, some argue that there has been a gradual intrusion of the federal
government into areas of provincial responsibility with a commensurate loss of single point
accountability. There is a sense that government services do not reflect public priorities. There is a
tendency for provinces to devote considerable energy to seeking a larger share of federal revenues rather
than developing their own economies.

There may be some truth to these arguments in a federal-provincial context. However, there is
definitely some truth to these arguments in a First Nation context. First Nations are dependent on
transfers for over 90 per cent of their revenues which is well above the transfer dependency of any
province. Many of the transfers to First Nation governments are conditional and the sense that
government decisions do not reflect local priorities is much pronounced in First Nation country than
anywhere in the country. The incentive to seek government funds rather than develop an economy is
more pronounced. Both these factors have contributed to accountability issues.

There are two causes of this fiscal imbalance. First Nations have too little tax jurisdiction and we have
been unable to develop the revenue potential of our existing tax jurisdiction. The key to eliminating
these is threefold.

    1.       First Nations need the legal and administrative foundations to support an investment market.

    2.       First Nation need a fiscal and institutional framework to prove certainty over future fiscal
             arrangements so that they can assume tax room without fearing economic gains will be
             removed by transfer reductions

    3.       First Nations need improvements to the existing system of land title and infrastructure. This
             will allow them to promote private investment in business and housing.

    Pre-Budget Submission                                                                                   4
Addressing the fiscal imbalance afflicting First Nation governments would go a long way towards
addressing the fiscal imbalance between the federal, provincial and local governments. It is a significant
issue within the federal-provincial context. It forces migration from reserves to cities and exacerbates
the issues surrounding service responsibilities to Status Indians. It puts additional strain on provincial
infrastructure. It introduces distortions into the formulae underlying provincial transfers that interferes
with their intent. Finally, because First Nation population shares are rising quite rapidly in some
provinces, all these issues are growing more pronounced.

    Pre-Budget Submission                                                                                     5
                Market Failure on First Nation Lands
A root cause of the First Nation fiscal imbalance is market failure on First Nation lands. The investment
market has failed on First Nation lands. Investment is subject to prohibitively high facilitation costs and
as a result socio-economic disparities persist despite large public investments to address these.

Research sponsored by ITAB found that an investor will spend four to six times longer seeing a project
through from proposal to final approval when it takes place on First Nation land. This issue affects
every First Nation in the country and its removal is a pre-condition to creating more self sustaining First
Nation governments oriented towards good governance and accountability regimes.

The causes of high investment facilitation costs are not simple. ITAB research found that additional
costs arise at many different stage of the investment facilitation process. The complexity arises because
these costs have emerged for three different, but related, reasons:

1. The Indian Act effectively removed First Nations from the economic union and created the
    following impediments to investment. The Indian Act assigned governance powers to a
    bureaucracy that is far removed and does not have an investment agenda. The Indian Act created a
    system of property rights and land use decision making that is slow and does not provide certainty.
    The Indian Act structure has resulted in a considerable uncertainty about the assignment of
    jurisdiction and expenditure responsibilities among governments. The result has been substandard
    services and more uncertainty. The fiscal arrangements that currently support First Nation
    government do not create an incentive for First Nations development and they handicap First
    Nations with respect to the means for attracting investment.

    Pre-Budget Submission                                                                                 6
2. The removal of First Nations from the economic union for over a hundred years has created the
    second problem. There has been an atrophying of the expertise and governance policies that would
    ordinarily support investment. For example, until relatively recent times, there were very few
    investment specialists who specialized in capitalizing on First Nation opportunities. Similarly, there
    was little understanding of the imperative of investment within the Department of Indian Affairs or
    of what is required to facilitate investment. Policy was made without reference to its impact on
    investment. This same problem is even more pronounced within First Nations. The removal of
    First Nations from the economic union shifted the political orientation of First Nations almost
    exclusively towards strategies for securing more public resources. To our knowledge the “schools”
    teaching First Nations public administration do not even teach basic investment facilitation skills.

3. Finally, the atrophying of investment on First Nation lands has created conditions where people are
    unable to take advantage of business and job opportunities themselves. For example, they are
    unable to access home equity which is the principle source of equity for business startups. They
    have lacked exposure to work place experiences. They lack business contacts. The prevailing
    attitude is that job opportunities are produced by the public sector.

