One of the more serious secondary issues surfaced during the forensic examination of the Canada-Israel Education Foundation was a series of false entries made on the T3010 Information Returns Income Statements submitted by the charity to the CRA. These false statements have the effect of concealing the overwhelming size of the donations made by the Gerald Schwartz and Heather Reisman Charitable Foundation into the conduit. The illegal entries appear to have been part of a necessary set of obfuscations done to assist the perpetrators in hiding the troubling relationships between the Chairman of the Schwartz Foundation Gerald Schwartz and the three directors operating Canada-Israel at its inception. There will be much more on later sections of the Dominion series on their intertwined relationships.
For those otherwise unaware, all Canadian registered charities are required to complete and file a Registered Charity Information Return (the T3010) within six months of their fiscal year-end. These returns, roughly equivalent to a tax-return for tax-exempt organizations, are filed annually by Canadian charities to provide the CRA with important financial and operational data to show the charity operates as legally required by the Income Tax Act. In Canada, all of these returns are publicly available information, accessible by informal information request or through the CRA website.
The presentation of the transaction trail will begin here. It is an unfortunately dry accounting analysis, but extremely important to establish illegal conduct on the part of the participants in the transaction trail and conduit, right from the start. These false statements on the Information Returns are clear violations of the Income Tax Act (ITA) made by directors at Canada-Israel and facilitated by conduct by the Schwartz Foundation. Therefore, irrespective of the author’s presentation of the transaction trail itself, these false statements should be examined for potential criminal prosecution by the RCMP. Moreover, two of the three Canada-Israel directors are attorneys licensed in Ontario. Ontario attorneys are required to adhere to the Ontario Law Society’s Code of Conduct, including the requirement not to participate in dishonest or illegal activities. An investigation of both attorneys should now be opened by the Law Society of Ontario for these serious violations of the ITA. The author is of the opinion both should be disbarred.
Importantly, it will establish how essential the Schwartz Foundation donations were to the conduit middleman charity. It is necessary for the reader to be aware that the middleman could not exist without Gerald Schwartz and the Schwartz Foundation. A normally operating charity is not beholden to one private foundation and one donor over a six-year time period like Canada-Israel was. This section will provide information sealing this argument.
Crucially, these are numbers. If one is interested in overcoming baseless accusations of anti-Semitism or allegations of reckless or slanderous statements, they are absolutely essential. It is very hard to argue with an abacus.
The T1236 Program Worksheets from the Gerald Schwartz and Heather Reisman Charitable Foundation list 24 contributions by this private foundation to Canada-Israel between 2010 and 2016 totaling $2.24 million. Annual contributions were highly variable, swinging between $74,916 and $729,707 (2011), but skewed noticeably towards the higher end.
The Schwartz Foundation contributions are absolutely essential to Canada-Israel. The charity’s income statements list a total of $2.63 million in revenue over six available fiscal years. The identified transaction trail from the Schwartz Foundation represents 85% of all declared revenue by the charity and 94% of all contributions positively identified by the author (more on this later).
The Schwartz Foundation’s support was apparent across the lifetime of Canada-Israel, with the first contribution of $33,333 made between July 1st and November 30th, 2010 shortly after Canada-Israel obtained charitable status. Every T1236 Program Worksheet from the Schwartz Foundation between the fiscal year 2010 until 2016 has at least one donation to Canada-Israel. All available information indicates that the Schwartz Foundation made the first and last donations ever into this charity.
Eight other private foundations and registered charities beyond the Schwartz Foundation also supported Canada-Israel with ten donations totaling $129,497. The total number of donations by other registered charities (10) was less than half (24) made by the Schwartz Foundation. While the Schwartz Foundation provided 85% of Canada-Israel’s revenue, all other identified registered charities provided 5% (10% of Canada-Israel’s revenue was made by untraceable individual donations). Not a single foundation supported this charity consistently across fiscal years, none made more than two transactions, and none provided more than 3 percent of the charity’s total revenue. All identified private foundations were controlled by close associates of Gerald Schwartz or were major benefactors of the Israeli lobbyist cofounded by Gerald Schwartz, the Centre for Israel and Jewish Affairs. The extent of these relationships will be discussed in detail in a later section of the Dominion Series.
