[1] The general anti-avoidance rule [hereinafter “GAAR”], found in Part XVI, section 245 Ss. 245(3) and (4) [Income Tax Act, R.S.C. 1985, c. 1 (5th Supp)], [hereinafter, the Act”], was enacted as part of the 1987 Tax Reform. It codifies the factual and legal requirements for the Minister of National Revenue to reassess a taxpayer for “abusive” tax avoidance.

[1] See, for example, XCO Investments Ltd. et al. v. The Queen 2005 DTC 1731 (TCC), at paragraph 40; (affirmed by 2007 DTC 5146 [FCA]), where Bowman, C.J. said “Where a specific anti-avoidance section covers a transaction but does not in the Minister’s view provide a remedy that the Moinister considers sufficient, section 245 is not there to permit the Minister to top up the remedy that the Minister believes to be inadequate.”

[1] Citing the Department of Finance’s Hisorical Explanatory Notes to the Act, Bill c-139; S.C. 1988, c.55, s.186; also, please refer to CCH Tax>Federal Income Tax> Canadian Income Tax Act>Historical Explanatory Notes to the Act>section 245>[General anti-avoidance rule]> (2) General anti-avoidance provision; also, please refer to The 2004 Federal Budget, Annex 9—Tax Measures: Supplementary Information and Notice of Ways and Means Motion (General Anti-Avoidance Rule)
Despite these consequences, this article is not meant as an apology for or against GAAR, nor is it an attempt to defend any particular perspective of what “non-abusive”—and hence, acceptable—tax avoidance is or ought to be. Rather, it is an attempt to prepare the international tax professional to grapple with the inherent difficulties of navigating Canada’s burgeoning doctrines regarding tax avoidance, predicated upon oscillating and competing perspectives and interests. While not meant as an exhaustive treatment of GAAR, it does canvass the progression of GAAR, as it relates to law and policy, drawing upon primary contributions of Parliament, the Department of Finance, the Canada Revenue Agency [hereinafter, the “CRA”], and the Supreme Court of Canada. Specifically, it is meant to serve as an introductory, concise, and yet eclectic guide to the most relevant concepts and concerns as they relate to Canadian taxpayers, both at home and abroad.
II. Inception & Evolution
The ironic tautology that marks GAAR’s evolution is that the very same judicial anti-avoidance principles enunciated by the Supreme Court over 20 years ago –the perceived misgivings of which were probably the catalyst behind Parliament’s enactment of GAAR–have now been reincarnated in today’s most seminal Supreme Court rulings, and are merely cloaked in an array of synonyms.

It would seem that a kind of schizophrenic legal duplicity is being forged over time. On one hand Parliament seems to have lacked confidence in the Supreme Court’s more expansive doctrinal approach to tax avoidance preceding GAAR. On the other hand, the Supreme Court seems to be shunning Parliament in a less than unanimous judicial repeal of Parliament’s intended restrictiveness to tax avoidance in GAAR, through legal hermeneutics and jurisprudential gymnastics. We are now two decades into a tug-o-war that challenges Canada’s monistic “rule of law” in general, and threatens Canadian tax law, in particular.
Ultimately, GAAR is more than a statutory remedial regime to prevent “abusive” tax avoidance. It is an over-intellectualized process of national catharsis, reflecting highly divergent interests, and cultural and philosophical attitudes regarding whether and to what extent there can ever be ethical tax avoidance, even given strict letter-of-the-law compliance.

See Stubart Investments Ltd. v. The Queen [1984] CTC 294, 84 DTC 6305 (SCC) [hereinafter, “Stubart”], where Estey, J.’s averred that an “object and spirit test” would serve as an effective anti-avoidance doctrine, which was their rejection to the predecessor doctrine, known as the “business purpose test”.

[1] See The Queen v. Canada Trustco Mortgage Company [2005] SCC 54 [hereinafter, “Canada Trustco], and Mathew v. The Queen, [2005] SCC 55 [hereinafter, “Mathew”].

III. Application: Practical & Theoretical
In the most pivotal judgment on GAAR, the Supreme Court in Canada Trustco formulated a trilateral set of interconnected requirements, all of which must be met in order for the Minister to justify GAAR as the remedy of last resort. These requirements seem, prima facie, clear and unambiguous, but, have been the subject of knitpicky debate and critical and evolving interpretation, which have sent GAAR into a tailspin of uncertainty. That notwithstanding, the author reminds the reader that while adequate terminological interpretation is vital, it is far beyond the scope of this work, and is still inconclusive at best. Plainly read, the conditions-precedent of GAAR are that there be:
(1) a tax benefit resulting from a transaction or part of a series of transactions (s.245(1) and (2), ITA);
(2) avoidance transaction/s, meaning that said transaction/s cannot have been reasonably undertaken or arranged primarily for a bona fide purpose other than to obtain a tax benefit; and
(3) a misuse or abuse, meaning that it cannot be reasonably concluded that said tax benefit deriving from said avoidance transaction/s would be consistent with the, spirit or object or purpose of the provision/s in the Act that the taxpayer relies upon.