The key to creating market forces on First Nation lands is to simultaneously address all three types of
problem listed above. There have been attempts to address individual aspects of the issue. However,
these have been largely uncoordinated and piece meal. For example, consider the First Nations Land
Management Act. It gave First Nations jurisdiction to substantially streamline the process by which
developers get approvals to use land. This jurisdiction created the potential to provide investors with
substantially more certainty. However, most First Nations lack the awareness and capacity to use these
powers towards these ends. Similarly, there have been capacity building exercises aimed at improving
administrations. However, for the most part these were not driven by the imperative of developing a
sound investment climate.

Even if the first two issues can be surmounted, initiatives are still needed which will allow First Nation
members to take advantage of the resultant job and business opportunities and First Nations to take
advantage of the resultant fiscal opportunities. Without this last step, First Nations political support will
not be forthcoming.

    Pre-Budget Submission                                                                                  7
The urgency of this issue and its impact on the rest of Canada should not be underestimated. The fiscal,
economic, and political costs of market failure on First Nation lands are large and growing. We
estimate the economic costs of First Nation disparities will reach $20 billion per year by 2020 because
our share of the working age population is rising so sharply.

Investors on First Nation lands face considerably higher costs in terms of time and money when
choosing to develop on First Nation lands. Consequently, First Nation investments tend to be less
profitable and more risky. A First Nation attracts far less investment than other jurisdictions from an
equivalent investment of property tax revenues. It therefore earns a much smaller return from an
equivalent investment in public infrastructure.

High costs of investment facilitation are the underlying reason that Canada has been unable to
significantly improve conditions on First Nation lands. It is easy to recognize reserves because they
remain barren, even in vibrant locations. These costs also explain the familiar observation that monies
that flow into reserves will flow out quickly and without producing lasting benefit.

In the absence of a strategy that allows the investment market to work, it will be enormously expensive
to remove First Nation disparities. It would cost $12.5 billion in new annual funding to remove income
disparities for aboriginal people in 2006 with their present levels of productivity. By 2020 this number
will grow to over $20 billion.

Market failure on First Nation lands is imposing fiscal and economic costs on Canada in five ways.

    1.      First Nations people are impoverished. Poverty impacts the fiscal balance. High investment
            facilitation costs affect off reserve people as well as on reserve. Many migrate to cities
            seeking opportunity but are disadvantaged because they grew up in poverty. The poverty of
            these people creates direct fiscal costs because many social programs, such as income
            assistance, are poverty driven. First Nation poverty reduces the fiscal flexibility of all
            governments and directly impacts the federal government’s ability to improve the fiscal
            balance of the federation.

    2.      First Nation poverty impacts the fiscal balance of the federation indirectly. It impacts the
            equalization formula. Off reserve migration in search of employment impacts federal-
            provincial transfers.

    Pre-Budget Submission                                                                                  8
3.     Market failure on First Nation lands is the root cause of the underemployment of First
       Nation lands and people. First Nations lands and people are the most underemployed
       resources in Canada and also the fastest growing component of the Canadian work force.
       This means large losses of economic activity.

4.     Market failure on First Nation lands has made it more difficult to resolve issues concerning
       aboriginal title for major investment projects. High investment facilitation costs mean First
       Nations are less able to share in the induced investment that large investment projects bring
       a region. For example, the service industry that supports a large resource development deal
       will not locate on First Nation lands. This makes it more difficult to close deals where
       projects affect First Nations traditional territories.

5.     Any federal or provincial initiative aimed at reducing First Nation or aboriginal, economic
       and social disparities implies enormous program costs in the absence of greatly improved
       commercial and residential investment on First Nation lands. We estimate it would cost
       $12.6 billion to bring Status Indian incomes to the national average using income transfers,
       even assuming such a direct transfer program created no disincentive effects.

Pre-Budget Submission                                                                                9
                            ITAB 2006 Pre-Budget Proposals
The ITAB proposes the following agenda to the Finance Committee for addressing the root causes of
First Nation market failure and improving the fiscal balance of Canada:

    (a)     The Finance Committee should support for initiatives that provide First Nations with the
            fiscal means to undertake development initiatives such as developing infrastructure to a
            business grade and enough fiscal certainty to have an incentive to pursue this. The ITAB is
            proposing a specialized First Nation infrastructure program to provide part of the solution.

    (b)     The Finance Committee should continue to support initiatives such as the First Nation GST
            that increase First Nation revenues. We suggest a greater role for the FNTC in support of
            the First Nation GST to accelerate the take up by First Nations. The Finance Committee
            should also support initiatives that provide for more First Nation fiscal certainty. The
            federal government should commit itself to a formula based transfer system which explicitly
            links service standards on First Nation lands to those prevailing in the provinces. It should
            make this available to any First Nation which can meet specific qualifications with respect
            to governance. A formula should support a delineation of financial responsibilities among
            First Nation, federal and provincial governments. This would allow governments to provide
            greater certainty over the provision and policy pertaining to specific services.