Given the weight of evidence, it is very difficult to argue that Canada-Israel could exist without the identified transaction trail flowing out of the Schwartz Foundation. In fact, it didn’t exist once the Schwartz Foundation halted contributing to the charity. The directors failed to file their information return and charitable status was revoked immediately after the last donation was made.
What makes Gerald’s support especially unusual is that it was technically illegal when it began in 2010. Until Bill C-48 Technical Amendment of the Income Tax Act was passed by Royal Assent on June 26th, 2013[1], subsection 149.1 (1) of the Income Tax Act (ITA) specified that charitable organizations could, under no circumstance, receive contributions exceeding 50% of total revenue in any given fiscal year from a single private foundation or group of donors within arm’s length.
In charitable parlance, this hard cap is known as the contribution test. The substantial contributions made by the Schwartz Foundation into Canada-Israel between fiscal years 2010 to 2013 clearly violated this test on a technical reading of the Income Tax Act. Though there is a fiscal year-end mismatch between the Schwartz Foundation sending funds (November 30th) and Canada-Israel receiving contributions (June 30th) which confuse the issue somewhat, even when only the Schwartz Foundation’s 2010 to 2012 fiscal year contributions are considered, the Schwartz foundation still provided 76% of the $1,586,051 in revenue Canada-Israel earned during its first three fiscal years prior to the amendment. This is clearly well above the 50% legal limit.
Lucky then for Canada-Israel that once the amendment passed in 2013, it was applied retroactively to all charitable donations subsequent January 1st, 2000. Today, the contribution test is gone and the donations legal.
Though the Schwartz Foundation’s donations were technically illegal when they were made, in practice the CRA was no longer evaluating charities using the contribution test and had not done so since late 2007. Instead, the CRA was already applying the replacement for the contribution test — the control test — in anticipation of the coming legal change and retroactive application. The technical notes to the 2013 Amendment of the ITA states,
For a charity that has applied for registration after February 15, 1984 and which has been designated as a private or public foundation, the definition “charitable organization” also requires that not more than 50% of the charity’s capital be contributed by a person or group of persons not dealing with each other at arm’s length. This definition is amended to replace the “contribution” test with a “control” test. As a result, a charity will not be disqualified from being treated as a charitable organization solely because a person, or a group of persons not dealing with each other at arm’s length, has contributed more than 50% of the charity’s capital. However, such a person or group is not permitted to control the charity in any way, nor may the person or the members of the group represent more than 50% of the directors, trustees, officers and similar officials of the charity.
A control test sets up a two-pronged evaluation process of the relationship between a donor and a donee. The first prong is just the original contribution test: did a donor contribute 50% or more of contributed capital (donations) to the charitable organization. If this first threshold his achieved, the donations are still legal unless the second prong is violated: the donor and the donee must control the charity in any way. Evaluation of control by the donor requires the donor to remain arm’s length from a majority of the board of directors at the receiving charity at a bare minimum.
The Canada Revenue Agency (CRA) provides a three-prong test for evaluating whether parties to a transaction are operating at arm’s length[2], relevant to the second prong of the control test,
(1) whether there is a common mind which directs the bargaining for both parties to a transaction;
(2) whether the parties to a transaction act in concert without separate interests; and
(3) whether there is de facto control.
It is not required that all three tests be satisfied in every case. Any of the three criteria may be of greater or lesser importance in the determination whether the parties are dealing at arm’s length.[3]
This would all matter a great deal if a CRA auditor arrived at Canada-Israel. The Schwartz Foundation was clearly a major contributor donating more than 50% of Canada-Israel’s revenue. But, unlike the prior contribution test, an auditor would then be required to examine the relationship between the directors of Canada-Israel and the Schwartz Foundation. As will be discussed later in great depth, a majority of the directors at Canada-Israel were financially reliant on Gerald Schwartz for at least a portion of their income and employment. Their intertwined relationships and biographies provide clear evidence that no-one in this transaction trail was clear-cut arm’s length. The auditor would notice that. The auditor would also notice Canada-Israel had engaged in making payments with clear evidence of illegality to a number of foreign organizations (to be discussed in detail). If the auditor remembered the audit, they might check in later, after Stephen Harper and John Baird had arrived at one of the intermediaries after leaving public office. You just can’t know for sure.
