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Under Canada's Constitution, lands reserved for Indians are within the federal government's jurisdiction. As federal lands, they are not part of the tax base from which municipalities may draw property taxes.

A municipality may face a loss of property tax revenue when a reserve is created or added to, as a result of a land claim settlement or other legal obligation. In such cases, Canada's policy on Additions to Reserve (ATR) requires that a First Nation negotiate directly with the municipality on reasonable compensation measures. The purpose of compensation is to allow the municipality to adjust to the reduction in its tax base.

An agreement reached between the First Nation and the municipality may be as simple or as comprehensive as those parties decide is necessary. In some instances, municipalities have chosen not to request compensation for tax loss.

Canada's Additions to Reserve policy does not require a First Nation to pay compensation to the municipality for an unlimited time for the loss of property taxes. The circumstances of each proposal to afford land reserve status must be considered on a case-by-case basis. The following factors are relevant in determining a reasonable compensation payment for municipal tax loss:

• the gross amount of taxes currently assessed on the property in question, limited to the municipal share of annual taxes;
• any funds the municipality is receiving in provincial equalization payments;
• any savings the municipality may experience as a result of reduced delivery of services if the land receives reserve status;
• any increased municipal revenues resulting from service agreements negotiated with the First Nation if the land receives reserve status;
• the relative size of the property tax loss in relation to the total tax revenues of the municipality; and
• whether the municipal tax base was receding or expanding at the time of the proposed addition to reserve.

Prior to First Nation lands being granted Indian Reserve status, they are normally "held in trust" for the First Nation. The provincial Assessment Act requires a First Nation to pay taxes on lands held in trust, if purchased after November 25, 1997 (when amendments to the Assessment Act took effect). If lands were purchased in trust for a First Nation prior to that date, they may currently be exempt from property tax. Reasonable tax loss compensation would need to be made for lands held in trust purchased after November 25, 1997.

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