Since the latter “misuse” or “abuse” provision (in subsection 254(4)) is the most important limitation on the application of the GAAR, it begs further consideration. It is designed to ensure that the rule will be applied only in those cases where a transaction offends or runs contrary to the intention or purpose (or object or spirit) of the provisions at issue. The Supreme Court further qualified this by proposing on several occasions that a textual, contextual and purposive approach to statutory interpretation was required for the purposes of determining the object, spirit or purpose of the provisions at issue. Importantly, the Supreme Court has placed emphasis on the object and spirit of the provision itself—without implicitly or explicitly presuming that economic substance must necessarily be inherent to the object, or spirit or purpose of every provision of the Act:
“In all cases where the applicability of s. 245(4) is at issue, the central question is, having regard to the text, context and purpose of the provisions on which the taxpayer relies, whether the transaction frustrates or defeats the object, spirit or purpose of those provisions.”

[1] There is now Supreme Court precedent that suggests that courts should not seek to give effect to an unexpressed parliamentary intention or purpose to restrict a clear and unambiguous provision. See 65302 British Columbia Limited v. The Queen, 99 DTC 5799 [SCC].

[1]  See OSFC Holdings Ltd. v. The Queen, 2001 DTC 5471 (F.C.A.), where the tax benefit does not necessarily have to be enjoyed by the party entering into the avoidance transaction.

[1] See Canada Trustco, at para. 66.

[1] Canada Trustco at paragraph 49.

It should be noted that in cases where GAAR was not at issue when interpreting the application of provisions in the Act, the Supreme Court has qualifyingly acknowledged the importance of, transactional economic substance.
The Supreme Court’s textual/provisional emphasis on a “misuse or abuse” should be juxtaposed with the economic emphasis of the Department of Finance, whose Explanatory Notes state that:
“[S]ubsection 245(4) recognizes that the provisions of the Act are intended to apply to transactions with real economic substance, not to transactions intended to exploit, misuse or frustrate the Act to avoid tax”. [italics added]
Further, the Court provided some general examples as to when the analysis will lead to a finding of abuse, or not:
“This analysis will lead to a finding of abusive tax avoidance when a taxpayer relies on specific provisions of the Income Tax Act in order to achieve an outcome that those provisions seek to prevent. As well, abusive tax avoidance will occur when a transaction defeats the underlying rationale of the provisions that are relied upon. An abuse may also result from an arrangement that circumvents the application of certain provisions, such as specific anti-avoidance rules, in a manner that frustrates or defeats the object, spirit or purpose of those provisions. By contrast, abuse is not established where it is reasonable to conclude that an avoidance transaction under s. 245(3) was within the object, spirit or purpose of the provisions that confer the tax benefit.”

[1] See The Explanatory Notes to Legislation Relating to income Tax, [“Explanatory Notes”], issued by the Honorable Michael H. Wilson, Minister of Finance (June 1988) at 464-465. Keep in mind, however that the Explanatory Notes state at the outset that they “are intended for information purposes and should not be construed as an official interpretation of the provisions they describe”.

[1] Canada Trustco at paragraph 45.

IV. Burdens and Boundaries
It seems clear that the court places the burden on the taxpayer to refute the existence of either a tax benefit or a/n avoidance transaction/s (which are understood to be questions of fact), and on the Minister to establish a misuse or an abuse (which is understood to be a question of law, and essentially the most important requirement).
As Canadian taxpayers shop beyond Canada’s borders for favorable tax jurisdictions to plan their affairs, Canada’s GAAR accompanies them with extra-territorial might. Foreign tax practitioners would be well-advised to inform their Canadian clientele that it is now well established that GAAR can, “potentially” , apply to treaties and that, whether successful or not, the CRA may try to even argue that treaty shopping, itself, is contrary to GAAR.
Not only, then, is the inception and evolution of Canada’s GAAR a 360-degree tautology, but so is the relevance of our national views of ethical tax avoidance relative to those of our tax treaty partners. There is an unrelenting effort by the CRA to construe treaties–otherwise silent on avoidance issues–as containing inherent anti-abuse rules, despite legal principles or tax court rulings to the contrary. Uncertainty may be a necessary trade-off for the prevention of abusive avoidance, whatever that means. But what is unnecessary is that Canada become a haven for uncertainty in the process.

Housing Works is led by President and CEO, Charles King, one of the preeminent leaders in the fight against AIDS in the United States. Stephen C. Mortfield, Director of HEDAC, along with Raymond Adelson, the Strategic Liaison between HEDAC and leading international charities, and Shy Kurtz, LLB, BCL, Charity Spokesperson and Chief Fundraising Consultant for HEDAC, spearhead this partnership; marking the first international collaboration and emergency response of this magnitude to the Haitian AIDS crisis since the earthquake.

This historic donation, consisting of antiretroviral, antifungal, and antibiotic medications, will enable immediate and ongoing relief for at least 500 Haitians. HEDAC has further committed that it will supply enough medication for several times that number of suffering Haitians—on an ongoing basis—upon Housing Works’ successful rollout of this first dispatch, which will include a collaboration with key international organizations. These openhanded organizations are already coming together to form larger and more efficient distribution channels so that delivery and need in the region will ultimately converge, leaving no man, woman, or child without access to medicine.

