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Law Times • augusT 24/31, 2009 Harper's 'Crown prerogative' on assisting Canadians in distress vents Stephen Harp- er from picking and choosing which Ca- nadians in trouble abroad he will help. When Suaad Hagi Mohamud was jailed by Kenyan authorities on false identity allegations, Harper left her hanging in Nairobi for 12 weeks — eight days of which were spent in prison — until a massive outrage in Canada forced him to relent. When Abousfian Abdelrazik hid in the basement of the Cana- dian embassy in Khartoum, Sudan, Harper let him languish there in a Kafkaesque world for 11 months. But when Brenda Martin was stuck in a stinking Mexican jail, Harper sent Immigration Minister Jason Kenney to Guadalajara in a private jet to get her out. Full-bore intervention. Different people, different call. It's Harper's right to decide if he will help — like a motorist who sees a driver beside a car in a ditch. Call it Harper's "Crown prerogative." Human rights activists, law as- sociations, and parliamentarians are saying it's high time all Canadians in trouble abroad are treated equal- ly, regardless of creed or colour. Now Mohamud is back home with a niggling and persistent cough and whatever else she picked up in the cramped quarters of the Nairobi women's prison with sick, tubercu- lar women and children. Once again, the issue of legal re- course comes up as it has in so many cases of people jailed abroad under the Harper government. The questions arise: Was there political involvement at the cabi- net level in the official decision to turn over Mohamud's passport to Kenyan officials? Who was behind the decision to tell the Kenyan of- ficials about the "thick lips" theory that led them to say she was not the woman on her passport photo? The big question is once again, N how much is this going to cost Ca- nadian taxpayers when it gets to court? It could be plenty. The commission of inquiry into the case of Maher Arar, the Cana- dian engineer who was flown by CIA jet to Syria and tortured with the complicity of Canadian officials cost us $14 million. In addition, the federal government had to pay Arar $10 million in damages. Mohamud still has not decided whether to sue. She's back in Toron- to with her 11-year old son while her lawyers decide about legal recourse. It would be an excellent time for the Harper government to write a big cheque before this thing ends up in court. Hers was a trip gone to hell that began last May. As she was depart- ing Kenya to return home after visiting her mother, KLM airlines and Kenyan authorities noticed a discrepancy between her appear- ance and her passport photo. They prevented her from leaving. The staff at the Canadian em- bassy in Nairobi, for reasons yet to be determined, sent her passport to othing in Canadian law pre- The Hill By Richard Cleroux Kenyan officials for prosecution rather than try to identify her posi- tively from photo documents avail- able back home — such as an Ontario driver's licence, or an OHIP health card. Her employer in Toron- to offered to help. Her family offered DNA samples. None of it convinced Canadian embassy officials. For some reason, both Foreign Affairs Minister Lawrence Cannon and Public Security Minister Peter Van Loan refused to get involved publicly. Finally pressure was too much and they let her come back. Lawyer Lorne Waldman says if there had not been an outcry in Can- ada, she might have gone to jail for six months for using a false document. "This is not as uncommon an issue as one might think," says Waldman. Hers is not the only case. It came out last week that Abdi- hakim Mohamed, a 25-year-old Ca- nadian with autism, has been stuck in Kenya since a 2006 attempt to re- new his passport was stopped by Ca- nadian officials who claimed his ears looked different in a new passport photo, said his lawyer Jean Lash. Canadian citizen Abdelrazik was forced to live in exile in Sudan for six years because the government wouldn't let him back in. He had gone to visit his ailing mother in Sudan in 2003 and was promptly arrested on suspicion of being an al- Qaida terrorist. He languished in a Sudanese hellhole prison until they let him out. But the Harper government would not let him come back home because the Americans had put him on a United Nations no-fly list. So Abdelrazik lived in the Cana- dian Embassy basement in Khar- toum for a year while world atten- tion built up. He became "the man who never returned." Finally an air- line agreed to fly him, but still the Harper government persisted. No return! No passport for him. The case went to court in Canada and Justice Russel Zinn ordered the Harper government to bring him home from the embassy. Under court order, Harper relented. Ab- delrazik came home. His lawyers have taken his case to court. Omar Khadr, the Canadian-born child soldier for al-Qaida remains incarcerated in Guantanamo prison. Harper's government refuses to take him back to stand trial in Canada. All other western countries have taken back their nationals. The list of Canadians in trouble abroad Harper has chosen not to help reads like an ethnic telephone book: Suaad Mohamud, Omar Khadr, Ab- dihakim Mohamed, Bashir Makhtal, Maziar Bahari, Abousfian Abdelrazik. The government will be sued in one civil case after another. Immi- gration lawyers will make a fortune. Canadians will be paying. LT Richard Cleroux is a freelance report- er and columnist on Parliament Hill. His e-mail address is richardcleroux@ rogers.com. COMMENT PAGE 7 A primer for those who eschewed it in law school Corporate finance 101 T he past two years have taught in- vestors painful lessons about cor- porate finance. Ponzi schemes in Canada and the United States have left many