Al Meghji

Al Meghji is described as the Wayne Gretzky of tax litigators in Canada. He is a Harvard-trained partner at Osler Hoskin Harcourt in Toronto and Calgary. He has argued and won most of Canada’s most important tax avoidance cases. In 2014 he was named one of the World’s Leading Business Lawyers, and in 2015 he was named Toronto Tax’s “Lawyer of the Year”.

BENGER: What’s your general opening statement about tax avoidance?

MEGHJI: Tax avoidance has become the subject of a lot of public discussion because of what’s been going on recently with some of the, some of the companies like Starbucks and Google. And it’s become a subject of discussion in forums that didn’t typically discuss this.

We didn’t used to talk about tax avoidance in the daily media but there is this public interest in whether corporations are paying, quote-unquote, their fair share of taxes. And there are those who feel they’re not and they’re taking steps to avoid paying their fair share of taxes.

And so it’s become the subject of public discourse like never before. And I think in the course of these discussions there’s a lot of misunderstanding, there’s some exaggeration, there is hyperbole, and I think there’s more passion than reason.

And I think we need to go back to talking about what tax avoidance is, why it happens, what’s acceptable tax avoidance, what’s abusive tax avoidance, what can legislatures and courts do about it and we need to get back to a more reasoned discussion about the subject

BENGER: You started with the Federal Justice Dept. in the 1990’s; why has there been such a dramatic increase?

MEGHJI: I’m not sure that there has been a dramatic increase. I think there are two reasons why we talk more about tax avoidance. I mean, perhaps there has been an increase in tax avoidance but here’s what I think is going on.

We have seen a dramatic increase in globalization, cross-border transactions, companies setting up operations all over the world. There has been a dramatic increase in capital flows. Starbucks has outlets everywhere. It carries out business all over the world. Amazon is in business all over the world.

We have more complex forms of commerce. We have e-commerce. And when you have complexity in commercial transactions, when you have internationalization of business, when you have globalization of trade flows, you are necessarily going to have companies thinking about how they’re going to organize their affairs to make them tax effective, to make sure that they organize their affairs so that the taxes they’re paying, you know, are minimized.

And so the increase in tax avoidance is directly related (L: to greed.) the complexity of the commercial world. And also there’s a lot more discussion about it. We talk a lot more about it than we did in the early ’90s.

BENGER: As an expert looking from the inside out what irks you the most?

MEGHJI: I think the most important point that gets lost in all of this, those who get passionate about the subject matter do two things that I think need to be scrutinized carefully. First, they question whether courts are doing what they should be doing in dealing with tax avoidance.

I have a particularly strong objection to the argument that courts are in the business of stopping tax avoidance. I don’t think they should be in that business. I think the business of managing tax avoidance, of deciding what type of tax avoidance is permissible and what should not be permitted is the legislatures.

We need to keep our focus on those that are responsible for making our laws. I think those that point the finger at the courts and say, well, the courts are not doing enough to stop tax avoidance that shouldn’t take place, I think unfairly criticize courts ’cause courts are not the watchdogs of the government.

Courts are supposed to be above the fray. They’re supposed to be impartial. And so there’s a lot of criticism leveled at courts, particularly by some legal scholars, tax scholars, and academics who say, “Well, look at the Supreme Court of Canada, it’s not doing what it should be doing.”

My answer is the Supreme Court of Canada is not the government’s watchdog. The Supreme Court of Canada is above the fray, it does what the legislature tells it to do. Legislatures write the law, courts interpret it. That’s one of my first objections in terms of the debate.

The second objection that I have, and this is a more recent phenomena, is where politicians, particularly those who are responsible for making fiscal laws, call into question the morality of taxpayers, be they individuals or corporations, who engage in tax avoidance. They say, “Well, you… what you’re doing is immoral.”

I find that, I find that allegation frankly unworthy and all I say to them is, “You’re responsible for writing laws. You are responsible for writing laws which reflect the morality of the community.”

And corporations and citizens and taxpayers simply comply with the law. So if you write laws that say, “This is acceptable and that is not acceptable,” and companies then follow that law, you can hardly accuse them of being immoral.

So this sort of overblown rhetoric about morality is the second troubling strand in this debate about tax avoidance. I think we have to move towards a more disciplined, a more focused debate on what exactly tax avoidance is and what we think should be permitted and what should not be permitted, and then write laws to reflect those values.

