Civil penalties for third-party tax advisors

Minimal participation in and knowledge of a tax shelter does not discharge one from third-party advisor penalties as long as one has a legal duty to ensure a tax planning arrangement complies with the Income Tax Act and Excise Tax Act, says David J. Rotfleisch, CPA, JD, of Rotfleisch & Samulovitch P.C.

TORONTO – Civil penalties for tax planners and tax preparers were introduced in the 2000 budget in order to deter those who promote tax shelters. These penalties were introduced as section 163.2 of the Income Tax Act and section 285.1 of the Excise Tax Act. The legislation was drafted to cover a wide scope of tax planning and tax preparation activities. Although the Minister of Finance reassured the public in 2000 that these penalties are only reserved for egregious situations, this assurance does not have the force of law. When a tax shelter is audited, a number of third party advisors with different levels of authority and involvement with the tax shelter may be assessed for third party advisor penalty under section 163.2 of the Income Tax Act or section 285.1 of the Excise Tax Act.

The Issue of Ploughman: Was Mr. Ploughman Sufficiently Involved to Constitute a Promotor or Creator?

The 2017 Tax Court of Canada decision Ploughman v. the Queen was decided over the issue whether the appellant Mr. Ploughman's involvement with a tax shelter was sufficient for the third party advisor penalty to apply. One of the lawyers involved in this donation program, Ms. Guindon, has also been assessed for third party advisor penalty under section 163.2. Ms. Guindon has appealed her case all the way to the Supreme Court of Canada, where the Supreme Court decided in favor of the CRA in 2015. In this appeal to the Tax Court of Canada, Mr. Ploughman argues his involvement with the donation program was of an entirely different nature compared to Ms. Guindon.

Specifically, Mr. Ploughman argued he was merely a marketer of the program and had no involvement with the design of the program. Mr. Ploughman further contended he cannot be liable in any case as he relied on Ms. Guindon's professional advice in good faith, which under subsection 163.2(6) of the Income Tax Act exempts him from liability.

Ploughman v the Queen

The donation arrangement in question was conceived in 2001. A Trust named the Global Trust would be set up first in which timeshare units located at the Turks and Caicos Islands would be transferred to the Trust. Afterward, each donor would purchase their rights in these timeshare units and become a beneficiary of the Trust. The participants would donate their rights in the timeshare units to a registered charity where receipts would be issued for the fair market value of the timeshare units. Trustee for the Global Trust would be an accounting firm which was partly owned by Mr. Ploughman.

For these donation arrangements known as in-kind donations, CRA will often take issue with whether the fair market value given on the donation receipt represents a fair and objective evaluation of the property. However, in this case, the Global Trust was never created, and no timeshare unit was ever transferred to the donors in the first place. Therefore there is no question that the fair market value claimed by the donors on their tax returns were false.

During the creation of the Trust, Mr. Ploughman asked Ms. Guindon for a legal opinion letter on the donation arrangement before all the documents were finalized. Ms. Guindon was a lawyer practicing in the area of family law and estate law. Ms. Guindon was also the director of the charitable foundation intended to be the recipient of the timeshare units from the donors. In the legal opinion letter, Ms. Guindon stated her expertise was not in tax law, and that the opinion she gave is based on the assumption that the documents would be finalized and that this donation arrangement would be substantially similar to another donation arrangement carried out by Athletic Trust.

Court Ruling: Failure to Conduct Due Diligence can constitute Culpable Conduct

Mr. Ploughman argued he cannot be considered a creator or promotor of the donation arrangement under section 163.2. His involvement with the donation scheme was minimal as he had no knowledge that Global Trust had not been created and the timeshare units were not transferred to the charity on the donors' behalf until April 2002, after the donation receipts were already sent out to the donors for the 2001 tax year.

Furthermore, even if he was a creator or promotor, he relied on Ms. Guindon's opinion letter for assurance. After discovering the issue with the Global Trust, Mr. Ploughmanthen consulted with a lawyer from the Turks and Caicos Islands and sent out a letter to the donors assuring the donors they will be able to retroactively claim their donation credits for the 2001 tax year once the issues surrounding the Trust and timeshare units had been resolved.

However, Mr. Ploughman's testimony of his involvement with the donation arrangement failed to sway the Court as they considered his legal status as the Trustee of the Global Trust and his letter to the donors in April 2002 to be determinative of his status as creator or promotor.

The Court further considered Mr. Ploughman's lack of knowledge as sufficient to constitute indifference as to whether the Act has been complied with, which falls under culpable conduct listed under subsection 163.2(1). Specifically, Mr. Ploughman's culpable conduct consists of ignorance of his duties as a Trustee, failure to consult a knowledgeable Canadian tax lawyer as to whether retroactive dating is permissible under Canadian tax law, and failure to do his due diligence when giving out donation receipts for the 2001 tax year.

The Court also found Mr. Ploughman's reliance on Ms. Guindon not to fall under subsection 163.2(6), which exempts advisors from the third party planner penalty when the advisor relied, in good faith, on information provided to the advisor by or on behalf of the other person. In the case, the Court found subsection 163.2(6) to be applicable only if Mr. Ploughman relied on information provided by the donors themselves or representatives of the donors. Since Ms. Guindon was not a representative of the donors, Mr. Ploughman's reliance on her legal advice cannot fall under subsection 163.2(6) exemption. The Court went on to state Mr. Ploughman's reliance on the opinion letter was not in good faith as the opinion letter was written on the assumption a Trust will come to existence. Mr. Ploughman should have done his due diligence regarding the existence of the Trust even after the opinion letter was produced by Ms. Guindon.

Due Diligence to Avoid Third-Party Advisor Penalties

Ploughman v the Queen suggests that minimal participation in and knowledge of a tax shelter does not discharge one from the third-party advisor penalties as long as one has a legal duty to ensure a tax planning arrangement complies with the Income Tax Act and Excise Tax Act.

The Appeal is the case of Glenn F. Ploughman and her Majesty The Queen was dismissed by the Honourable Justice Don R. Sommerfeldt with costs in favour of the Respondent, calculated in accordance with Tariff B of Schedule II to the Tax Court of Canada Rules (General Procedure). Title photo from Unsplash.

David J. Rotfleisch, CPA, JD is the founding tax lawyer of Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law firm and is a Certified Specialist in Taxation Law. He appears regularly in print, radio and TV and blogs extensively. 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 david@taxpage.com.