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CALU INFOexchange 2009, Vol. 1

February 24, 2009

This issue features two major articles - Socially Responsible Investing by Michael Jantzi and The Lipson Decision by CALU Tax Advisor Jillian Welch.

Paul McKay, CAE

Table Of Contents

Lipson and Interest Deductibility: two steps forward or one step back?

By Manjit Singh and Jillian Welch, Wilson & Partners LLP<

As readers will be aware, the Supreme Court of Canada's decision in Lipson v. The Queen[1] was eagerly awaited. Tax planners hoped that the decision would bring clarity to the confusion over which tax-engineered structures, transactions and arrangements would be considered to amount to abusive avoidance for purposes of the general anti-avoidance rule[2] (GAAR) in the Income Tax Act (Canada).[3] But more particularly, it was hoped that the Supreme Court's decision would clarify whether tax planning techniques designed to facilitate interest deductibility, notwithstanding what might be regarded as an indirect use of borrowed money for an ineligible purpose, were permitted under the GAAR. Arguably the decision does not deliver much in the way of clarity on either of these questions.

This article focuses on the interest deductibility aspects and explores what can be drawn from the decision. The Lipson decision is as relevant to the acquisition of a life insurance policy as it is to the acquisition of a principal residence, as both are uses that would not support the deduction of interest on funds borrowed to directly finance such purchases.

In a pre-GAAR context, the CRA had challenged the use of a similar leveraging technique in Singleton v. The Queen,[4] and lost. In Singleton, the taxpayer withdrew capital from his law partnership and used the funds to acquire a house. On the same day, he borrowed from a bank to replace his capital in the partnership, and deducted the interest on this loan on the basis that it was money borrowed for an eligible use. While the Tax Court of Canada ruled against him, both the Federal Court of Appeal and the Supreme Court of Canada held that he could rely on paragraph 20(1)(c) of the Act to deduct the interest expense, as the borrowing was directly traceable to the replacement of his partnership capital. However, the facts at issue in the Singleton case arose before the GAAR was enacted and so the various courts did not consider how it might apply to the Singleton facts.

Since the Singleton decision, Singleton-type planning has been implemented with some confidence. Such plans involve arranging the affairs of taxpayers so that they finance the purchase of personal or otherwise ineligible assets, such as principal residences and life insurance, out of equity or available cash, and finance the purchase of income-earning assets with debt. For example, a taxpayer owning non-registered investments could liquidate these investments, as needed, to purchase a life insurance policy and then borrow funds to reinvest in other non-registered investments. By ensuring that the borrowed funds are directly traceable to the non-registered investments, a deduction for interest paid on such borrowings would be available pursuant to paragraph 20(1)(c) of the Act, consistent with the Singleton decision.[5]

The key question is whether the decision in Lipson has changed the basic rules of interest deductibility to the extent that the interest deduction in Singleton-type planning has been compromised.

In our view, the answer should be no. While a majority of the Court in Lipson held that the GAAR applied to deny the tax benefit relating to a loan that was used, indirectly, to fund the purchase of a home, the Court's decision did not expressly or impliedly change the rules of interest deductibility except in respect of their use in conjunction with the "attribution rules" in the Act.

The Lipson Planning
Mr. Lipson and his spouse had agreed to purchase a house from an arm's-length vendor. The day before closing, Mrs. Lipson borrowed funds from a bank (the first loan) and used the funds to purchase shares of a private family investment corporation (LipsonCo) from her husband. Mr. Lipson used the proceeds from the sale of the shares to complete the purchase of the home. Title was taken in their joint names.

The day after the closing, another loan (the second loan) for the same amount as the first loan was obtained from the same bank, secured by a mortgage on the house. The proceeds of the second loan were used to repay the first loan.

LipsonCo paid dividends to Mrs. Lipson for each of the three years that were reassessed. In two of those years, the interest expense on the second loan exceeded the dividends received by Mrs. Lipson, resulting in a loss. In one year, the dividends exceeded the interest expense, resulting in net income.