BENGER: Define tax avoidance for me.

MEGHJI: Tax avoidance can be described as any behaviour, transactions which seek to minimize or avoid the taxes that are associated with any particular activity. A very simple example is if you making an RRSP contribution tomorrow morning. You’re going to avoid certain taxes if you do that.

Corporations do more sophisticated forms of tax avoidance. So Alberta has a much lower tax rate than, say, Newfoundland or Quebec. A business might decide that they are going to locate certain business activity in Alberta because it’s going to result in lower taxes.

So making decisions where you are, where you are informed or driven by a desire to minimize taxes can be described generally as tax avoidance. It can range from very simple things, such as an RRSP contribution to much more complex forms of tax avoidance as is the case with companies like Google and Starbucks, etc.

BENGER: I want to come back to a response you had in an earlier conversation, the response you would have given to Margaret Hodge in the UK parliamentary committee hearings when she said to Starbucks, “Well it may be legal, but its not moral”.

MEGHJI: I think Margaret Hodges was actually more dramatic than… I think you give her too much credit in terms of the way she put it. She actually said, “We’re not accusing you of doing something illegal, we’re accusing you of doing something immoral.”

When I say that her objection is unacceptable, at least to me, it’s because what corporations do is they look the law as it is passed, as it exists. And they say, “Well this law allows me to do something.” If a law allows you to do something, indeed sometimes encourages you to do something, and you in fact then behave that way, it’s hard to argue that you’re behaving immorally.

And as for your point about we elect governments that sometimes don’t like taxes. And so they minimize taxes, they pass rules to allow corporations certain tax breaks. Well, but that’s a choice we’ve made as a democracy.

You know, there are governments that believe that taxes are a price we pay for civilized society. There are others who believe that taxes are expropriation of private property and are generally detrimental to the wellbeing of a functioning economy.

These are competing political choices. These are people with different visions, different ideas about how we ought to organize society.

And if we then elect one type of government over the other, and the government then passes laws to reflect that philosophy, you can’t then say to citizens and taxpayers who then reflect that philosophy in their decision-making that they’re behaving immorally.

I think governments pass the buck when they accuse taxpayers of behaving immorally when taxpayers are simply doing what the law permits them to do.

BENGER: Now, you converse professionally with the big corps, global and domestic, when they have to come to you what is their mindset towards paying their fair share?

MEGHJI: I think that it’s fair to say, and I don’t think anybody would really disagree with this, that most of the, most corporate taxpayers are determined to comply with the law. What they do is generally fairly public. They’re audited regularly.

You know, state tax agencies are routinely looking into what they do. Their affairs are an open book to governments, it’s all transparent. So what they want to do is make sure that what they are doing is first of all permitted by the law.

They don’t usually engage in activities that are illegal or activities that turn upon hiding what they’re doing, so they seek legal advice and they talk to their accountants and lawyers to say, for example, “I have to finance an operation in Australia and I’m going to need $200 million to do that. My accountants have suggested to me that if I arrange my financing in the following way, it will be most tax effective as opposed to doing it another way. Can you tell me if this will work? If I organize my affairs and finance my business this way, am I complying with the law? And if the government challenges me, do you think I will be okay? Do you think that the courts will find the transaction that I have carried out acceptable?”

Meaning they do the best they can to work with existing laws, they get good advice, and they do what they understand to be legal tax planning.

BENGER: What about the Flaherty dilemma: we have a govt. in power that wants to give business tax breaks and a G8 that wants to close tax breaks.

MEGHJI: The government has a philosophy of having low taxes. There’s no debate about that. Mr. Flaherty said that, the prime minister has said that. In fact the prime minister has gone as far as saying that he doesn’t think there is such a thing as a good tax.

So the government obviously believes that the lower the rate of taxes generally the better. But I don’t think that that is necessarily inconsistent with, you know, with what’s happening internationally. I think they can do both.

I think what they have to careful about is when they take specific steps vis-à-vis our tax system, that they are not making our economy less competitive than what’s going on in other jurisdictions.

For example, if they decide that certain tax, financing costs are not going to be deductible in Canada anymore but they are deductible in other jurisdictions, or certain types of incomes are going to bear higher rate of tax in Canada than they do in other jurisdictions, then there will be consequences to that.

