Thursday, February 18, 2010

A non-profit board risk management checklist

Sitting on a non-profit board: A risk management checklist for lawyers
© 2010 Lawyers’ Professional Indemnity Company.

Serving as a director of a charitable or not-for-profit corporation can be a rewarding but potentially risky experience. A director can be held personally liable for his or her own actions or failures to act, as well as jointly and severally liable with the other members of the board of directors.
Directors with specialized knowledge and expertise, such as lawyers, are held to a higher standard of care. LAWPRO’s standard professional liability insurance policy provides coverage only for the “professional services” that a lawyer provides as a lawyer. It does not provide coverage for liability arising as a result of a lawyer’s actions as a director.

Accordingly, here are some questions you should ask yourself before serving as a director on the board of a charity or not-for-profit organization.

1. How well do I know this organization? Does it engage in activities that have an especially high risk of attracting legal liability?

2. What are my motivations for joining this board – business, personal, community service, etc.?

3. Will I be able to devote my time and energy to ensure that I fully meet my obligations in this role?

4. Do I understand the risks and responsibilities that come with directorship? Am I aware of the statutory and common law liabilities that I may be exposed to?

5. Does my firm have a policy regarding its lawyers serving on the boards of charities and not-for-profits?

6. Is the charity or not-for-profit organization a client of my firm? If so, does my firm have a policy regarding its lawyers serving on the boards of charities and not-for-profits that are clients of the firm?

7. Will the charity or not-for-profit organization agree to indemnify me for liability arising out of my role as director?

8. Does the charity or not-for-profit organization maintain directors and officers (D&O) insurance to protect me from personal liability arising out of my role as director?

9. If so, what are the details of this D&O insurance? What policy terms, conditions and exclusions are likely to apply? What are the limits of liability per claim and in the aggregate?

10. Is there an outside director liability (ODL) insurance policy in place that may respond to claims against me arising out of my directorship? If not, should I purchase such insurance, whether from the Canadian Bar Insurance Association (CBIA) or through my insurance broker?

11. Is there any other insurance in place or optional coverage that may be purchased that may cover my activities as director? Have I consulted my insurance broker? (Note: LAWPRO’s optional excess insurance policy does not provide incidental D&O coverage, but some excess professional liability insurance policies may do so. If so, does that coverage “drop down” to afford primary protection?)

Monday, February 15, 2010

GAAR

Every now and again an acronym is also onomatopoetic, and I would think that "GAAR" qualifies. The acronym means the "General Anti-Avoidance Rule" and the onomatopoeia comes with the noise made by a taxpayer who has had a tax plan disallowed by the Canada Revenue Agency [CRA] under the GAAR despite the plan's technical compliance with the tax laws.

What is the GAAR, according to the CRA?

The GAAR is really just Part XVI "Tax Avoidance" of Canadian Income Tax Act, (ss. 245 and 246).

In that Part the government creates the concept of an "avoidance transaction", which it defines as "a single transaction or one that is a part of a series of transactions where the single transaction or the series results directly or indirectly in a tax benefit, unless the transaction is carried out primarily for bona fide purposes other than to obtain the tax benefit". (CRA IC88-2, "General Anti-Avoidance Rule - Section 245 of the I.T.", an information circular "to provide guidance with respect to the application of the general anti-avoidance rule". )

What exactly is the GAAR, in non-legalese?

The best description I've ever seen is that provided by Osgoode Hall Law Student Mr. Ankur Bhatt:
A fundamental tenet of Canadian tax law...is that a taxpayer is entitled to make any lawful arrangement that he or she sees fit in order to reduce his or her liability to tax. The General Anti-Avoidance Rule (”GAAR”), at s. 245 of Canada’s Income Tax Act, has greatly confused this once-clear principle. While “tax evasion” is the general term for efforts to not pay taxes by illegal means, what is known as “tax avoidance” is the otherwise not illegal navigation of the tax regime to reduce tax payable. The GAAR, as its name would suggest, stands as a general damper on the latter. The rule entails that, even if one follows to the letter the (other) rules as laid out, the government may feel fit to disregard such compliance and levy the tax that it deems would otherwise have been payable had such (other) rules not been taken advantage of. Specifically, the benefit of a tax avoidance transaction may be denied if, pursuant to s. 245(4), the transaction constitutes a “misuse” or “abuse” of the tax-related provisions it utilized.

Noted tax law scholar Vern Krishna related the gist of general anti-avoidance legislation at a recent lecture competition:
The law allows you to do something. You do it according to the law, and take advantage of the law, and then somebody says, “No… that was not very nice. You went too far.” And you say, “How far is ‘too far’?” And [they] say, “Well, we’ll tell you when we find out.” (Laughter.) But you say, “I need to know, because I need to plan in advance!” And they say, “No, you’ll find out in the fullness of time.” (Laughter.)
Thus, general fairness concerns of uncertainty, unpredictability, and retroactivity arise. Furthermore, having to do with but a property interest, general anti-avoidance legislation is not subject to Charter scrutiny under s. 7. As expected, the courts are left to divine the meaning of “misuse” and “abuse” under s. 245(4), demarcating the line between valid and non-valid arrangements of financial affairs.
[The quote is from "Copthorne Holdings: “Series of transactions” under the GAAR", "The Court", Osgoode Hall Law School, February 2nd, 2010. The "s.7" reference is to Section 7 of the Charter of Rights and Freedoms, which states: "7. Everyone has the right to life, liberty and security of the person and the right not to be deprived thereof except in accordance with the principles of fundamental justice".]

A problem: two not-in-sync SCC cases

The Supreme Court of Canada is there, amongst other reasons, to clarify the law. Unfortunately it has done rather the opposite on the GAAR.