HEDAC chose Housing Works specifically for its phenomenal reputation, passion, and ability to recruit, organize, and mobilize distribution networks, and to locate, reach, and care for those most in need on the ground. Distribution will be closely monitored, tracked, traced, audited and reported, ensuring that medicines will finally be placed directly into the hands of those in need. HEDAC looks forward to a long and beneficial collaboration with Housing Works, and plans to continue extending its efforts in other life-prolonging and life-saving partnerships.

From over 83,000 registered Canadian charities, this donation serves to highlight HEDAC’s rank as the number 2 charity in Canada. Highlighted in terms of how much of one’s donation actually goes to the cause, as per the Canada Revenue Agency’s public statistics, as was recently showcased in the January 2010 issue of MoneySense Magazine.

HEDAC is quickly gaining international acclaim for the unrivaled success of its hybrid fundraising techniques, colloquially referred to as “the new philanthropy”. By relying on proprietary methods that combine mathematic, legal, and economic principles, HEDAC has created a never-before-used and efficient model to fundraise that stimulates the local economy, while helping the world. By aligning interests of donors and charities, and by merging for-profit with not-for-profit economies, HEDAC is putting theory into practice, benefiting from the new-age economies created for the purposes of donation, rather than for the purposes of consumption.

Individuals and corporations seek to generate maximum “income” in terms of absolute dollars, but aim to (hopefully legally) reduce their calculable “taxable income”. Ironically, this mental conditioning of legally reducing one’s declarable income, can stand in the way of corporate owners from maximizing the potential effects when participating in a (RPGA). I will tell you why.

First, corporate tax rates, ceteris parabis, are lower than individual tax rates. Second, RPGAs offer “credits” for individual taxpayers and “deductions” for corporate taxpayers. (Credits are typically valued at the highest combined marginal tax rate regardless of what tax bracket the taxpayer is in. Deductions, on the other hand, are only valued at the “reverse marginal” rate, meaning the rate at which every previously earned dollar is to be, or was, taxed in the hands of the taxpayer.) Together, this means that it is more advantageous when direct participation in such RPGAs is effected individually rather than corporately.

However, upon closer examination, if a business owner were to do the unthinkable, s/he could achieve the unimaginable. If, for example, instead of typically declaring a dividend (which is included in income preferentially) one has their company directly bonus all net earnings to them personally (thereby unthinkably increasing their declarable income maximally and at the higher personal rates yet), two things happen. First, there is nothing at the corporate level to tax. Next, they also increase their personal donation limit (based on 75% of their net income). This will now allow them to take advantage of the shelter to the maximum while also stripping the corporation tax free and repatriating all monies personally (not to mention effecting admirable donations)!

In tax, it is not the size of the projectile that counts but how you aim it. Killing two taxes with one RPGA—a fiscal double-whammy.

The “appeal process” is the term commonly used to refer to all stages available to a taxpayer to dispute a reassessment of their Notice of Assessment for a given tax year, which is often the result of a desk audit—as opposed to a field audit—(as is in  the case of tax shelters).

In fact, the “appeal process” comprises three processes:

[1] Audit Stage

[2] Objection Stage; and

[3] Tax Court Stage.

Most non-tax-shelter disputes with the CRA are resolved either at the audit or the objection stage. With tax shelters, the Tax Court presence the truest test of the appeal process.

In fact, a taxpayer cannot file an appeal to the Tax Court until certain steps at the audit and objection are completed. It is important to understand the audit and objection stage, therefore, in order to understand the Tax Court process.

Audits

An audit (or review) usually looks like this:

• A “taxpayer” (usually an “individual” and not a corporation in the context of tax shelter or RPGA participation) files a T1 return.
• The CRA usually issues a Notice of Assessment, with “due dispatch” (expeditiously) without an in-depth “audit” or “review”. This initial assessment does not indicate that the CRA is satisfied with the return. Initial assessment starts the three year limitation (statute-barred) period running. In general, absent a misrepresentation or fraud, the CRA cannot reassess an individual taxpayer more than three years after the date of the initial assessment, and keep in mind that it does take some time to commence, correspond, and complete an audit.
• For algorithmic reasons best known to itself (statistically determined), the CRA selects the taxpayer’s return for a review or audit. Where a taxpayer participates in a registered tax shelter, which has a tax shelter identification number (similar to a S.I.N.), the audit is actually of the tax shelter and not of the taxpayer; however, that is more semantic than it is real, as the result will be applied to the taxpayer relative to their quantum of participation in the shelter. What is important is that the audit, since it is only of the tax shelter, will not result in an audit of any affairs in the individual taxpayer’s other affairs.
• At this stage of discovery, the auditor’s powers are quite broad. In general, almost any question or any demand for documentation, as long as it reasonably relates to the taxpayer’s liability under the Income Tax Act is fair game. Throughout the review or audit, the taxpayer has the opportunity to rebut any suspicions or concerns the auditor might have.
• The auditor issues a proposal letter, which sets out the auditor’s proposed reassessment. The letter generally allows the taxpayer 30 days to make submissions against the proposed reassessment.
• After reviewing the taxpayer’s final submissions, if any, the auditor prepares an audit report (usually called a “Form T20?) that provides the factual and legal basis (based on facts and on law) for the proposed reassessment.
• The auditor’s team leader reviews and approves the form T20.
• A notice of reassessment is issued to the taxpayer, usually with a form T7W-C that summarizes the adjustments made by the reassessment. The reassessment replaces the assessment originally issued to the taxpayer, and it fixes the taxpayer’s liability for tax under the Act unless the taxpayer successfully disputes it by filing an objection or, if that step is unsuccessful, by filing an appeal to the Tax Court.