The Tax Provisions in Play
Several provisions of the Act were particularly relevant to the Lipsons' planning:

The subsection 73(1) spousal rollover applies even when the transferor spouse receives cash consideration on the transfer Ð a unique feature of the spousal rollover.

Mr. Lipson's Position
Mr. and Mrs. Lipson filed their tax returns on the basis that:

The CRA's Position
The CRA reassessed on the grounds that GAAR applied to deny the interest deduction to Mrs. Lipson. The result was that Mrs. Lipson's gross income from the shares (i.e., the dividends) was attributed to Mr. Lipson, rather than her net income or loss (i.e., after deducting the interest expense). The result of the reassessments was that neither Mr. Lipson nor Mrs. Lipson could deduct the interest expense. The CRA asserted that GAAR should apply because the purpose of the series of transactions was to borrow money to purchase the house, not to acquire the shares.

The Tax Issue
The taxpayer admitted that the steps he and his wife had taken gave rise to a "tax benefit" and an "avoidance transaction",[7] two prerequisites for the application of the GAAR, but argued that GAAR could not apply because a third requirement, found in subsection 245(4), was not met. That provision states that GAAR can be applied only if it may reasonably be considered that the transaction in question would result directly or indirectly in a misuse of the provisions of the Act or in an abuse having regard to the provisions of the Act read as a whole.

Lower Court Decisions
The Minister of National Revenue was successful in both the Tax Court[8] and the Federal Court of Appeal.[9] The Tax Court judge held that the series of transactions resulted in a misuse of all the provisions relied on, because they were carried out for the purpose of making interest deductible on borrowed money used to buy a residence. The Federal Court of Appeal upheld this decision, finding that the Tax Court judge was entitled to take into account the purpose of the series of transactions in determining whether any of the transactions in the series resulted in an abuse.

The Supreme Court of Canada Decision
In a 4-3 decision, the majority of the Supreme Court panel found that to allow the attribution rules to operate to reduce Mr. Lipson's incomeÐby giving him the benefit of the interest deduction - was an abuse of those rules and that GAAR should therefore apply.

The reasons for the majority's decision are important. The decision states that if Mr. Lipson had simply sold shares of LipsonCo to his spouse and she had claimed an interest deduction on money borrowed to acquire these shares, the transactions would have been "unimpeachable." The provisions of paragraph 20(1)(c) and subsection 20(3) had not been misused or abused.

However, the transactions became "problematic" when the Lipsons turned to subsection 73(1) (the spousal rollover) and subsection 74.1(1) (the attribution rule) to shift the interest deduction to Mr. Lipson. The Court held that to allow subsection 74.1(1) to be used to reduce Mr. Lipson's income tax would frustrate the purpose of the attribution rules and so the GAAR was properly invoked by the Minister.

Although the Minister had approached the assessment by disallowing the interest deduction altogether, and adding the gross dividends on the LipsonCo shares held by Mrs. Lipson to Mr. Lipson's income, the majority of the Supreme Court panel held that even though the dividends should continue to be attributed to Mr. Lipson, the interest deduction should be allowed to Mrs. Lipson. The decision does not disclose whether Mrs. Lipson had income against which to claim this deduction, but for taxpayers in her situation who have other income sources, the allowance of the interest deduction to the spouse is welcome and significant.

The question of most interest is whether Singleton-type planning is still acceptable. Before the Supreme Court of Canada, the Minister conceded that it did not claim that GAAR would have applied on the facts of Singleton. In Binnie J.'s dissenting judgment (concurred in by Deschamps J.) in Lipson, he clearly assumes that the Singleton planning would not be found to be subject to GAAR and concludes that the Lipson planning, which he characterized as Singleton with a "spousal twist," should similarly not be found to be abusive tax avoidance. He could not reconcile the majority's conclusion that the interest deduction per se was not abusive with its conclusion that the plan became abusive with the addition of a spousal rollover that operated precisely as it was intended by Parliament to operate.