    (c)     The Finance Committee should support for initiatives which raise awareness about the
            potential for economic development and what it required to realize it. The ITAB suggests
            that open market housing on First Nation lands should be one of these initiatives.

    (d)     The Finance Committee should support for initiatives which allow First Nations to create
            greater certainty over land use and title such as the proposed First Nation Land Title Act.

    Pre-Budget Submission                                                                                 10
A Specialized First Nations Infrastructure Program

The elimination of First Nation disparities will require substantial improvements in the economic
infrastructure of First Nations. Many First Nations are in situation similar to small communities during
the earlier development of Canada. They have growth potential but need a grant program so they can
develop infrastructure and begin to utilize it. Most of these communities were then able to become self-
sustaining after receiving this initial “leg-up”.

Federal investments in First Nation infrastructure could provide some of the highest social rates of
return available to federal infrastructure dollars and would make the goal of reducing First Nation
disparities more fiscally attainable. They would largely idle economic assets to work.

Unfortunately, even the most well situated First Nations have been slow to develop their economic
potential because they cannot finance infrastructure at the level required by business for insurance and
other reasons. The infrastructure problem has arisen because of policy, fiscal and capacity and

A major policy constraint is that existing DIAND policy is to not fund infrastructure improvements to a
business grade. There is considerable stove piping of funding which sometimes makes it difficult to
consolidate funding in order to build on the most efficient scale.

There are two major fiscal constraints: a lack of sufficient revenues and poor access to capital.
Regarding the first constraint, some First Nations have enough economic potential to become more self-
sufficient. However, they lack the funds necessary to undertake those initial infrastructure
improvements that would bring in investors and allow them to utilize this potential. Regarding the latter
situation, the situation will be improved when the FSMA comes into force. However, even after the
FSMA comes into force, First Nations will suffer from a substantial infrastructure deficit and still lack
access to sufficient revenue sources.

    Pre-Budget Submission                                                                               11
The capacity constraint is mainly related to infrastructure planning and management. First Nations have
little experience in developing the economic, capital and financial plans that support infrastructure
development in the rest of Canada. There are two reasons for this. First, most infrastructure development
to date on First Nation land is non-economic in nature and generally funded from one source. Second,
there is no support or training provided to First Nation administrations to collect and develop the
sophisticated planning tools necessary to justify a long term infrastructure investment and attract

The ITAB/FNTC is proposing that the Finance Committee recommend a First Nation Economic
Infrastructure program that addresses each one of these policy, fiscal and capacity constraints. In
particular, this First Nation Economic Infrastructure program should be tailored to First Nations who are
attempting to develop a positive investment climate for both on-reserve market housing and commercial

The program cost is estimated at $125 million over the next five years. The program should be delivered
in partnership with the ITAB/FNTC. The FNTC would work to ensure that funds do not subsidize what
the First Nation in the short term can finance itself. The FNTC would be able to ensure that the funds
are allocated based on a realistic estimate of the economic potential of the First Nation (the criteria
would be in addition to federal government criteria). The FNTC standards would provide that funds for
economic development are disbursed only to First Nations willing to undertake the policy changes that
are also necessary to attract and support investment.

The program should:

       Help FSMA First Nation complete the necessary economic, financial and capital plans
        necessary to support an investment grade credit rating for debentures issued by the First Nation
        Finance Authority

       Encourage First Nations to assume the First Nation GST (FNGST) authority by providing a
        matching FNGST grant to support economic infrastructure development

       Provide financial assistance to First Nations who need it to make initial investments in
        infrastructure that allow them to attract commercial investment or to implement open market

    Pre-Budget Submission                                                                                 12
       Provide an initial “top up” to First Nations who could benefit from large scale investment but
        need some initial resources to break the catch 22 of infrastructure financing

Supporting First Nations in implementing the First Nation GST

The First Nation Goods and Services Tax Act was enacted in 2003. This would allow First
Nations to collect revenues from all GST collected on their lands. Since that time at least 20
First Nations have either expressed an interest or actively pursued an agreement with Canada.
Seven First Nations in the Yukon implemented a First Nation Goods and Services Tax
(FNGST) in 2004. The Tsawout First Nation implemented their FNGST system on October 1st,