But if they have rules that challenges abusive tax avoidance, I don’t imagine that that’s going to have a particularly meaningful consequence on our system.

BENGER: Cameron has established a registry in the UK of beneficial ownership. Will Canada agree to beneficial ownership?

MEGHJI: I think that the whole concept of beneficial ownership… the reason it gets slippery is because you don’t want to adopt a meaning of beneficial ownership, which creates commercial uncertainty.

This is the big thing about tax avoidance. When we debate tax avoidance, we have to be very careful to not speak of tax avoidance and create rules where businesses are left not knowing the rules of the game.

So if you say to a business, “We are going to impose some notion of beneficial ownership, or some notion of economic substance, we are going to move away from a tax system based upon legal rights and obligations and move towards some concept of economic ownership — that’s fine except you should have a system where they know the rules of the game before the game starts.

That’s where uncertainty creates problems.

BENGER: Will you take me into the courtroom, you are the Wayne Gretzky of tax lawyers: what’s the pull for you?

MEGHJI: I always tell young lawyers work with me and students that I often teach that what we do for a living, we litigate. It’s not just tax litigators. Tax litigation is one branch of litigation.

We’re really, at the end of the day we’re competitive story tellers. I mean, that’s what we do for a profession. And for me, the idea, the idea of being able to take something as complex as a corporate tax case, often these are very complicated cases, and to be able to tell a story about the case in a way that’s understandable and to persuade a judge at the human level…

Because remember, judging and… is a human process. These are human beings who are engaged in deciding what is right and wrong. Most of these are morality plays.

And so the fascination and the interest and the passion for me is about putting together and telling a story which gets across what your client’s cause is, explaining in a human way, in a way that’s understandable, that what my client did is just fine.

And when I was with the department of Justice, it was the same thing except it was from the other side. And so there are two people there telling their version of a story in a way that is designed to persuade, you know, a person who is intelligent, thoughtful, fair-minded, interested in coming to the right answer.

It combines, you know, intellectual rigour with human psychology, a bit of art, a bit of storytelling to get to the end result.

BENGER: Tell me about some of your cases. Shell for example.

MEGHJI: Shell was a case where Shell Canada needed some money for corporate purposes. They needed capital for their business. And they needed U.S. dollars. So they could have gone to the marketplace directly and borrowed whatever they needed at a certain interest rate.

I don’t remember the numbers but say they could have borrowed $200 million U.S. at, say, 2 per cent. And if they had done that they would have got an interest deduction of 2 per cent.

But they could achieve the same commercial objective of securing the $200 million indirectly by first of all borrowing New Zealand dollars, and the using the New Zealand dollars to purchase the U.S. dollars they needed.

So they could do it directly by going to the market and simply borrowing the U.S. dollars, or doing it indirectly by borrowing New Zealand dollars and then buying U.S. dollars, and it chose the indirect route. Why?

Because after you do all the math, the tax consequence of the indirect route was that the tax savings they enjoyed were larger than the direct route. So they chose the indirect route and the government found that objectionable.

The government said, “Look, the substance of your transaction, when you cut through all the legal contracts, what you really did was you really just borrowed U.S. dollars and you engaged in a bunch of transactions to essentially claim a bigger interest deduction that you should have.”

And that is the case that went to the courts and ended up ultimately in the Supreme Court.

The Supreme Court tells us in Shell, and this is, Shell is a classic tax avoidance case, is that corporations are allowed to use complicated structures to minimize their taxes. They have a commercial objective, which is to get $200 million, they don’t have an obligation to use a route which results in the most amount of tax.

They can use a route that results in the least amount of tax. And if parliament doesn’t like the route they use, parliament can shut it down.

So Shell was a classic debate about will courts get in the business of basically disregarding economic relationships and legal relationships if they think that those transactions were done for tax purposes. And the court said, “No, we’re not going to do that. We’re going to respect the legal relationships that were entered into.”

BENGER: I understand that, whether it was your company or not, they charged the government for 77 lawyers and the government had 3 lawyers. I met a lawyer for the Department of Justice actually at the Osler cocktail party she said to me it’s an uneven playing field and this was her example.

MEGHJI: I think that anecdote has a lot of hyperbole in it and here’s why.

