March 15, 2005

A Recipe for Poverty

Millions of Canadians take the right to buy and sell their own home for granted. Yet on Canada's reserves, where land is held communally, aboriginals have been systematically denied this fundamental economic right for generations. In a four-part series beginning today, Tanis Fiss, director of the Canadian Taxpayers Federation's Centre for Aboriginal Policy Change, will explore the consequences of this obsolete land-use policy, and provide recommendations for reform.

The news from Natuashish is bleak. In 2002, the federal government spent $152-million relocating Labrador's Mushuau Innu to the newly constructed community, hoping the epidemic of unemployment, suicide and substance abuse that had plagued their decrepit Davis Inlet settlement would abate. But a recent in-depth investigation performed by the CBC shows conditions among the Innu are worse than ever. Drug and alcohol use is still rampant, the local economy is virtually non-existent, and now it is reported that $3-million in band funds have gone missing.

Sadly, Natuashish is all too typical of other aboriginal communities. Under the Indian Act, natives have been encrouraged to remain on reserves, where land is held in trust by the Crown and controlled collectively by band councils, not by individuals. This communal arrangement, which resembles nothing more than the collective farming model implemented disastrously under Soviet communism, stifles individual entrepreneurship: Because landholders do not own their property in fee simple, they may not obtain mortgage financing, the most common method for small business owners to raise start-up capital. Indeed, the arrangement gives landowners little motivation to improve their property or build equity of any kind within their community. The policy thereby stifles economic development, and promotes unemployment and ideleness - as well as the ills that follow in their wake.

Some reserves have attempted to promote economic development through so-called "customary" or "hereditary" rights. Under such an arrangement, some band councils allot parcels of reserve land to families and individuals who have lived on that land for a long period of time. However, such informal rights are more limited than the outright fee-simple ownership most Canadian property owners take for granted. In many cases, customary rights may be exercised only for residential or agricultural use, not commercial purposes. Moreover, although holdings can be passed on to heirs and subdivided among family members, they cannot be sold to an unrelated third party. Nor can they be siezed by banks or other financial institutions, which explains why they cannot be used as mortgage collateral.

Since it's the band that assigns customary rights, it's the band that handles any disputes that arise over ownership. (The federal government does not recognize customary rights, as such rights lie outside the purview the Indian Act). Since owners cannot invoke the powers of the Canadian legal system to protect their interest in a given parcel of land, they are liable to dispossession based on arbitrary or even corrupt decisions emanating from band councils.

The link between land ownership and prosperity is well-known to economists. Yet land reform remains elusive because Canadian governments and native leaders remains wedded to the idea that reserve land should be owned collectively. Courts have played a role as well. In 2001, for instance, the B.C. Supreme Court ruled in the case of Lower Nicola Indian Band v. Trans-Canada Displays Ltd. that a band council holds a fiduciary obligation to all band members, and must therefore consider the rights of other band members in decisions involving the use of property.

In the Nicola case, a band member had claimed possession of 80 acres of reserve land based on customary use, and had entered into an agreement with a company to display billboards on that land. After his death, his estate claimed the property. The court, however, held that customary use did not create a legal interest in the land; and that until permission was given by the band or the government, the company displaying billboards would be deemed to be trespassing on reserve lands.

It is also common for disputes to arise over property rights during divorce proceedings. Courts trying to divide up on-reserve property have no recourse to provincial family law, but must instead rely on the federal Indian Act, which contains no provisions for distribution of property upon the breakdown of a marriage. In normal situations that arise off-reserve, a house can be sold and the proceeds split between divorced parents. That is usually impossible on reserves. And because tribal councils often side with the ex-husband in domestic disputes, it is not uncommon for wives to be turfed out of their homes, and off the reserve entirely.

For all of these reasons, it is clear that customary rights are a poor way to manage the private use of land on aboriginal reserves. Over the next three days, I will discuss ways to reform the current system in a way that protects the rights of landholders and the autonomy of tribes alike.

A Step Toward Better Native Housing

Millions of Canadians take the right to buy and sell their own home for granted. Yet on Canada's reserves, where land is held communally, aboriginals have been systematically denied this fundamental economic right for generations. In this second installment of her four-part series, Tanis Fiss explains the benefits of Certificates of Possession, a mechanism some reserves have adopted in response to Canada's obsolete native land-use policy.

Pride of ownership provides a powerful motivation for individuals to improve their property. It explains why homeowners are willing to spend their weekends fixing their houses and mowing their lawns. The reason they do so is because the property is theirs and theirs alone. They own it in "fee simple" - that is to say, outright. As the well-known expression goes, no one ever paid money to wash a rented car. As a visit to a typical Canadian reserve reveals, such pride of ownership is absent in many native communities. Housing is dilapidated, and there is little evidence that occupants care much about their properties.