Objections

To dispute a reassessment, a taxpayer must file an objection. The taxpayer cannot appeal directly to the Tax Court. The following describes the objection process.

• The taxpayer begins the process by completing a notice of objection in writing and sending it by mail or delivering it to the Chief of Appeals “in a District Office or Taxation Centre” (see subsection 165(2) of the Act). The CRA has created a form for objections (the T400A), but the Act does not prescribe this form, and so it is not necessary to use it (see Lester v. The Queen, 2004 TCC 179, where a letter was held to constitute a valid notice of objection). To avoid confusion and to ensure that the objection is not misdirected somehow, it is advisable to use the CRA’s form. The objection must be filed on the day that is 90 days after the day of mailing of the notice of reassessment or, in the case of an individual or a testamentary trust, on or before the later of (1) the day that is 90 days after the day of mailing of the notice of assessment and (2) the day that is one year after the taxpayer’s filing-due date for the year for which the reassessment was issued. Section 166.1 of the Act allows a taxpayer to apply to extend the time for filing a notice of objection. The taxpayer, however, among other things must make the application within one year “after the expiration of the time otherwise limited by this Act for serving a notice of objection.” David Sherman, in his notes on section 166.1 in The Practitioner’s Income Tax Act, states that in the year ended March, 2004, the CRA accepted 91% of all applications made under section 166.1.
• The CRA sends a letter to the taxpayer (with a copy to the taxpayer’s representative) acknowledging receipt of the notice of objection. In Hamilton, it can sometimes take the local “District Office” (Tax Services Office) months simply to send such a letter.
• The Chief of Appeals assigns the objection to an appeals officer for review. The appeals officer reviews the objection, the taxpayer’s submissions, the tax return in question and the auditor’s report and working papers. The appeals officer also reviews the provisions of the Act, case law and the CRA’s own publications on the law.
• The appeals officer usually asks the taxpayer for further submissions or additional documentation or information.
• The appeals officer usually sends a proposal letter outlining the CRA’s position.
• The taxpayer can make final submissions.
• The appeals officer prepares an appeals report (usually on form T401) setting out the officer’s conclusions on the facts and law and the disposition of the objection. The officer can reverse, vary or confirm the reassessment under objection.
• The appeals officer’s team leader reviews and approves the report.
• The CRA issues either a new notice of reassessment and T7W-C to vary or reverse the reassessment under objection or a notice of confirmation confirming that the reassessment under objection was correct as far as the CRA is concerned.
• If the taxpayer wishes to dispute the new reassessment or the reassessment that was confirmed, the taxpayer can file an appeal with the Tax Court of Canada.

TAX COURT

1) Notice of Appeal

Description:

A taxpayer (the appellant) commences an appeal to the Tax Court by filing a notice of appeal and paying the appropriate filing fee. Among other things, the notice of appeal sets out the material facts relied on (but not the evidence), the issues to be decided, the statutory provisions relied on and the reasons why the appeal should be allowed (why the appellant should succeed).

Timing:

Within 90 days of the confirmation of the taxpayer’s notice of objection or a reassessment following objection; or more than 90 days after serving the notice of objection (where no confirmation or reassessment has yet been issued).

2) Service of notice of appeal

Description:

The Tax Court registrar serves the notice of appeal on the Department of Justice—the CRA’s lawyer (the respondent)—and sends a certificate of service to the appellant

Timing:

“Forthwith” after the notice of appeal is filed

3) Reply

Description:

The respondent (CRA/Justice) must file a reply to the notice of appeal. Among other things, the reply states the facts that are admitted by the respondent, the facts that are denied, the facts of which the respondent has no knowledge and puts in issue, the findings or assumptions of fact made by the Minister when making the assessment, any other material fact, the issues to be decided and the reasons why the appeal should be dismissed (why the respondent should succeed).

Timing:

The respondent must file the reply within 60 days after service of the notice of appeal and serve it within 5 days after the expiry of that 60-day period.

4) Answer

Description:

The appellant may (but need not) file an answer. Among other things, the answer identifies the new facts raised in the reply that are admitted, the new facts that are denied, the new facts of which the appellant has no knowledge and puts in issue and any other reasons the appellant intends to rely on. If the appellant does not file an answer, then he or she is deemed to deny all of the allegations of fact made in the reply.

Timing:

Within 30 days after service of the reply.

5) List of documents

Description:

Each party must file and serve a list of documents identifying all of the documents of which the party has knowledge at that time that might be used in evidence by the party. A party need not list every relevant document unless the parties otherwise agree or the court so orders. In general, however, both sides will ask for all relevant documents at the examination for discovery.

Timing:

Within 30 days after the close of pleadings. In practice, however, the exchange of the list can take months until the Court intervenes to impose a specific deadline.