The majority decision sidesteps the question of whether the Singleton case is relevant to the Lipsons' planning, by noting that neither GAAR nor the attribution rules was at issue in Singleton. The majority decision also states that applying paragraph 20(1)(c) and its "direct use" test involves an inquiry that is distinct from the inquiries that must be made under section 245 (GAAR). Although the Court was urged to find for the Lipsons on the basis that to do otherwise would introduce undesirable uncertainty into tax planning, the majority decision states that uncertainty is inherent, because the GAAR analysis always requires consideration of the unique facts. In this respect, the majority decision now creates uncertainty as to whether the interest deduction in simple Singleton-type planning, that on its own would not necessarily be abusive, may be considered abusive when used in conjunction with other provisions of the Act.

The second dissenting opinion was delivered by Rothstein J., who agreed with the reasoning of the majority and of Binnie J. that the GAAR did not apply with respect to the use of paragraph 20(1)(c) and subsection 20(3). However, Rothstein J.'s further conclusion that the GAAR did not apply in respect of the use of the attribution rules was based on his view that the plan should have been found to fail by operation of a specific anti-avoidance rule in the Act that relates directly to the abuse of attribution rules.

Implications for Interest Deductibility?
Lipson it may have to revisit its position on the Singleton-type planning, and other types of planning techniques such as "cash damming," techniques that today are endorsed as acceptable in the CRA's Interpretation Bulletin IT-533 (Interest Deductibility and Related Issues). One hopes that the CRA concludes that there is nothing in the Lipson decision that would require or indeed justify any change in its previously established positions set out in IT-533 and elsewhere.

The majority decision does not deal with the type of planning undertaken in Singleton, which involved a single taxpayer arranging his affairs to maximize interest deductibility. The majority reasons in Lipson make it clear that the narrow focus of the analysis, and the reason for concluding that the GAAR applied, was the introduction of the attribution rules into the planning. Both dissenting judgments are emphatic that planning to finance personal assets out of equity and income earning assets out of borrowed funds is acceptable tax planning, and nothing in the majority decision contradicts this. In addition, the interest deduction was allowed, albeit to Mrs. Lipson. This can be interpreted as a positive development and support for the proposition that Singleton-type transactions are not in and of themselves subject to GAAR. So what does the Lipson case tell us? Perhaps nothing more or less than that creative variations of these types of transactions involving spouses and the attribution rules may no longer be acceptable.


[1] 2009 SCC 1 ("Lipson").

[2] Section 245.

[3] Income Tax Act, R.S.C. 1985, c. 1 (5th Supplement), as amended, hereinafter referred to as the "Act". Unless otherwise stated, statutory references in this Article are to the Act.

[4] 2001 SCC 61.

[5] While in such arrangements the ineligible asset acquired may be pledged as security for the loan, this tie between the loan and the property does not appear to colour the courts' or the CRA's analysis of Singleton-type structures.

[6] The Canada Revenue Agency (CRA) did not challenge the selling price of Mr. Lipson's shares of LipsonCo as not reflecting fair market value. Presumably, there was an accrued capital gain on the shares but this was not required to be included in income as the transfer occurred on a rollover basis under subsection 73(1).

[7] Interestingly, Mr. Lipson's admission in this regard was the very issue considered by the Tax Court of Canada in Overs v. R., 2006 D.T.C. 2192. The facts in Overs are quite similar to Lipson, except that, rather than the purchase of a home, the ineligible use of borrowed funds in Overs was the repayment of a loan owed by the husband to the family-owned corporation in order to avoid an income inclusion under subsection 15(2) of the Act. The spousal rollover provision in subsection 73(1) and the attribution rule in subsection 74.1(1) were similarly used. The CRA also asserted that the GAAR applied to deny the interest deduction effectively taken by the husband as a result of the attribution of the net loss on the shares he had transferred to his wife, subject to the spousal rollover. The Tax Court concluded that no avoidance transactions had occurred. Had Mr. Lipson not admitted that an avoidance transaction had occurred, this issue would have been considered by the courts in the context of the facts of before them, and the Overs decision and the Federal Court of Appeal decision in R. v. MacKay, 2008 DTC 6238. In MacKay, the Court held that the existence of a bona fide non-tax purpose for a series of transactions does not preclude the possibility that the primary purpose of one or more transactions within the series is to obtain a tax benefit, and hence, such transactions can be avoidance transactions. Interestingly the Tax Court, in deciding Lipson, commented on Overs in the context of recognizing the important factual component that must be considered in applying GAAR. The Tax Court indicated that the facts in Overs had an underpinning of commerciality or estate planning which was not present for the Lipsons. While not free from doubt, it appears that the courts in Lipson would have distinguished the Overs decision in order to find that an avoidance transaction did occur, if this fact had not been admitted.