Needless to say, this is not a reflection of aboriginals themselves, but rather an indictment of our government's native policy: Federal law does not permit those who live on Indian reserves to own their homes in fee simple. Since they cannot sell their houses to recover their investments, residents have no economic incentive to spend money on improvements. For the same reason, there is no reason for housing developers and other entrepreneurs to create new building stock for private buyers.

This explains why a 2003 federal Auditor General (AG) report found there was a shortage of 8,500 houses on Canada's Indian reserves - despite the fact the federal government spent $3.8-billion over the past decade on native housing.

As things currently operate, the Department of Indian Affairs and the Canada Mortgage and Housing Corporation (CMHC) transfer federal housing money directly to native band councils. From there, it is up to the chief and council to determine who gets a new house or repairs. As one would expect in any system in which material benefits are dolled out by unaccountable leaders, bald-faced favouritism is common. In many cases, reserve residents complain, one must be connected to the band council in some way in order to obtain new or improved housing.

Even well-intentioned native leaders have difficulty fulfilling their oversight responsibilities. For instance, band councils are supposed to ensure that any new housing meets National Building Code standards. But bands often have no way to ensure new housing meets these codes, which helps explain the high percentage of substandard housing.

The average non-native homeowner can walk away from a housing purchase if the dwelling is poorly constructed: In a free market, he has a thousand other homes from which to choose. But on reserves, residents have no choice: Like the citizens of some bygone communist regime, they must take what their political masters give them, whether its falling apart or not.

Because fee-simple ownership of reserve land is forbidden, systems of what may be called "quasi-ownership" have emerged. One such system, customary rights, was discussed in yesterday's column (along with its various flaws). Another more promising alternative is the allotment of "Certificates of Possession" (COP). When a band issues a COP, the landholder is deemed to have an interest in the property he inhabits. This interest may then be used to apply for mortgage financing, which, as noted yesterday, is otherwise unavailable to reserve residents.

In return for a loan, a holder of a COP transfers his certificate back to the issuing band as collateral. The band then enters into an agreement with CMHC by which it pledges to assume the mortgage in the event of a default. Since COP holders can be dispossessed if they do not meet their repayment schedule, they will generally be motivated to comply with the terms of their loan. Once the mortgage is paid off, the certificate is transferred back to the individual.

Certificates of Possession are a stronger and more valuable form of property rights than customary or hereditary ownership: Canadian courts will enforce the rights and obligations associated with COPs, whereas they typically will not in the case of customary rights. And since land held under a COP can be subdivided, left to an heir or sold to another person having a right to reside on that reserve, certificate holders tend to assume the mindset and habits of a true property owner.

Many native bands across Canada have been motivated to issue Certificates of Possession because they are a means to bring more funding to the reserve. Moreover, the economic value that inheres to COPs provides an enticement for younger band members to stay on-reserve. In some parts of Canada, internal real estate markets powered by COPs are thriving. The Six Nations Band in Ontario, for instance, has issued over 10,000 COPs.

In sum, Certificates of Possession are win-win-win: Bands are able to secure more income; residents become eligible for mortgage financing; and Canadian taxpayers are relived of some of the burden associated with the constant replenishment of native housing stock. One can only hope that more of Canada's reserves follow the example of the Six Nations band.

Wrapping Native Land in Red Tape

Millions of Canadians take the right to buy and sell their own home for granted. Yet on Canada's reserves, where land is held communally, aboriginals are systematically denied this right. In this third part of a four-part series, Tanis Fiss explains how bands are subject to costly restrictions that limit their ability to lease tribal property.

As I have described in the first two parts of this series, land on Indian reserves cannot be bought and sold in the usual way. As a result, native bands that wish to transfer their property to an outside party are forced to rely on a variety of indirect leasehold arrangements.

These leases allow native bands to temporarily "designate" or "conditionally surrender" reserve land to the federal government. The government then leases out the land to a third party, which may subdivide and sublease the property. These complex arrangements are a poor substitute for the straightforward commercial arrangements that Canadian landowners and entrepreneurs are able to freely pursue off-reserve.

The process native bands face is cumbersome. Before it can enter into a lease agreement, the band must obtain the approval of the majority of its members. And since Indian reserve land is held in trust by the Crown, native bands must also seek the approval of the Minister of Indian Affairs.

Once all the T's have been crossed and the I's dotted, the band typically receives less money than it would have if the land were privately owned: Because of the cumbersome protocols that surround the development of native land, its value is diminished in the eyes of would-be business partners.