6) Examinations for discovery

Description:

Each party is entitled to ask the other party any relevant question about the case either in written form or orally in front of a court reporter while the person answering questions is under oath. Discoveries should narrow the issues between the parties and allow each side to understand the other’s case.

Timing:

No specific deadline. In practice, the Court will often intervene to impose a deadline on the parties.

7) Undertakings

Description:

Frequently, a party cannot answer a question asked at an examination for discovery or produce a document requested. As a result, the party will “undertake” to provide an answer or produce the document at a later date. In addition, each party has an ongoing obligation to provide information subsequently obtained that corrects or completes an answer given on discovery.

Timing:

“Forthwith” after discovery. In practice, the Court will often impose a deadline on the parties for completing undertakings. The obligation to correct or complete answers subsists until the hearing.

8 ) Discovery of non-parties.

Description:

Sometimes neither party has all of the information needed to answer questions asked at a discovery. As a result, one or both parties can apply to the Court for an order requiring a third-party to attend and give answers under oath respecting matters relevant to the appeal.

Timing:

No specific deadline.

9) Written offer of settlement

Description:

A written offer of settlement is usually made to try to settle the appeal without a hearing. A party who makes such an offer and who succeeds at trial will usually try to rely on having made a written settlement offer to obtain a higher award of costs (reimbursement for having had to proceed to trial).

Timing:

At any time.

10) Joint application

Description:

The parties can apply jointly to the Court for a hearing date.

Timing:

After the close of pleadings. In practice, the parties will not apply for a trial date until after discoveries are complete.

11) Pre-hearing conference

Description:

The parties can apply to the Court for a pre-hearing conference at which a judge (who will not hear the appeal) can provide a frank assessment of each side’s case in front of the parties and with counsel present. The purpose of the conference is to encourage settlement or to narrow the issues between the parties. Where the parties have requested three or more days for a hearing, the Court will usually order a conference to try to reduce the length of the trial.

Timing:

After the appeal has been set down for hearing.

12) Hearing

Description:

The Tax Court sits in cities across Canada including Hamilton and St. Catharines. In Hamilton, the Court will usually use space at the John Sopinka Court House.

Timing:

As and when ordered by the Court.

13) Appeals are possible with leave to appeal up to the Supreme Court of Canada.

Note: Most cases are settled before they proceed to Tax Court

Interest, and penalties

Clock ticking during Objection and Appeal

Reassessed amounts are not subject to collection during the appeal process. In other words, you do not have to pay taxes under objection until you have had an impartial review by the CRA or, if you have filed an appeal, until the Tax Court of Canada has issued its decision. If the CRA considers that the collection of the amount is in jeopardy, the CRA will apply to the court for approval to start immediate collection action. Should you lose your appeal at the Tax Court of Canada, you may appeal the decision to a higher court. However, you will be required to pay the disputed taxes in full or post acceptable security. Furthermore, in the eyes of the CRA, interest will continue to accumulate during this period; however, if you pay and then prevail in the process, the CRA will return the interest plus prescribed interest. Should you lose, you will have stopped the interest clock. Should the taxpayer lose and did not pay the interest immediately upon reassessment, s/he can ask the judge that interest be waived.

Frivolity Penalty

The courts are empowered under section 179.1 of the Income Tax Act to impose a penalty of 10% of tax when an appeal proves to be frivolous or groundless and one of the main purposes for appealing was to defer the payment of tax.

Deductibility of Fees. Interest, and Penalties

When can a taxpayer deduct fees paid to contest an assessment or reassessment? As is usual in tax matters, the answer is neither simple nor obvious.

Paragraph 60(o) of the Income Tax Act provides that a taxpayer, in computing income for the purposes of the Act, may deduct:

amounts paid by the taxpayer in the year in respect of fees or expenses incurred in preparing, instituting or prosecuting an objection to, or an appeal in relation to […] an assessment of tax, interest or penalties under this Act or an Act of a province that imposes a tax similar to the tax imposed under this Act

The CRA, in IT-99R5, also permits taxpayer to deduct

amounts expended in connection with legal and accounting fees incurred for advice and assistance in making representations after having been informed that the taxpayer’s income or tax for a taxation year is to be reviewed, whether or not a formal notice of objection or appeal is subsequently filed.

The CRA also points out that the fees in question need not be paid to a lawyer; fees paid to an accountant in the course of an audit or objection should be deductible as well.

Paragraph 60(o) permits a taxpayer who appeals a reassessment to a court to deduct fees awarded against him by the court. See CRA technical interpretation number 2000-0042175 dated November 20, 2000.

Paragraph 60(o) does not apply to GST or provincial sales tax assessments. Fees incurred to contest such an assessment could be deductible under subsection 9(1) of the ITA, but only if the person assessed is carrying on the business.

In Canada, we value the individual as a kind of sovereign entity possessing an inalienable right to life. Historically, this and other substantive rights (like ownership) were traced back to a sort of divine inheritance of “reason”, “freedom of choice”, and “voluntarism”, which are metaphorically captured in the time-tested notion of the Imago Dei (being created in the image of God). For years, philosophers and theologians viewed the individual as an extension of the sacred in the world of the profane.