[8] 2006 DTC 2687

[9] 2007 DTC 5172

About the Authors

Manjit Singh and Jillian Welch are with Wilson & Partners LLP, a law firm affiliated with PricewaterhouseCoopers LLP.

Copyright the Conference for Advanced Life Underwriting, March 2009

Comment: Tax and Estate Planning Involving Eligible Dividends

In the "new" landscape of eligible dividends, much has been written regarding how this may affect tax and estate planning involving successful private entrepreneurs. For example, Florence Marino recently wrote an excellent and thorough article on this topic in this newsletter. (See "Eligible Dividends Ð Another New Landscape," 2008, Vol. 3.) I certainly agree that the introduction of the eligible dividend rules significantly improves tax integration which therefore affects tax, remuneration and estate planning for private corporations and its shareholders.

Given the above, old rules of thumb involving bonusing down to the small business limit, looking for bonus replacements, loss carry-backs upon death, utilizing the "50% solution", etc. are no longer rules of thumb and, instead, should be replaced by a rule that every situation needs to be independently analyzed in order to determine the most tax efficient plan.

One of the matters that has bothered me recently is that old "bonus replacement" strategies still appear to be marketed as being wholly applicable and are still valid rules of thumb. For example, marketing with respect to contributions to a retirement compensation arrangement trusts ("RCA") appears to still be in high gear with certain commentators arguing that contributions to RCA's still make a lot of sense as bonus replacements. I disagree with such a rule of thumb. As stated above, the landscape of the eligible dividend rules has completely turned private tax planning on its head. While in some cases the mathematics and overall planning may make sense to continue making contributions to RCA's, it is my experience that the landscape of the eligible dividend rules has in fact changed the pendulum to just the opposite. With corporate tax rates aggressively declining thereby allowing for significant tax deferral to occur (as compared to the highest personal tax rates) one queries when the mathematics would actually in fact make sense to continue making contributions to RCA's as a rule of thumb for a bonus replacement. Having said that, RCAs can still be a useful estate planning tool in the right situation.

Some people may disagree with me, and that is fine. Instead, hopefully this short note to the editor will cause some people to reconsider and instead complete a thorough mathematical analysis on a year to year basis to look at the entrepreneur's current and long-term cash needs and plan with all available tools. To suggest that contributions to RCA's still makes a whole lot of sense as a bonus replacement in all cases suggests to me that such planning has not been done.

Copyright the Conference for Advanced Life Underwriting, March 2009

SRI in a Challenging Investment Landscape: An Opportunity for Success

By Michael Jantzi

Socially responsible investment has evolved in countless ways since it appeared on the Canadian landscape more than 30 years ago. Once primarily the domain of individuals who wanted to align their investments with their values, it now encompasses a growing number of foundations, charities, and faith-based institutions, wanting to ensure that their portfolios don't work at cross-purposes to their mission.

SRI: The beginning
Traditionally, SRI meant screening out companies from an investment portfolio if they did not pass some sort of environmental, social or governance (ESG) screen. However, many institutions that practice SRI in Canada now take a more proactive approach. They implement "positive screens" and seek out investments in companies that, for example, have implemented leading-edge environmental practices.

SRI encompasses more than screening portfolios. Instead of avoiding problem companies, some investors put more emphasis on using direct pressure as shareholders of corporations to improve their ESG performance. This encompasses various means, including letter writing, meetings, shareholder resolutions, and proxy voting, to dialogue with management and influence corporate behaviour.