Gerald Schwartz’ would obviously be uncomfortable with the prospect of being identified within arm’s length of the directors at Canada-Israel given the facts. Whether Canada-Israel was deciding its conduct by either the practical or technical definition of the law, both presented distinct issues.
All contributions to qualified donees by private foundations are required to be entered on Line 4510 Contributions from Other Registered Charities of the receiving charity’s T3010 Information Return’s Income Statements. Private foundations are one of three forms of registered charities in Canada and are therefore tax-exempt. As tax-exempt status has already been applied to the entity’s pool of assets, the private foundation’s donees cannot legally issue a donation receipt to it. Therefore, line 4510 is where the Schwartz Foundation’s contributions should have been listed on the T3010 Information returns by Canada-Israel.
If a charity receives donations from a private individual or other entity that does not have registered charitable status, the contributions must be tallied instead on Line 4500. Contributions in this category are issued a donation receipt because tax-exempt status has not already been applied. Donations from private foundations cannot be included on this line of the T3010.
The proper allocation of contributions is where the false statements on the T3010’s from Canada-Israel were identified. Canada-Israel misallocated the Schwartz Foundation’s contributions between these two lines of the T3010. The Schwartz Foundation made $2.24 million in donations to Canada-Israel between 2010 and 2016. Canada-Israel only ever listed a total of $1,058,511 on the appropriate line 4510. Line 4510 should have at least reflected the full total contributed by Schwartz. It didn’t.
Instead, much of the Schwartz Foundation’s contributions wound up on the incorrect line 4500. Canada-Israel listed a total of $1,587,259 on this line indicating they issued a donation-receipt. This is impossible, there was only $390,000 in contributions ever received outside of the identified contributions on the T1236 Program Worksheet from the Schwartz Foundation. The implication is clear: the directors at Canada-Israel were by necessity splitting the Schwartz donations and incorrectly submitting them on their T3010 Information Returns.
The Schwartz Foundation was unusual not only for selecting Canada-Israel for a large level of support but in how it supported this charity. The fiscal year end at the Schwartz Foundation is November 30th. Which means the first full fiscal year when both Canada-Israel and the Schwartz Foundation were active concurrently was 2011. It was in this year that the Schwartz Foundation noticeably shifted its pattern of support to qualified donees. Prior to this fiscal year, when the Schwartz Foundation made a donation it was almost always done with one disbursement per qualified donee. That changed in 2011. Instead, the disbursements were split apart and “chunked” into numerous transactions.
For example, the charity Eva’s Initiative received one contribution from the Schwartz Foundation in 2010 for $100,000, but two contributions in fiscal 2011 even though it received a far smaller donation total of $31,627. This had a dramatic effect on the gross total number of contributions, which moved from 47 to 83 between 2010 to 2011.
Canada-Israel was chunked like none other. The $729,707 contributed by the Schwartz Foundation was chunked into no less than 14 installments. No other recipient was chunked into more than three transactions. Given the degree of disparity between the utilization of this “chunking” technique between donations to Canada-Israel and other qualified donees, the author is of the opinion that Canada-Israel was the reason this technique was adopted and the other “chunks” just another half-assed attempt at obfuscation by Gerry. Most interestingly, this pattern rapidly dissipated until disappearing entirely in fiscal 2013. Afterward, only one donation was made until fiscal 2016.
The fiscal 2016 Schwartz Foundation contributions to Canada-Israel require additional clarification. Though two contributions were made, only one was labeled correctly. The final donation for $136,023 was mislabelled as being donated to the Jewish Federations of Canada-UIA on the 2016 T1236 Program Worksheet. It was only identifiable by using the attached Business Registration Number included beside the organizational name on the worksheet. The Schwartz Foundation made this error despite submitting a previous donation in that same fiscal year’s Program Worksheet correctly and labeling 22 prior contributions from previous fiscal years to Canada-Israel correctly. The effect was to maintain the facade of the downward pattern to an outside observer while in reality breaking the pattern in fact.