One interpretation of the creation of “Man” in the Book of Genesis is that “Man” would have “dominion” over the world (as opposed to another interpretation that viewed the human creation as merely God’s “steward” on Earth). As such, the individual has been dubbed the primary unit of this reality, the primary constituent of society, and the ultimate standard of value.

Capitalism is a natural consequence of a belief in dominion over the world. The word “capitalism” itself means “head” (latin: capitalis), probably referring to the heads of cattle that were privately owned and traded. In common law, personal property is referred to as “chattels”, derived from the word “cattle” as well. Property (from the word proprio, meaning “self”) was seen as an extension of one’s self, which is the primary belonging of any individual. And self-interest inherent in capitalism is rooted in the law of the harvest, where one was to harvest what one sows.

With almost divine eloquence, capitalism, or free-market enterprise, holds that the market is inherently efficient, as some “Invisible Hand” (of God?) works tirelessly to determine the best allocation of resources when individuals (consumers) have free choice, and other individuals (producers) respond accordingly to meet consumer demand using means and factors of production that they privately own.

But if Canadians value the individual so, how do they reconcile their allegiance to democracy, which, by definition, means “the people rule”, and not the individual?

Ironically, individualism is also based on a key assumption: that individuals benefit most from living within societies. If it’s true that civilized society is the most rational and fertile environment for individuals to live in, then it is in every individual’s common and rational interest to cooperate to have a peaceful coexistence. This can only be achieved on the basis of the recognition of one another’s rights —or reciprocity.

Simply stated, society is the means to individual ends, and therefore, it becomes the individual’s moral authority to act as redistributor and guarantor of economic equality and wealth. So what is the democratic answer to reciprocity and redistribution?

Western civilization has always resorted to forms of either voluntary or mandatory “taxation” to achieve various forms of wealth redistribution and distributive justice.

Black’s Law Dictionary defines tax as a “non voluntary payment or donation”. However, the legal definition of a donation requires that it be “voluntary”. After all, we “give” donations (gifts) of things we own at any given time, whereas we “pay” tax on what we earn within a given timeframe. The real difference, though, is one of unilaterality versus reciprocity. For example, gifts are known as unilateral contracts, predicated on the unilateral and voluntary concept of one’s own animus donandi (intention to give), for which no reciprocal consideration (quid pro quo) is permitted. Comparatively, our tax system is said to be a “voluntary” system of self-assessment and disclosure, even though it is actually quite “mandatory”. Usually when one “pays” for something, it is subject to a contractual obligation, which is, by definition a reciprocal concept that infers “offer” and “acceptance”. Nonetheless, tax is a non-contractual obligation, but which—theoretically anyway—promises a reciprocal benefit—representation. After all, there is no taxation without representation.

But what values are actually “represented” through taxation?

The answer lies in a deep-seated political conflict that arises when politicians have to create budgets and categories of spending—that are justifiable. Theoretically, the Department of Finance should redistribute monies to these categories, from the Consolidated Revenue Fund, which is funded by taxpayer revenue collected by the Canada Revenue Agency. That spending should accurately represent the values of Canadians. Surprisingly, our values are represented more by what money is not spent on than what it is spent on—that is, the ever-expanding charitable and nonprofit sectors.

With over 160,000—and growing—different registered nonprofit organizations and charities in Canada, each with its own mission, how could a politician decide how much and to whom to give? Political survival requires drawing a line between all nonprofit and profit activities, taxing the latter, and leaving it up to individuals the fund the former.

Despite having one of the most onerous tax systems in the world, Canada’s no longer directly funds the Canadian values that we pay for it to represent.

Statistics Canada recently published the Canada Survey of Giving, Volunteering and Participating (CSGVP). It reveals that Canadians gave $10 billion in 2007, representing a 12% increase from 2004. Further, Canadians volunteered 2.1 billion hours in 2007 (equivalent to 1.1 million full-time jobs). And these are merely those donations and services that are actually registered and accounted for. Canadians, along with the British and the Americans, rank highest in terms of private philanthropy in the world. We have no choice. Our tax system won’t fund these values.

Capitalism is under siege.

It is being incrementally eroded and altered by an uncompromised value-system orphaned by democracy’s parental tax system. The line between profit and nonprofit activities is becoming increasingly blurred by contrived and convenient legal fictions, as it must. In order to avoid the political nightmare of spending on social values, the law is accommodating and attracting heightened involvement in nonprofit and charitable activities, regulated more by the Income Tax Act than by Industry Canada or the Canada Business Corporations Act.

By expanding the definition of what constitutes a “charitable purpose”, and by offering unprecedented tax incentives and opportunities for legal tax avoidance (such as tax sheltered gifting arrangements) tax law (in Canada and in several countries around the world) is shifting the responsibility from government back to the individual to represent individual values, while still collecting more tax revenue than ever before.

Now, leading philanthropists and entrepreneurs alike are realizing more and more that charity pays, that nonprofit activities can be extremely profitable, and that capitalist principles of efficiency are compatible with and necessary for innovative fundraising techniques.

This is the “new philanthropy”—a philanthropic revolution, where private and nonprofit sectors converge to form hybrid philanthropreneurial structures that are measured by a “double bottom line” of profit as well as the achievement of social values. The mainstream is only now beginning to understand what the wealthy and successful have known for years: how they can do well by doing good.