While a number of First Nations have expressed interest, the take up has so far been slow.
There are two reasons for this. First, for many First Nations there is insufficient financial
incentive to implement a FNGST. In response, the Conservative party promised in a letter to
the Congress of Aboriginal Peoples, to collect FNGST by matching the FNGST revenues
collected by First Nations. Second, the Department of Finance does not have the broad base
credibility with developing First Nations to broker a FNGST deal with First Nations in a timely

With respect to the second constraint, the ITAB and eventually the FNTC can help. ITAB has a strong
interest in developing First Nation tax bases and GST revenues would support this goal. ITAB has
facilitated the establishment of more than 100 First Nation property tax systems. Many First Nations
have also approached the ITAB to provide information and supportive services with respect to the GST.
During the last six months, the ITAB has helped in the ongoing negotiations concerning five FNGST

We propose four recommendations to the Finance Committee:

       Utilize the ITAB/FNTC to promote FNGST systems to First Nations as it does with property

    Pre-Budget Submission                                                                                13
       Provide the mandate to the ITAB/FNTC to develop model First Nation expenditure, financial
        administration, and possibly taxpayer relations laws to provide the legal framework for FNGST
        systems. This can be accomplished through agreement or legislative amendments to the FSMA.

       Develop a FNGST course to be delivered by Canada and the ITAB/FNTC. This course would
        provide training to implement the legal and administrative framework of the FNGST. It would
        also ensure sound economic and fiscal planning with respect to FNGST revenues.

       Direct that proposed FNGST matching funds be used to directly finance First Nation economic
        infrastructure as per the ITAB/FNTC infrastructure proposal and work with the FNTC and First
        Nation Finance Authority to establish the regulatory framework so that FNGST revenues could
        be used to securitize long-term First Nation infrastructure debentures.

Encouraging First Nation Home Ownership

Most Canadians make a fundamental connection to the market economy through the value and equity in
their home. Home equity is a significant source of start-up capital for new businesses. Citizens are
motivated to demand accountability, service and infrastructure improvements because it improves home
values. Homeowners are often more supportive of attracting investment to their region, because of its
impact on house values.

First Nations cannot make this connection to the market economy. They are, for the most part, unable to
earn equity from improvements in their homes and communities. The problem is that the system of First
Nation land tenure does not support a housing market. It does not allow owners to sell homes and does
not provide sufficient investment certainty to entice suppliers into building houses.

Nearly all Band member housing on reserve is currently being subsidized by federal transfers from
either CMHC or DIAND. Residents in this housing are unable to leverage their homes (assets) into
capital. There is little prospect of earning a return from improvements. In many situations, Band
governments do not wish to re-possess houses or evict residents and so there is little incentive to repay
rents or mortgages. The result is a stock of housing which deteriorates quickly, substandard
infrastructure in communities and people who cannot access capital to build family net worth or to start
businesses. The political incentive for First Nation governments is to expend resources lobbying for
more transfers to increase and improve on reserve housing.

    Pre-Budget Submission                                                                               14
The negative cycle can be broken by addressing the root cause of this market failure which is the lack of
tradable land tenure on reserve. Currently, with respect to residential property, there are three types of
tradable tenure on reserve lands: certificates of possession; Band owned homes; and long-term
residential leaseholds. Certificate of possession tenures are controversial in some communities but
generally politically easier to implement. However, over the medium term, long-term leasehold tenure
provides the best opportunity to break the cycle and provide a real home ownership option for First
Nations. The reasons are outlined below:

   Higher Value – The market for leasehold tenures is open to all buyers whereas only Band members
    are eligible to buy certificates of possession. The larger market for leasehold tenures yields higher
    values. For example, in Kamloops, leasehold homes on the Sun Rivers development are worth at
    least 6 times more than certificate of possession homes down the street.

   Marketable Asset – Financial institutions are much more willing to provide mortgages to leasehold
    tenure homes than certificate of possession homes. They will appreciate in value more easily and
    they are easier to liquidate in the event of a foreclosure.

   Maintenance Costs – Leasehold tenure homes have lower maintenance costs. Homeowners are
    more motivated to maintain leasehold houses. Leasehold houses are not tied to the fiduciary
    obligation so homeowners are self reliant and maintain their own properties

   Service Costs – Leasehold homes would pay property taxes to the First Nation government to pay
    for local services. Certificate of possession homes generally do not pay property taxes.

