For several years now, the Toronto Financial Services Alliance, a public-private partnership dedicated to building Toronto as a global financial services centre, has promoted the idea of positioning the city as the North American hub for alternative, also known as Islamic, financing.
The realization of that goal would be a significant development not only for Toronto’s economy but for its major law firms.
“Most of the large Canadian law firms have some experience with clients or issues involving Islamic finance,” says Jeffrey Graham of the Toronto office of Borden Ladner Gervais LLP. The firm recently hosted a seminar on Dubai’s plans to become a global hub for the Islamic economy.
By way of example, Blake Cassels & Graydon LLP, Bennett Jones LLP, and Norton Rose Fulbright Canada LLP have presences in the Persian Gulf region. Stikeman Elliott LLP’s lawyers have written extensively about Islamic finance and Cassels Brock & Blackwell LLP has given advice to parties in that space.
“It’s an opportunity for the legal community, in conjunction with the financial services and business consulting community, to promote Toronto in a way that is both different and complementary to what they are doing otherwise,” says Graham.
“It’s interesting that there have been a number of Islamic commercial banks established in the U.K. and, as a result, many of the country’s major law firms have Islamic finance practices.”
What’s clear, however, is that nothing will happen if and until all levels of government are on side.
But just when the federal government intends to move on the issue, if at all, isn’t certain. “Canadian government outposts in the Gulf see this in a positive light because it helps Canada distinguish itself from the U.S. in terms of being supportive and open and behaving consistently with a broad view of the world and at the same time attract an industry that is growing rapidly,” says Graham.
In reality, however, the federal government has work to do, particularly in the area of creating a tax environment that treats alternative and traditional financing on a tax-neutral basis.
A simple example involves the sale of a $500,000 house. Using conventional financing, HST would be payable on the $500,000. Under the Islamic system, interest on a notional mortgage would be incorporated into the sale price, raising it, hypothetically, to $750,000. Despite the fact that $250,000 of the sale price actually represents future interest, HST would be payable on the full amount because Canadian law makes no allowance for the vagaries of alternative financing.
“The U.S. and the U.K. have gone much further in making themselves tax-neutral,” says Walid Hejazi, associate professor of international business at the University of Toronto’s Rotman School of Management that boasts the only master of business administration course on Islamic finance in Canada. “There’s no doubt that we’re behind the curve.”
Otherwise, several efforts to establish Islamic banks in this country have reportedly been “less productive” than the applicants’ sponsors had hoped them to be.
“There’s some sense that there’s a bias or at least a reluctance to allow the establishment of an Islamic bank in this country,” says one observer familiar with the situation.
“But the real problem might be the high entry standards we have.”
The Ontario government, committed to supporting the continued growth of Ontario’s financial services sector, has publicly recognized the potential for alternative financing.
“The provincial government has been fully supportive of events relating to Islamic financing,” Hejazi says.
Indeed, the Ministry of Finance’s response to a Toronto Financial Services Alliance list of priorities that included positioning Toronto as the North American hub for alternative financing has been encouraging.
“The Ministry of Finance has agreed to participate in any potential working group led by the federal government to review tax and regulatory issues related to alternative financing with the goal of developing a feasible, cost-effective package of potential federal and provincial legislative and regulatory amendments that subject to federal-Ontario approval, would: result in alternative financing having similar tax and regulatory treatment to conventional financing; and be based on fiscal neutrality for the province, tax neutrality, the integrity of the tax and regulatory systems, economic growth and consumer protection,” it stated in its response.
Dany Assaf of Torys LLP’s Toronto office is optimistic about the growth of Islamic financing in Toronto but he notes that plans are still embryonic. “The contours of a specific strategy are just starting to come together and we’re still looking for leaders,” he says.
“What we are doing well, particularly at the Rotman School of [Management], is developing the professional tools and skills to work with alternative finance and the connections to bring the business here.”