The Growth Curve
Increasingly the data supports overwhelming anecdotal evidence that SRI is growing in Canada. According to the Social Investment Organization, SRI assets under management have grown from $65.5 billion in 2005 to $503 billion in 2007.

This is consistent with other major markets globally. Institutional SRI assets across Europe total more than Û2 trillion, with retail SRI products adding another Û49 billion. In June 2007, Watson Wyatt reported that SRI is the "fastest growing sector in the Australian managed investment market." However, one cannot talk about SRI without mentioning the United States, where the Social Investment Forum reports that almost (U.S.) $2.7 trillion in assets is managed using SRI strategies.

Through this period of extraordinary growth, one constant has remained. Social investors continue to view the world through a dual lens microscope. On the one hand they are interested in competitive bottom line returns. But they want to achieve these returns within the framework of personal values or organization mission.

SRI: A Continual Evolution
More recently, there has been a dramatic growth in awareness among mainstream investors that ESG factors can be material to financial performance. Unlike traditional social investors, the mainstream views ESG factors through the single lens microscope of investment risk. As noted by the head of British Columbia Investment Management Corporation (bcIMC), a company's success in operating in a sustainable manner "will be critical to sustained commercial profitability and therefore, to long term financial success for our pension beneficiaries."

Traditional barriers between SRI and the mainstream investment community began crumbling about nine years ago in the United Kingdom when amendments were passed to the 1995 Pensions Act. The Act now requires trustees to declare: "the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realization of investments; and the policy (if any) directing the exercise of the rights (including voting rights) attaching to investments." Similar legislation followed in Belgium, France, Germany, Italy, and Australia. In December 2008, the Ontario Expert Committee on Pensions recommended that the provincial government require pension plan statements to "reveal whether, and if so, how, socially responsible investment practices are reflected in the plan's approach to investment decisions."

An early indication of this mainstreaming trend was the move by global investors to work together on climate change issues. Launched in 2002, the Carbon Disclosure Project (CDP) now involves almost 400 institutions managing more than (U.S.) $57 trillion. Each year the largest companies in the world are asked to disclose how they are addressing the risks or opportunities that they face in relation to climate change. Canadian CDP signatories include the stalwarts of the Canadian SRI industry, in addition to some of the largest pension funds and financial institutions in the country, including bcIMC, Hospitals of Ontario Pension Plan, the Ontario Teachers Pension Plan, and RBC Financial.

In 2005, the UN Secretary-General launched the Responsible Investment Initiative. Twenty of the largest asset owners in the world, including Canada Pension Plan Investment Board (CPPIB), set out to develop a set of guidelines to outline commitments and responsibilities in the SRI area. The Principles of Responsible Investment were launched in April 2006 and are now backed by signatories managing almost (U.S.) $15 trillion in assets. Canadian signatories also include bcIMC and Caisse de dépôt et placement du Québec.

Arguably the most significant moves in this area have been made by CPPIB over the last several years. The most prominent pension fund in the country, the CPPIB has been very public about its commitment to evaluate ESG criteria within a fiduciary mandate. As outlined in its Responsible Investment Policy, which was launched in October 2005, CPPIB believes that long-term responsible corporate behaviour with respect to ESG factors can generally have a "positive influence on long-term corporate financial performance," and is therefore consistent with the Board's duty to maximize investment returns without undue risk.

Why Advisors and Financial Planners Should Care?
Clearly, SRI is growing. But why should advisors and financial planners care? What does this mean to your business?

There are two ways to address this question. SRI provides an excellent opportunity to build your book. The data shows that Canadians are looking to more closely align their investment decisions with their values. This opportunity becomes even more pronounced if you wish to target foundations, endowments, faith-based institutions or other mission-driven organizations as part of your business strategy.

On the other hand, there's a risk that your competitors will beat you to the punch. If you're unwilling to handle SRI inquiries, you run the risk of losing some clients to the growing number of advisors, planners, or ICPMs that are willing and able to provide service and support in this realm.