“Before Shy Kurtz even started university in New York, he had already lived, worked, and served in over thirty countries. During Shy’s academic career he became an award-winning scholar, who obtained straight “A”s with uncanny certainty. Despite a shocking diagnosis of severe learning disabilities while at McGill Law School, Shy finished two law degrees in record time, while also working full-time as a Faculty Researcher. When he suddenly found himself a single father of two, he decided to stop collecting university degrees, and gave himself a final school project: to start applying his “A”-Technique in the “the real world,” aka the private sector. Now, Shy combines his skills in language, logic, law, and lore to address international acts and omissions that equivocate to “genocide” and human suffering, by structuring Canadian Government-registered programs that bring hundreds of millions of dollars (every year) of AIDS relief to world leading charities, NGOs, and to the Ministries of the Interior of embattled Sub Saharan African nations. Shy not only shows leading philanthropists and entrepreneurs around the world how to combine for-profit and nonprofit activities to achieve a “double bottom line”, but he inspires and empowers others how to apply the same principles to their career aspirations. Please visit: shy@sintax.pro.

Headlines for the past two years constantly referred to the “Global Financial Crisis.” But notice, the causes and the cures are always U.S.-centric. We are in a crisis. Though, it won’t be cured by a U.S.-Government-initiated domino-effect of fiscal stimuli, or by the quick and dirty expansion of monetary policy, or even by wholesale institutional bailouts paid for with money from downtrodden taxpayers filing for bankruptcy after defaulting on their mortgages. It’s myopic to think the crisis began with the tumultuous bursting of the U.S. housing and commodity bubbles. And no, it wasn’t caused by overzealous U.S. subprime lending practices, over-leveraging of U.S. consumers, or the incorrect pricing of risk either. These convenient taglines highlight the symptoms of a far more sinister crisis. The real tragedy, although never headlined, actually preceded the Yankee boondoggle, and in hindsight, even foreshadowed it. Soon, it will overshadow it, posing a growing threat to the lives of the billions who don’t, and can’t, even read our newspapers.

The root of global woes is linguisti-cultural. We seem to have a problem with the notion of “scarcity” which economists describe as the fundamental “economic problem”. That is, in a world of limited resources, there are seemingly unlimited human needs and wants. But bundling these two very different lingual concepts into one unifying concept, like “scarcity,” triggers an undifferentiated hoarding culture of consumption. Constantly chasing what we don’t have, and forgetting what we do have, is the unsustainable economic equivalent of putting out a fire with a hole in the water bucket. Something has to give. And giving is the key.

For most Canadians, a “Financial Crisis” means having less of what you want. For over half the world, it means having less of what you need. How many Canadians don’t breathe clean air, drink good water, or eat plenty of food? How many don’t have clothes, shelter, or access to essential medicines, medical care, or even quality education? Let’s compare that to almost half the world (over 3 billion people), living on less than $2.50/day, which is grossly insufficient to consume the basic needs we are accustomed to.

Since most of the world doesn’t have the resources to purchase and consume basic needs, there can be no profit incentive. Without profit, there can’t be an efficient allocation of need-based supply to meet need-based demand (even if that supply readily exists and is sitting around in surplus stockpiles waiting to be destroyed)! Those who can afford it don’t need it, and unfortunately, they continue to ravage limited want-based supply to meet their insatiable want-based demand. With such economic misalignment, a majority of the world’s market lays idle, meaning it’s up to non-profit initiatives to redistribute enough resources to meet global demand, further pushing away the North Pole of wealth from the South Pole of poverty.

So the rich get richer and the poor get poorer. In December 2009, Canadian Business did an expose on Canada’s 100 Richest People. Despite our supposed “financial crisis”, 69 of Canada’s 100 richest actually increased in total wealth. In the same edition, Seymour Schulich (ranked #40) had a message for his fellow well-heeled: “give away more of your money”, making the point that their increased wealth is not equating to increased donations, despite the fact that “first of all it is tax effective, and second of all, it’s going to do an enormous amount of good.”

Emphasis naturally focuses on tax stimuli to automate more giving. Canada’s donation tax benefits are already extraordinary, but are too complex for most advisors to optimize giving structures. While commendable, staying tax-focused unnecessarily displaces commercial imagination. On December 9, the Standing Committee on Finance released its report to Parliament, entitled A Prosperous and Sustainable Future for Canada: Needed Federal Actions. It aims to assist charities in recovering from the increased competition, coupled with the ironic decrease in funding, they are facing from the U.S.- centric financial crisis. Aside from recommending additional tax incentives for donating, it also recommended (because Canada is a “wealthy” country), an increase in funding to the Global Fund to Fight AIDS, Tuberculosis and Malaria. With 23 million AIDS victims in Sub-Sahara Africa alone, tax incentives alone will be insufficient unless they are organically rooted in commercial arrangements that generate profit. Enter Scrooge.

After Boxing Day, statisticians trepidatiously crunch data to determine how much Christmas gift-giving has stimulated the economy. The message is clear: buy more, give more, no more crisis. But Wharton economics professor, Joel Waldfogel, in his recent book Scoogenomics, warns that givers should stop buying presents for the holidays. His book, marketed as “the gift that stops giving”, argues that (in the U.S. alone) $12 billion of the $66 billion spent annually on holiday presents is wasted (and another $50 billion is borrowed). Crunch!

