Third party penalties under the Income Tax Act
Why the landmark 2015 Guindon decision by the Supreme Court of Canada matters to Canadian accountants
The third party penalty in section 163.2 of the Income Tax Act is not criminal in nature nor does it provide true penal consequences, explains David J. Rotfleisch, CA, CPA, JD, of Rotfleisch & Samulovitch P.C.
TORONTO – In Guindon v. Canada, 2015 SCC 41, the Supreme Court of Canada (the "SCC") confirmed that section 163.2 of the Income Tax Act (the "Act") does not amount to criminal sanctions and is constitutional. Section 163.2 is a tax penalty provision relating to third party tax advisors, including Canadian tax lawyers and accountants. Through this provision, the Canada Revenue Agency (the "CRA") can impose civil penalties on third party tax advisors who make false statements relating to tax matters or cause another person to make false tax statements.
Ms. Guindon, who is the taxpayer in this case, was a lawyer who primarily focused on family law and wills and estates. She had no expertise in income tax law. Nonetheless, she agreed to provide a legal tax opinion on a tax donation program called the Global Trust Charitable Donation Program. Under this program, participants would acquire and donate timeshare units to a charity at a fair market value greater than their cash payments for the timeshares. She provided a legal tax opinion letter on the tax consequences of this program without reviewing the supporting documents. She was also the president and administrator of a registered charity that participated in the said tax donation program.
The CRA disallowed the tax credits claimed by the donors of the donation program on the basis that it was a sham. The CRA also assessed Ms. Guidon for penalties under section 163.2 of the Act for each of the tax receipts issued on the basis that she knew or would have known but for willful disregard of the Tax Act that the tax receipts were false statements. Ms. Guidon was assessed in the amount of $546.747. She appealed the assessment to the Tax Court of Canada.
Tax Court and the Federal Court of Appeal
In her appeal at the Tax Court, she submitted that section 163.2 of the Act created a criminal offence and that she was a person "charged with an offence" entitled to the protection of section 11 of the Charter of Rights and Freedoms (the "Charter"). She thus challenged the imposition of the penalties on the basis that they are criminal in nature. The Tax Court of Canada agreed with Ms. Guindon. The Tax Court found that Ms. Guindon's conduct was culpable within the meaning of section 163.2 of the Act but vacated the assessment since the provision is criminal in nature and involves a sanction that is a true penal consequence. The CRA appealed to the Federal Court of Appeal (the "FCA"), and the FCA overturned the Tax Court's decision. Ms. Guindon appealed to the SCC.
The Supreme Court of Canada
The SCC upheld the FCA's decision on the basis that the third party penalty in section 163.2 was not criminal in nature nor provided true penal consequences. The Court stated that section 11 of the Charter applies to proceedings that are "criminal in nature" and that have "true penal consequences." The Court stated that a proceeding is criminal in nature when it is aimed at promoting public order and welfare within a public sphere of activity. On the other hand, the Court stated that proceedings of an administrative nature are primarily intended to maintain compliance or to regulate conduct within a limited sphere of activity. The Court held that a "true penal consequence" involves imprisonment or a fine which, by its magnitude, would appear to be imposed for redressing the wrong done to society at large.
The Court stated that the traditional hallmarks of criminal proceedings were not present in section 163.2 of the Act. The Court stated that section 163.2 of the Act does not involve the laying of a charge, an arrest or a summons to appear before a court of criminal jurisdiction. The Court also stated that section 163.2 does not lead to a criminal record. On the other hand, in the process leading to the imposition of the third party penalty, a CRA auditor conducts an audit, advises the preparer or planner in writing of the audit, and considers any representations the individual may make before imposing the penalty. These administrative processes are different from the processes which apply to criminal offences.
The Court also stated that the administrative monetary penalties in section 163.2 did not amount to a true penal consequence. A true penal consequence is an imprisonment or fine which is imposed to redress the wrong done to society at large rather than simply to secure compliance. Although the Court recognized that the penalties were substantial in this case, the Court held that the amount of the penalty on its own could not be determinative. The Court held that sometimes, hefty administrative penalties might be needed to deter conduct to the administrative scheme. Thus, the Court found that the penalty does not constitute a true penal consequence. The Court thus stated that the Charter protections could not be invoked by Ms. Guindon, and the appeal was dismissed.
Guindon affirms that third party penalties under section 163.2 will continue to be imposed through the CRA assessment procedure. Therefore, tax advisors, including Canadian tax lawyers and accountants, must always take care when advising on tax related matters. This case also shows that directors of charities must ensure that their tax receipts are issued properly because section 163.2 penalties may be used by the CRA to assess the directors of charities if it believes that the tax receipts are false.
Editor's Note: Guindon v R is a landmark decision of the Supreme Court of Canada and there is a great deal of commentary about the case by both lawyers and accountants. The Minister assessed substantial penalties against Ms. Guindon, which the SCC stated "are about ensuring that this discrete regulatory and administrative field of endeavour works properly."
David J Rotfleisch, CPA, JD, is the founding tax lawyer of Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law firm. With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax litigation. Visit www.Taxpage.com and email David at firstname.lastname@example.org.