When conflicts arise, their resolution is often held up by the Department of Indian Affairs, whose bureaucracy is as inefficient as any other. Consider, for instance, the long and tedious landlord-tenant dispute between the Musqueam Band of British Columbia and 73 tenants who leased homes in Musqueam Park. The tenancy was rooted in a 1965 conditional surrender agreement involving the band, the Musqueam Development Corporation and the federal government. According to the terms of the 99-year leases, a rent review was to take place after the first 30 years, in 1995. Until then, each leased lot had its rent pre-determined, and the average annual lot payment was $338. After 1995, the lease rents were to be hiked to 6% of the current value of the lots.

But in 1995, the Federal Court of Canada intervened, overrode the lease agreements, and set new rents - at an average of $10,000 per lot per year. How did the court arrive at the new figure? It used the steep rise in property values in neighbouring west Vancouver as a guide to the appreciation on applicable Musqueam lands - and then discounted the reserve lands' value by 50%.

Why the discount? The court argued that the muddled legal situation surrounding the land makes it worth less than similar land off-reserve.

After a series of appeals, this result was confirmed by the Supreme Court of Canada. In his ruling, Justice Charles Gonthier admitted that the government's many restrictions on the sale and use of reserve land substantially drives down its value.

Of course, in any normal commercial situation, prices are decided by supply and demand, not courts. But under our patronizing land use policies, we have decided that native bands cannot be trusted to manage their own properties like private landowners. And we have laid down such a thicket of regulations and prohibitions on what they can and can't do that their property has been stripped of fully half its value.

This is unacceptable. Land is a fundamental asset for any community - no more so than for native bands, which often have little else of value to sell or lease. If our federal government truly wants to help aboriginals, then it should give them the freedom to buy, sell, lease and manage their land like the rest of us - without government intermediation and interference.

Let Natives Choose

Millions of Canadians take the right to buy and sell their own home for granted. Yet on Canada's reserves, where property is held communally, aboriginals are systematically denied this right. In this final instalment in her four-part series on the subject, Tanis Fiss calls on the federal government to end its patronizing native land-use policies.

Since 1997, the Canadian Taxpayers Federation (CTF) has been urging the federal government to implement a system of private property ownership on Indian reserves as a means to empower natives and reduce poverty. Regrettably, this idea has been rejected by a majority of native leaders and activists. They claim that the concept of communally held property is a basic tenet of aboriginal life.

But as Montana State University professor Terry Anderson has shown, this isn't true: Prior to European contact, North American Indians were well-versed in the notion of private ownership. The Machiacan Indians of the Northeast, for example, bequeathed rights to well-defined tracts of garden lands along rivers, and marked beaver-trapping territories by carving family symbols on trees.

These natives understood a basic principle: Economies function best when property is privately owned. Prof. Anderson's work proves this principle applies to modern-day Indians. He has shown that individually allotted Indian lands in the American West are more productive than tribally or federally controlled Indian lands.

To make Canada's native reserves prosperous and self-sufficient, we must take this lesson to heart. Private property rights that are stable and transferable have been the foundation for wealth creation in virtually every society on earth. It is scandalous that we would systematically deny the benefits of a market economy to reserve-resident aboriginals, the poorest segment of Canadian society.

The root of the problem lies with our Indian Act, a vestige of the 19th Century: Aboriginals who live on reserves cannot own their land. Even the tribes themselves cannot own the land. Instead, the land is held in trust by the Canadian government.

It is true that native Canadians aren't forced to live on reserves. But the various incentives offered to reserve residents, such as tax exemptions and free housing, discourage them from leaving. As I've noted previously, a major problem with the current scheme is that reserve-resident aboriginals are prevented from mortgaging their property in the usual way. This policy deprives them of a mode of financing that is commonly used by other Canadians to start businesses.

Reserve land is difficult to mortgage because a mortgagee cannot enforce his or her interest against the land in the event of a default. Section 89 of the Indian Act states: "Subject to this Act, the real and personal property of an Indian or a band situated on a reserve is not subject to charge,pledge, mortgage, attachment, levy, seizure, distress or execution in favour or at the instance of any person other than an Indian or a band." The original intent behind this provision was laudable: to protect native Canadians from exploitation and from loss of land due to seizure. But
intoday's world, this section only scares off potential investors and business partners, and is based on a view of native Canadians as incapable of participating in our economy as equals. Canada's progressive culturevenerates the respect for the land instinctively exhibited by Indians. So why don't we trust them to manage their own lands properly?

Aboriginals' inability to own their property affects their private rights. But this private problem has created a very public crisis on reserves. Since economic activity is so severely curtailed, development depends almost wholly on public money funnelled through band leaders. The few businesses and jobs that do exist on many reserves are thus beholden to the band council - a recipe for corruption.

It is demeaning to Indians for the federal government to continue to hold title to Canada's Indian reserves. We should let aboriginals themselves decide - on a band-by-band basis - whether their long-term interests are to be achieved through the private ownership of land, or the existing collectivist approach. Until we give them this freedom, they are doomed to a life of dependency on government handouts.