The benefits of leasehold tenure would be enhanced through the development of a First Nation Land
Title system described below. In particular, certainty of title would reduce the risk that often leads to
short terms of leasehold tenure.

We are proposing 3 recommendations to the Finance Committee to establish open market housing
through long term leasehold on First Nation lands:

           Establish a $250 million 5 year First Nation mortgage support program for leasehold houses
            to get first time First Nation homebuyers into the market. This will lead to over 5000 new
            homes being build on First Nation lands and the on going servicing and maintenance cost to
            Canada will be nothing and,

    Pre-Budget Submission                                                                                   15
            Utilize the successful Sun Rivers model in Kamloops to help First Nations establish the
             institutional framework (model lease, development and servicing agreements) necessary to
             support long-term leasehold residential tenure.

            Develop a First Nation Land Title System so that First Nations can provide greater
             certainty, reduce the transaction costs associated with land transfers and create a fee simple
             equivalent tenure system.

First Nation Land Title Legislation

The current methods for securing title on First Nation lands and the Indian Lands Registry are
inadequate. They do not provide sufficient title certainty. This is true regardless of who invests (First
Nation and non-First Nation) and regardless of the type of investment (commercial or residential).

The consequences of poor land title have been profound. Land certainty is the bedrock of the
investment and financial markets. Its absence has deterred investment and greatly lowered land values
on First Nation lands. It has slowed and even prevented the development of a housing market on First
Nation lands. It has resulted in valuable lands being put to very low value uses.

Poor land title has skewed the political orientation of First Nations. For example, poor land title has
meant that no real housing market has developed. As a result, First Nation persons have been far less
able to earn equity from their homes. The immediate political consequence is that First Nation persons
have invested less in their homes and in community infrastructure. They have been less supportive of
development which would raise house values in other circumstances. They have also been far less able
to access capital in order to take advantage of business opportunities since home equity is a significant
source of start-up capital. The end result of this is that the political constituency that supports
development and self-sufficiency has not been able to develop within First Nations.

Poor land title has also created political difficulties, created administrative costs and raised the costs of
doing business on First Nation lands. The current system is poorly coordinated with electronic or hard
copy surveys and this significantly increases the cost of and time for title searches that are necessary for
land transactions. Furthermore, the inability to register interests and create indefensible title has meant
there are few or no remedies for disputes relating to estates and matrimonial property.

    Pre-Budget Submission                                                                                   16
The economic impacts of unclear property rights are clear. Poor land title and registry systems have
been thoroughly analyzed and their implications clearly explained in Hernando de Soto’s Mystery of
Capital. Many observers have pointed out the parallels between the situations described by de Soto in
the developing world and First Nations in Canada. Not surprisingly, the result is the same in both
situations, Third World conditions.

It is recommended that the Finance Committee support the development of First Nation land title
legislation. Based on experience with previous First Nation legislation, we believe that the cost of
legislative development and consultation will be $10 million over the next 3 years. The objectives of
this legislation should be to:

     Ensure First Nation jurisdiction on existing First nation Lands;

     Create First Nations lands that are as marketable and attract the same financing as non First
      Nation lands;

     Ensure that the registration of the interests in land is a priority;

     Contain a process for resolving competing interests in land;

     Protect matrimonial property;

     Include a requirement for surveys for all registered interests in land; and

     Integrate the land title system with land survey documentation.

     Replace the authority of the Indian Act over land registry;

     Facilitate the transition from the Indian land registry to the First Nation land registry;

     Facilitate a land title guarantee;

     Create an independent First Nation institution to operate a First Nation land registry so as to
      achieve economies of scale;

     Accommodate First Nations under the First Nation Land Management Act, self-government
      agreements or Treaties as well as those who are party to none of these agreements;

    Pre-Budget Submission                                                                               17
Summary and Costing of ITAB 2006 PBS proposal

The table below summarizes the ITAB 2006 PBS proposals.

       Proposal                                  Benefits                                    Cost
Specialized                More First Nation capacity                           $125 million over 5 years
Infrastructure Program
                           More First Nation transparency and information
for FSMA First Nations
                           More First Nation economic infrastructure
                           More investment on First Nation lands
                           More First Nation independent revenues
                           More First Nations using FSMA institutions
FNTC mandate to            More First Nations collecting sales tax              No Cost
include sales tax
                           Regulatory structure for First Nation sales tax
                           Use of sales tax for debentures
Open Market Housing        Home equity and wealth transfer                      $250 million over 5 years
                           Opportunity to finance businesses
                           Four times as many homes built compared to social
                           No on-going maintenance or service costs
First Nation Land Title    Higher First Nation land values                      $10 million over 3 years
                           Land title certainty for individuals and investors
                           Remedy for disputes relating to estates and
                            matrimonial property

    Pre-Budget Submission                                                                                   18
                    Appendix How to implement Market
             Orientated First Nation Policy Changes
Advancing a First Nation policy agenda focused on market solutions is challenging for four reasons.