Scroogenomics explains that if you spend one dollar on what you want, at least one dollar of satisfaction is produced. But, if you spend the same dollar on a surprise present for someone else, it will be an inefficient transaction, due to less informed choices. Therefore, when you buy gifts, they are worth less than cost to the recipient, resulting in economic deadweight loss.

Maybe Ebenezer Scrooge was not so misanthropic after all. Ebenezer, from the Biblical Hebrew words “Eben-Ezer” (in 1 Samuel 7:2b-14), meaning “Stone of Help,” is finally earning his namesake, as the legacy of the Christmas curmudgeon is changing thanks to the efficient gift-giving advocacy in Scroogenomics. The book actually advocates that instead of buying gifts for others we should all donate cash to charity (in someone’s name). This is where I have to say, “Bah humbug”!

Holiday gifts are kind of obligatory and are mainly want-based. But charitable gifts are different. They are, by definition, voluntary and need-based. The most efficient needbased gifts, or donations, are “gifts-in-kind”. That is, property other than cash, such as the need-based supply that you hope the charity will purchase with the cash you donate (ie, AIDS medicines, water purification systems, anti-malarial mosquito netting, food, clothes, etc.). If Scroogenomics wants the optimality in donation-giving that it seeks in present-giving, the backdrop must be the alignment of charity, market, and donor interests.

The charity’s interest: We need more public initiatives to eliminate pre-donation fundraising fees and post-donation logistics fees wherever possible, such as through the use of certain government-registered gifting arrangements. Buying and donating giftsin- kind, whenever possible, will help charities eliminate fundraising and administrative fees (which typically aren’t paid on gifts-in-kind). Eroding the donation erodes donor confidence, especially where transborder aid is involved. As Stephen Jarislowsky said (ranked #25 in the Canada’s 100 Richest People): “Giving money away is more difficult than making it. Let’s say you want to give it to relief in Africa… you know damn well half of it will probably end up in a Swiss bank account. If you give it to a cancer society, 30% of it probably goes to administration.” Mr. Jarislowsky, if you are serious about donating to Africa and not to Switzerland, you know where to reach me.

The market’s interest: Niche for-profit vendors of philanthropic products need to specialize in need-based supply-chain management and transborder logistics. By amalgamating for-profit and non-for-profit economies, excess supply will now find a market, as it will be indirectly consumed (bought) for the purposes of donation and not only for the purposes of direct consumption. This will greatly stimulate the economy. Vendors will pay tax on profits, which funds donors’ tax credits, rather than the charity paying fundraising fees from the donation, thereby losing purchasing power.

The donor’s interest: More lawyers, accountants, insurance professionals, estate planners and fundraisers are needed to incorporate the profit incentive into giving (not only selling). Did I just say, “profitable gifts”? Isn’t that an oxymoron? Just ask the Prince of Humbugs. No, not Scrooge…P.T. Barnum! Phineas Taylor Barnum earned that title for his life’s work as a debunker, and authored various books on topic, like The Humbugs of the World (1865), and The Art of Money-Getting (1880). Few know that he was also a pioneer of philanthropreneurialism, believing in what he publically called “profitable philanthropy”. In his Struggles and Triumphs, he spoke about giving, saying that if he “could do so at a profit, the incentive to do ‘good works’ will be twice as strong as if it were otherwise.”

Among other ways, profitable giving begins with a purchase of goods on favorable credit terms. This is known as a “leveraged donation”. According to the Income Tax Act, donation tax credits accrue to the donor at the time the gift is made, based on the cost of the goods, but payment on the property may be made in full up to 10 years later. In some countries, there is no limit as to when one must pay in full. In many cases, especially at today’s interest rates (thanks to the Crunch), investing your tax credit alone for 10 years may reasonably yield returns exceeding the net non-deductible interest charge plus the cost of the donation, resulting in a profitable gift. Yes, we really can do well by doing good.

Theories are nice, but practice makes perfect. I’m privileged that Help Eliminate Disease and Addiction Canada (“HEDAC”), was one of the first of several Canadian registered charities to rely on a version of my proprietary borrow-buy-donate system. In the last 18 months, HEDAC raised about $100 million in AIDS relief for Africa, enough to save 250,000 human-life years. This accomplishment is earning Canadian donors heartfelt gratitude from Africa, it’s earning HEDAC worldwide acclaim, and it has ushered in a new era of efficient philanthropy. Domestically, MoneySense ranked HEDAC the 20th largest charity in Canada (from over 83,000 registered charities), and 2nd in Canada in terms of how much of one’s donation actually went to the cause. Changing our attitudes towards scarcity means looking beyond the wants and needs of self; and selfish nationalism mustn’t trump global humanitarianism. The U.S. may be the center of the universe, but it’s not the center of the Earth. Global crises require efficient markets, which require efficient giving and borrowing. Whether Ebenezer or the Prince of Humbugs is the potential donor, creating profit is the key to non-profit stimulus; and believe me, charities won’t discriminate. And, insofar as Santa really existing? Well, I told you not to believe everything you read.