In 2005 the Court, (in Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601) "effectively sanctioned the well-worn practice of tax avoidance, saying transactions structured to minimize what is owed to Caesar, as it were, don't per se constitute a breach of the law" ["General Anti Avoidance Rule - GAAR - CRA Loses Catch-All Case", Wednesday, October 26, 2005 from The Globe and Mail, reprinted at "Canada Offshore"], permitting "aggressive" tax planning. (Truth be told, such complex plans are rarely available to small businesses, who even more rarely have the time, volume of gross income, or piles of cash to hire the platoons of hyper-specialist tax accountants and lawyers necessary to even come up with the avoidance schemes.)

In 2009, however (in Lipson v. Canada, 2009 SCC 1, [2009] 1 S.C.R. 3) "the Supremes" (as they are often cheekily known) stood for instead of against application of the GAAR: "The approach to determining whether a transaction resulted in a misuse and an abuse for the purposes of s. 245(4) of the Act required the court to first interpret the provisions at issue to determine their essential object, spirit and purpose. The second step in the s. 245(4) analysis was to determine whether the avoidance transaction frustrated the object, spirit or purpose of the provisions. Where a tax benefit resulted from a series of transactions, any individual transaction became relevant in ascertaining whether it gave rise to an abuse of the provisions of the Act. The GAAR applied even where abuse was an indirect result of a transaction. Thus, a court had to refer to the `overall result' of the transactions, rather than the `overall purpose', which may incorrectly imply that the taxpayer's motivation or the purpose of the transaction was determinative."

There are two things of interest to me in the Lipson decision.

First, the decision was an odd and narrow (4-2-1) split decision with a short bench of seven, made without the benefit of the Chief Justice MacLachlan, who is arguably the Court's best tax specialist: please see "Supreme Court Hands CRA Biggest Ever GAAR Victory In A Cliff-Hanger", (19 January 2009, Article by William I. Innes, Chia-yi Chua and Carman R. McNary, Fraser, Milner, Casgrain, LLP) for further details and commentary.

Second and worse: unlike the Canada Trustco case, Lipson was an "aggressive" tax plan that was created by ordinary taxpayers: a taxpayer and his wife who structured a loan transation for a family residence using financing arranged around the purchase of shares in a family corporation; the share loan was $562,500 and the mortgage was $562,500. (Please see the Lexis-Nexis/Quicklaw Digest for the Lipson case to obtain a useful summary. The explanatory quotation above is from that Digest.) Canada Trustco, by contrast, was a "complex sale-leaseback transaction" of high value and potentially wide application. I can't shake the concern that one judicial standard is being applied to rich corporate taxpayers while a more rigid and demanding one is being applied to ordinary people. What will be of interest will be to see whether the harsher Lipson standard will be applied to future corporate tax arrangements such as the one found in Canada Trustco; if it is then the class bias concern will be negated. What will also be worth following is whether or not the law will alter course for a third time: it is possible that the SCC will accept a GAAR case to clarify any uncertainty.

Until the matter is clarified, however, I will be wary of an American-style tax standard where the tax avoidance tune is okay if done with complex scores played by expensive orchestration, and impermissible if done in simple chords.

What can you do to avoid a problem?

If you are engaged in aggressive tax planning, one option is to go to the CRA, where "Revenue Canada, Taxation will issue advance rulings with respect to the application of the general anti-avoidance rule to proposed transactions and will publish summaries of the facts and rulings in those cases that will provide further guidance where the rulings themselves are not published. In order to ensure that the rule is applied in a consistent manner, proposed assessments involving the rule will be reviewed by Revenue Canada, Taxation Head Office." One should, however, consult with a tax law and accounting specialists to ensure that (a) the proposed tax arrangement meets the laws as they stand, and (b) whether it is prudent to obtain a predetermination at all.


Further reading:

"Anti-Avoidance Provisions, Including GAAR" - CA School of Business

"The Year in GAAR", Fasken Martineau Taxation Group presentation by Alan Schwartz and Louis Tasse

Sunday, February 14, 2010

Quite. So.

TD Bank CEO Ed Clark [made]the following comments ... at a TD Ameritrade management conference in Florida last week:
"It will astound you, but there's a group called the Canadian Council of Chief Executives and we had a meeting two weeks ago, and almost every single person said, 'Raise my taxes, get this deficit done.' "
Nothing warms the hearts of Canadians more than hearing the CEO of a major corporation, especially a bank, calling on the government, as if on behalf of all Canadians, to "raise my taxes."
"CEOs unite for GST hike", Terence Corcoran, Financial Post. Saturday, February 13, 2010

Friday, February 12, 2010

When can you not fire an employee?

Well, the truth is you can fire any employee at any time for any reason .... if you are willing to pay the price that a court may award that employee for wrongful dismissal or such other cause of action. Most small business naturally don't have that kind of convenience money, and have better things to spend it on even if they did.

One of the better known and well-published labour law lawyers is Mr. Howard Levitt of Lang Michener, LLP.

He recently wrote a Law Note on "Dealing with Malcontents" in the workplace.

In that article he recommends a number of key points that employers "should consider ... before firing staff for subordination"
Is the order lawful? ...
How reasonable is the directive? ...
Is the instruction within the employee’s job functions? ...
Is the order clear? ...
Is it related to a significant issue? ...
Is there a reasonable excuse? ...

The full article is well worth a read.

Tuesday, February 2, 2010

Why do we have law at all?

"Law is born from despair of human nature."

José Ortega y Gasset

A good writer ponders a bad jury

“In the McFarland case, the defendant set up a plea of insanity and succeeded in proving himself a fool. And he was acquitted by a jury of his peers.”

Ambrose Bierce,
in a comment on a San Francisco case.