The author is of the opinion that this relates to the falsification of Canada-Israel’s T3010 lines. Chunking maintains the superficial appearance that there are many donors of differing interest or financial ability supporting the charity. Instead of one very large donation in each fiscal year, there are many variable amounts, including a small donation of $15,000 and a larger contribution of $190,000 in fiscal 2011 alone. Canada-Israel could then mislabel some of these smaller chunked donations on the incorrect 4500 T3010 line while placing others in the correct category for private foundations.
If the Schwartz Foundation made one very large contribution per year with no additional contributions into the Canada-Israel Education Foundation, it would become very difficult for Canada-Israel’s directors to falsify their returns. First, they were technically violating the contribution test in effect prior to 2013, which could be a potential issue and would require multiple small transactions. Second, very large donations rarely come from individual donors who require a donation receipt and are more likely to be made from wealthy benefactors using a private foundation, which does not receive a receipt. Therefore, Canada-Israel would likely want enough small donation entries to justify the false entry on line 4500.
This is a testable hypothesis. If the above assertion is correct, earlier Income Statements submitted by Canada-Israel to the CRA will see more income splitting through mislabelling donations as gifts where a charitable receipt was issued (Line4500) than later fiscal years, simply because the early years exhibited the chunking behavior.
This trend is exactly the noticeable pattern on the actual Schedule 6s submitted by Canada-Israel (please see graph below). Considering one technique, the chunking, is done by the donor and the other pattern, mislabelling, is done by the receiving charity, the two parties must necessarily be working closely in tandem in order for the technique to be effective.
There is an intricate dance here between the major contributor and the receiving charity. A dance that appears intentional. This is important, for by attempting to conceal the Schwartz Foundation’s overwhelming donations into Canada-Israel, the perpetrators have unintentionally provided evidence that they “acted in concert” and, therefore, were non-arm’s length. In particular,
The courts have expanded [the arm’s length test] to include the concept of “acting in concert” with respect to an element of common interest. Therefore, even when there are two distinct parties (or minds) to a transaction, but these parties act in a highly interdependent manner (in respect of a transaction of mutual interest), then it can be assumed that the parties are acting in concert and therefore are not dealing with each other at arm’s length.
This push-pull effect of chunking and mislabelling very much appears to fit the court’s concept of a “highly interdependent manner”. The reader may decide for themselves.
Interestingly, the technique’s deployment noticeably halts once the Technical amendment passes the House of Parliament in 2013 adopting the control test. It appears as though the participants were cognizant of the contribution test, based on the distribution of mislabelling by Canada-Israel, after all.
The reader is directed to make their own decision over the author’s analysis of the interdependent chunking and mislabeling pattern between the Schwartz Foundation and Canada-Israel. However, what cannot be denied is that the returns did contain erroneous entries consistently on lines 4500 and 4510 across the lifespan of Canada-Israel. This was not a small error. Over a million dollars was mislabelled. Canada-Israel’s directors were highly sophisticated operators, with decades of charitable experience. Two were licensed attorneys. They knew their obligations. These are not individuals who make an accounting error of this magnitude for years just by accident.
Which means it becomes important to understand exactly who Gerald Schwartz is, what his interests are, how they relate to Canada-Israel and why the perpetrators would be interested in concealing the relationship.
That’s up next, as the Dominion Series abandons the numbers to delve into the interests of Gerry “the Curly Haired King” Schwartz. If the reader is aware of who Gerry is and what he wants, go ahead and skip to Dominion Part 6, where the Schwartz Foundation’s Board of Directors is discussed in greater detail.
[1]https://www.canadiancharitylaw.ca/blog/long_awaited_technical_amendments_affecting_charities_receive_royal_assent
For further reference, please see the CRA case law on “acting in concert” (Interpretation Bulletin IT-419R at ¶17) and Viking Food Prod. Ltd. v. M.N.R., [1967] D.T.C. 5067 at 5070, [1967] C.T.C. 101 at 106 (Ex. Ct.) per Jackett, P. cited in J Owen, “Acting in Concert”.
[3] Canada v. Remai, 2009 FCA 340, 2009 DTC 5188 (FCA), at par. 32
[4] A complete overview of the CRA’s audit of Beth Oloth Charitable Organization between 2016 and January 2019 is included near the end of the analysis as an example of a CRA audit.