individuals destitute. Corporate fraud trials — Livent Inc., Garth Drabin- sky, Myron Gottlieb — and the collapse of Lehman Brothers Holdings Inc. remind- ed us all of the dangers of financial ignorance. Financial By Vern Krishna Corporate finance classes in law school have never been great draws for law stu- dents, who consider monetary courses mundane and removed from everyday life. Yet, as we see mammoth corporate bailouts and infusions of capital into banks and auto companies, we realize that the mun- dane touches the lives of ordinary people. The fundamentals of corporate finance are not exotic. There are basically five con- ventional sources of corporate funds: • share capital; • debt capital; • retained cash earnings; • off-balance-sheet financial instruments (warrants, debt); and options, leases, bundled • government grants and subsidies. Starting with these basics, corporate financiers can create some fairly complex asset-backed structured instruments. Corporate, tax, and accounting rules determine how much of each of these sources is appropriate, desirable, or legal. Financing decisions can depend upon the type of corporation, its size, access to capi- tal markets, rules of accounting disclosure, and securities laws. The capital structure of most small businesses and private corporations es- sentially comprises two elements: equity and debt. Equity, in turn, comprises two categories: share capital and retained earnings. Only large, publicly listed, cor- porations can access sophisticated capital markets and issue derivatives — such as options and collateral debts. Tax considerations influence the cost of funds and often determine the ap- propriate financial structure of a corpo- ration. For example, a corporation may prefer to issue debt rather than share capital because of the deductibility of in- terest expense in calculating income for tax purposes. Tax factors may also deter- mine the amount of debt — the debt-to- equity ratio — if non-residents control the corporation because of withholding taxes and thin capitalization rules. Equity or share capital represents an ownership interest in the corporation. The rights, restrictions, terms, and con- ditions attached to the shares determine the nature of the interest. In the absence of any special provisions, all shares of a corporation are presumed to be equal. Corporate shares have four fundamen- tal characteristics: • shareholders are not personally liable for corporate debts; • corporations cannot reduce capital if the reductions will prejudice their creditors; • a corporation can return its paid-up capital to shareholders on a tax-free basis; and • corporate dividends are not deductible from income. Each of these characteristics serves a different purpose, and corporate statutes and the Income Tax Act have complex www.lawtimesnews.com Matters the provisions to ensure their integrity. For ex- ample, corporate statutes ensure that share- holders not withdraw their capital ahead of creditors. Hence, there are strict rules about reducing corporate-stated capital. In contrast, tax law is concerned that shareholders not in- crease paid-up capital of their shares because they can withdraw paid-up capital tax-free. The distinction between debt and share capital is also important for corpo- rate and tax purposes. Debt is a sum of money due by agree- ment — whether express or implied — that includes the obligation of the debtor to pay and the right of the creditor to re- ceive and enforce payment. A debt gen- erally arises from a contractual obligation whereby one person lends money to an- other on terms and conditions that the borrower and lender negotiate. There are four quintessential character- istics of corporate debt: • debt does not represent ownership in a corporation but merely creates a rela- tionship of debtor and creditor between the lender and the corporation; • creditors rank ahead of shareholders in any claims to the corporation's assets. Hence, corporations cannot reduce their contributed capital if the reduc- tion will prejudice their creditors; • a creditor may secure debt against cor- porate assets; and • interest on business debt is generally de- ductible for tax purposes. The rule that interest is deductible on business debt and dividends are paid with after-tax dollars has profound con- sequences on corporate financing and capital structures in domestic and inter- national markets. Then there are some financial instru- ments that have characteristics of both debt and share capital. Since interest on debt is deductible for tax purposes and dividends are not, cor- porations try to devise hybrid financial instruments that allow them the best of both worlds. From the corporation's perspective, it is attractive to issue a hybrid instrument that has all the corporate characteristics of share capital, but that can be classified as debt for tax purposes. The tax authorities are understand- ably concerned about such instruments and there are complex rules to minimize their use. These rules circumscribe the use of hybrids — such as "taxable-preferred shares," "term-preferred shares," and "income bonds". If there is one lasting lesson that we can take away from the events of the past two years, it is that investors and, more importantly, their financial advis- ers must be vigilant about the nature and quality of financial products in the marketplace. Who owned what and at what risk? We need to understand the mundane aspects of corporate finance if the capital markets are to flourish in the future. LT Vern Krishna is tax counsel, mediator, and arbitrator with Borden Ladner Gervais LLP and the executive director of the CGA Tax Research Centre at the University of Ottawa. He can be reached at vkrishna@blgcanada. com