The way that large law firms like ours work is we have lawyers who specialize in things. So let’s assume that a lawyer working on a case says, “You know, I wonder how this guarantee will be interpreted. Is the language used in the guarantee appropriate?”

So she picks up the phone and she calls a lawyer in our commercial department and says, “Hey Jane, I’ve got this guarantee in front of me and it’s got this clause. How do you think that will work?”

And Jane says, “Well, that’s easy. This case says that the guarantee will be read this way.” And Jane, who answered the question, will mark down .1 hours. So what happens is out of the 77 lawyers, 73 of them had .1 to answer to question, and the trial judge who dealt with the costs bill didn’t pay us for that. He just said, “I’m going to charge the government for the 3 or 4 lawyers who worked on the case.”

BENGER: What this all comes down to… its absolutely fascinating to listen to you and to hear your insights into these things, I doubt if there’s a Canadian watching who wouldn’t respect your great skill, but other Canadians will look at this and say…and I tried to add up before our interview how much money you’ve saved for your clients and its north of a billion dollars, mean you are the billion-dollar man. But, at the same time you, through your skill, have denied the Canadian fiscus more than a billion dollars of revenue which many Canadians might say should have been paid to the Canadian government. How do you sleep at night, I guess is the question?

MEGHJI: Frankly, I have no trouble sleeping at night. I think that’s an honourable calling. And to the extent that as a consequence of a decision, parliament decides that that’s not the way the tax system should work, it’s very easy. They change the rules the next morning.

So I have this saying about lawyering. Everybody has something to say about lawyers until they need one. And then lawyers are their best friends. We just, we are essentially intermediaries between taxpayers and a very powerful state agency and I think that’s, it’s frankly a worthy profession.

BENGER: What are your own politics on this issue?

MEGHJI: I’ll say to you Robin that if you talk to my partners, they would tell you that they think I am a big time tax and spend liberal. I believe in a big welfare state. Those are my own politics.

So when I see that of course it concerns me because I do believe that we ought to have a society where those of us who are well off through our taxes contribute to the wellbeing of those who are not so well off.

But this isn’t about that. This is about making sure that governments collect the taxes that the law says they’re entitled to collect. What we do just makes sure that that happens. I don’t think anybody wants to live in a society where governments are collecting taxes that they’re not lawfully authorized to collect.

I think everybody wants to make sure that we live in a system where the rule of law prevails. That’s all we do. This is about the rule of law. This is about making sure that governments collect the taxes the rule of law says they aren’t.

When I hear somebody say, “Well, you’re depriving governments of revenues that they should have when you win a case,” I say, “I’m depriving governments of revenues they shouldn’t have.” And that’s a good thing.

BENGER: You wake up very early and meditate?

MEGHJI: Sometimes I will do some walking meditations, sometimes I will focus on a mantra, sometimes I will focus on breathing. I don’t have a consistent habit. Most of the time I just focus on the breath and try and meditate for say, 20 minutes.

BENGER: An island of tranquility in a busy life.

MEGHJI: I think that what I do for a living is try not to be busy. Because I believe that what I do for a living is best done with a state of mindfulness. And business is counter-intuitive.

I mean, what is it that I do? I try and think about complex problems in a simple way. And I’m often portrayed as somebody who runs from place to place, is completely immersed in books and cases and arguments. It’s the way I try not to be.

I think what I do really is about taking complexity and making it simple. And so I think the most important skill, the most important thing that I can do for my clients is to be mindful about what I do.

I think I have what the (searching for words)… Zen Buddhist would say is a monkey mind and so it is a difficult exercise. For some it’s much easier exercise.

That is a tradition I come from, that is the tradition I was raised in. But I’ve lost so much of it. I regret to say.

BENGER: Did you mention that putting together a case is like a Puccini opera?

MEGHJI: I think the better metaphor for putting together a case is painting. Chief Justice Bowman, who is — I don’t know if you’ve heard of Chief Justice Bowman, but probably the greatest tax jurist the country has ever had, who is now a retired lawyer. He was the chief justice of the tax court of Canada once said to me when I was very young, he thought what we did was like painting.

And he said, “And you must think about what you want to paint. Do you want to paint a clear portrait of your case or do you want something impressionistic? And he said, “And that turns on how good your case is.”

So I think what we do is we paint and we tell stories. The opera was probably an over-blown metaphor because I probably was working on something that day which was too complicated and had too much noise.

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