The Opportunity: Canadian Investors
Market research, undertaken by GlobeScan in 2008, shows that SRI is on the agenda for a significant number of Canadians. For example, GlobeScan reports that 73% of Canadians strongly agree (30%) or somewhat agree (43%) that SRI-type reporting is an important factor when making an investment decision. Almost a quarter of Canadians reported that they bought or sold shares because of a company's social performance (an additional 10% considered it). And while determining the motivations of Canadian investors can be difficult at the best of times, a majority of Canadian shareholders (54%) maintain that socially responsible companies are more profitable than irresponsible ones.

And here lies the opportunity for advisors and planners. According to GlobeScan, 78% of Canadians are very interested in learning more about the ESG performance of companies in their portfolios, a slight increase from 2004. But while they are more interested in SRI than ever before, your clients increasingly rely on the media to provide the information they require. You might ask what you can do to ensure that your client or prospect views you as a trusted source of SRI information and advice. Becoming more informed about SRI seems like a logical strategy in an increasingly competitive landscape where customer service is the key to client retention and building your book.

This increased SRI focus on the part of Canadian investors has been highlighted, in part, by the entrance of the major financial institutions into this market, decisions that were both underpinned and driven by increasing levels of client demand. In May 2007, Barclays Global Investors Canada Limited launched the iShares CDN Jantzi Social Index Fund, an ETF based on the Jantzi Social Index® (JSI®). Later that month, RBC Financial Group announced the launch of three SRI mutual funds. Bank of Montreal and Scotiabank have followed with SRI product offerings as well.

The growth in the Canadian retail space reflects trends in other markets around the world. In May 2006, ABN Amro released the findings of some market research, which highlighted that 88% of UK investors surveyed were positive about SRI, however, only 23% were aware that SRI funds existed. Understanding that its advisors were in the perfect position to help bridge the gap between what people wanted, but didn't know about, ABN Amro set out to seize this SRI opportunity in the marketplace.

Steady SRI growth in Australia since the mid-1990s took a significant upswing in 2003. Although difficult to ascertain with certainly what the drivers were, it's not difficult to imagine that the implementation of ASIC Practice Statement 175 that year was an important catalyst. Characterized as a "Good Practice Recommendation," financial advisors in Australia are encouraged to introduce SRI into the "know your client" process. Interestingly, AMP Financial Planning, the largest advisory firm down under, has adopted a standard set of basic SRI fact-finding questions, which it has made mandatory for all of its advisors.

The Opportunity: Foundations and Other Mission-Driven Organizations
If your business plan includes a focus on this segment of the market then SRI should be a key part of your sales and operational strategy. Foundations and other values-based organizations are beginning to realize that SRI can help them strengthen their mission and attain other objectives. An advisor or planner that is equipped to help trustees think through these challenges, and can provide SRI support, will be well positioned in an increasingly competitive financial services environment.

Traditionally, there has been a wall between financial and grant making operations at foundations. However, foundation trustees are realizing that this type of structure can hamper the organization from reaching its full potential.
For example, imagine that a foundation with an environmental mandate supports an environmental group fighting to save an ecologically significant piece of land from being mined by a large gold company. Let's assume that this funding totals $10,000 a year. Imagine that we discover that this foundation holds this gold company in its investment portfolio and its investment totals $100,000 in stock. Is this foundation really meeting its mission when its support of David is but a tenth of that for Goliath?
SRI can also help NGO or other voluntary sector organizations reduce the dissonance between their programming sides and the management of their financial resources. An NGO that works on human rights concerns in the international arena might find it uncomfortable to be invested in a company that is linked to these types of abuses in jurisdictions where it operates. Or a religious institution that has a commitment to peacemaking, might find it objectionable to be involved with a company that manufactures weapons.

Many advisors and planners are focused on helping their clients with their philanthropic initiatives. Having a capacity to offer SRI support can reinforce these efforts. Canadians are beginning to understand that "it's not just about how they give away the money they make, it's about how they make the money they give away." Why would your client, who supports environmental charities, want to invest in companies that cause the problems in the first place? If you can be the trusted advisor that brings these contradictions to light, and, more importantly, offers a solution, you have created a relationship that is more resistant to competitive threats.