To begin, First Nations cannot compete for private investment with other jurisdictions largely because
they were removed from the Canadian economic union through the Indian Act over 100 years ago.
However, bringing First Nations back into the economic mainstream will require more than simply
changing the Indian Act. This long removal means that structures that support the investment market
and allow people to act on market opportunities have declined considerably in a First Nation context.
These structures will need to be rebuilt. Finally, the political constituency that would ordinarily support
such policies is only emerging in First Nation country.

Second, the mandate for these types of policy changes is often broad and unfocussed. Laudable policy
objectives articulated at the political level are not translated into clear policy initiatives. This provides a
great deal of latitude to bureaucracies to design and implement policies, programs and legislation.
Unfortunately, the Indian Affairs bureaucracy is primarily a delivery agency for social programs and
seldom has the inclination or capacity to develop reforms that allow the market to operate.

Clear policy objectives, clear instructions to the bureaucracy and an “optional” approach have
characterized successful aboriginal policy changes. These conditions characterized the implementation
of First Nation property tax systems in the mid to late 1980s. There was a clear objective to facilitate
property tax jurisdiction. There were clear instructions to change specific sections of the Indian Act led
by a focused and supportive Minister and bureaucracy. The policy change was implemented
incrementally – First Nations could pass a property tax by-law at a time of their choosing.

Third, First Nation governments fear the loss of current entitlements. Many are deeply mistrustful of
aboriginal policies advanced by other governments. Even economic development itself is a controversial
goal because many First Nations fear it masks an agenda for the federal government to abandon its fiduciary
obligations. These apprehensions are exacerbated because there is little business constituency within First
Nations and no economic focus in most institution driven First Nation training.

    Pre-Budget Submission                                                                                     19
These apprehensions make it politically difficult for aboriginal governments to pursue an investment
orientated policy agenda. However, it is not impossible. The key to overcoming these difficulties is to
offer an optional approach that can clearly speak to identified community needs. New aboriginal
policies must be clear and ideally should be demonstrated through a case study or pilot project. It is
crucial to work with a cadre of aboriginal leaders who support market solutions in order to advance an
economic policy agenda.

Finally, First Nation governments often lack the administrative, legal or professional capacity to
implement policy changes that support investment facilitation. Much of the necessary policy and legal
work is initially expensive to develop. However, once developed, is often applicable to First Nations all
across the country. However, rather than take advantage of this work, most aboriginal governments are
forced to repeat this expensive policy development process because there is no national forum to share
model laws and administrative systems. Moreover, there is little institution-based training that provides
aboriginal investment facilitation training or general awareness of the principles of economics and
public finance.

Stated concisely, the recipe for implementing market oriented First Nation policy change is as follows.

    A. The federal government must support market orientated policy change within the context of a
        clear, incremental and beneficial deal to First Nation governments. For example, some First
        Nations supported the FSMA accountability agenda because they realized it improved their
        credit rating and their investment climate. It is worth noting that the FSMA accountability
        system is compatible with all the objectives of the Federal Accountability Act.

    B. First Nation leadership is required to broker the deal and communicate its policy implications
        with interested aboriginal governments. A group of First Nation leaders supportive of market
        solutions is beginning to coalesce around the opportunities presented by the First Nation Fiscal
        and Statistical Management Act. A more formal organization of First Nation leaders supportive
        of market approaches should be encouraged.

    C. First Nation institutions are required to institutionalize the deal. The DIAND institutional
        framework is ineffective and inappropriate. It has to be incrementally replaced with an First
        Nation framework that supports the investment facilitation policy agenda. This is precisely what
        the FSMA was intended to accomplish.

    Pre-Budget Submission                                                                                20
Expectations must be realistic. First Nation governments will adopt an investment facilitation policy
agenda incrementally. As it proves successful, understanding of, and support for this approach will
increase and a business constituency will develop. This is the story of First Nation property tax. Twenty
years ago, it was expected that only 20 First Nations would implement property tax systems. Today
there are 105 and 20 more are in development

    Pre-Budget Submission                                                                               21

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