SRI: Key Questions
Whenever the issue of SRI is discussed there are certain core questions that arise. Although there is not the space to deal with all of these, we'll now focus on two of the most prominent ones.

SRI and the Bottom Line
Critics of SRI argue that integrating ESG criteria into the investment decision-making process reduces the size of the universe; thereby resulting in a less efficient portfolio, as defined under modern portfolio theory. However, as we've learned, some mainstream investors are beginning to view these types of indicators as an important part of the research process. Managers say that in some cases ESG criteria helps them identify risks in the marketplace that often are not covered or well understood by traditional analysis. For example, the screens help identify best-of-sector oil and gas companies that are better positioned with respect to climate changes risks or opportunities regarding alternative energies. They help identify companies that may not be aware of human rights risks in their operations overseas or those firms that are trying to mitigate environmental risk by implementing leading-edge environmental management systems and practices.

So which is it? Does an evaluation of ESG performance detract from the bottom line or does it enhance shareholder value over the long-term?

Once piece of evidence in the Canadian context is our own Jantzi Social Index, a socially screened, market capitalization-weighted common stock index, in January 2000. It consists of 60 Canadian companies that pass a set of broadly based ESG rating criteria.

Through the end of October 2008, the JSI's performance remained strong relative to the traditional benchmarks, posting a 4.06% annualized return since inception versus the S&P/TSX Composite (3.69%). But poor relative performance in the final two months of the year, primarily due to an underweight in gold companies, now means the JSI lags the Composite by about 30 basis points.

No doubt the JSI's recent performance has been disappointing to social investors, and critics will begin to voice the "I told you so" arguments. However, given its history and make up, one can surmise that when the Canadian market experiences a broader recovery, the JSI will once again show a more competitive face. Moreover, as calls for greater corporate disclosure and transparency continue to emerge out the financial crisis, and demand for ESG leadership and performance are incorporated into economic recovery packages, many of the JSI constituents will be well positioned to compete in the new and changing marketplace.

Does SRI Make a Difference?
The SRI success story goes well beyond financial returns. For example, the SRI community leads the way in corporate engagement and the filing of shareholder proposals. On the governance side, shareholder discontent with respect to levels of executive compensation is in the spotlight. Other proposals have addressed issues such as climate change, railway track safety, tobacco sales, labeling of genetically modified foods, and human rights issues.

But even if we couldn't point to any corporate success stories, SRI would still be an important option to consider. The very act of helping clients align their investment decisions with their values is enough. For foundations and other mission-driven organizations, the exercise of reviewing ESG parameters also has merit, in and of itself. According to Stephen Viederman, former head of the New York City-based Noyes Foundation, "ultimately SRI conversations deepened and strengthened the foundation's understanding of its mission and our values, which is of great benefit whether or not Noyes changed the world through its resulting screened investments."

What Can You Do?
There's no magic answer that will guarantee success on the SRI front. Like anything it requires a commitment to educate and familiarize yourself with the SRI tools you have at your disposal, and begin to build these into your business plan and strategies.

The single most important piece of advice I can give is simply this Ð ask the question. Our experience suggests that you can't rely on clients to request SRI products and advice. In order to maximize your opportunity, and reduce the risk of losing your client, you need to be proactive. Introduce the concept of SRI in a non-threatening manner. Leverage your philanthropic expertise as a point of entry. Borrow from the Australian model and work it into the "know your client" process. Take the opportunity to get to know your client and work to build those bonds that deepen loyalty and trust.

Of course the challenge is not so much in asking the question, but whether you know how to cope with the answers and are able to manage the ensuing conversation to deliver outcomes that reflect that conversation. Make sure that you have access to SRI research and support services to allow you to engage with your clients in a meaningful and effective manner.

About the Author

Michael Jantzi is president of Jantzi Research Inc., an independent investment research firm that evaluates and monitors the environmental, social, and governance performance of securities. He will present a workshop on Socially Responsible Investing at the CALU 2009 annual meeting. Michael Jantzi can be reached at mjantzi@jantziresearch.com

Copyright the Conference for Advanced Life Underwriting, March 2009