The Tax Court of Canada's recent decision in Guindon v. R. concerned an assessment of third-party civil penalties pursuant to section 163.2 of the Income Tax Act (the “Act”). For a primer on this type of penalty, please see a previous issue of this Newsletter here. Essentially, section 163.2 allows for monetary penalties to be assessed against third parties who knowingly (or in circumstances in which they should know) make or participate in the making of a false statement on an income tax return.
This is an important and interesting case as it stands for the proposition that third-party civil penalties are in fact criminal in nature and attract the constitutional protections afforded by section 11 of the Charter of Rights and Freedoms. Those procedural and substantive protections include the presumption of innocence and a raised burden of proof – from proof on a balance of probabilities to proof beyond a reasonable doubt. Subject to any successful appeal, CRA will therefore have a higher threshold to meet in assessing and imposing third-party civil penalties.
This case involved a tax shelter whereby participants would buy timeshare units for a fraction of their value as beneficiaries of a trust. They would then donate these interests to a charity and receive a tax receipt for their full fair market value. The appellant, a lawyer, was involved as both the signatory of the charitable recipient of the timeshare donations, and as the legal advisor for the developers of the timeshare/trust program. The third party assessment against the lawyer was the consequence of the fact that while tax receipts were issued by the charity (and subsequently disallowed by the CRA), neither the establishment of the trust nor transfers of the timeshares to the charity were found to have actually occurred.
Justice Bédard relied on the Supreme Court of Canada case R. v. Wigglesworth in determining whether the matter is criminal and penal in nature, thereby attracting the protection of section 11 of the Charter.
With respect to whether the matter at hand was criminal and penal in nature, Justice Bédard interpreted section 163.2 to have a broad purpose extending beyond the deterrence of specific behaviour and ensuring compliance with the Act. He held that its purpose included promoting public order and protecting the public at large:
“The individual against whom a third party penalty is assessed is not one who himself or herself made a representation in his or her return. Rather, section 163.2 of the Act contemplates the harm that may be done by aid given by a person to the taxpayer which could damage the integrity of the system of honest self reporting.” (at paragraph 57)
In terms of true penal consequences, Justice Bédard held that the penalties described in section 163.2(4) constituted true penal consequences, due to their unlimited nature. Penalties under section 163.2(4) are calculated as a function of the tax avoided by the false statement(s). In the context of donation tax shelters, in which many participants may be found to have avoided significant tax by virtue of donation receipts improperly claimed in their returns, third party penalties can potentially be very substantial.
“The penalty under subsection 163.2(5) thus has the potential of increasing ad infinitum depending on the number of “other persons” involved. As the Appellant submitted, where the penalty is unlimited and is imposed on a third party, it seems evident that its purpose is to redress a wrong done to society and consequently ceases to be a purely administrative matter or one of internal discipline.” (at paragraph 62)
Justice Bédard also commented that the gravity of the penalty imposes a stigma on the person that cannot be ignored, including damage to professional reputation and personal damage.
Based on this analysis, the section 163.2 penalty was held to be criminal in nature and therefore subject to the protection of section 11 of the Charter. The implications of this protection include the presumption of innocence, protection from self-incrimination, trial held in provincial court in accordance with criminal (as opposed to tax) procedure, as well as the raised burden of proof to that of beyond a reasonable doubt.
As an aside, Justice Bédard also stated that the appellant would have been liable for the penalty if it had been found to be a civil one. The lawyer had demonstrated culpable conduct, pursuant to the definition in the Act (conduct that shows an indifference as to whether the Act is complied with or shows a wilful, reckless or wanton disregard of the law) in that it was reasonable to have expected that she knew that the tax receipts issued to participants in the tax shelter program contained false statements. By signing the tax receipts, the appellant had “participated, assented to or acquiesced” in the making of false statements to the CRA.
This is an important case for various reasons. On one hand it provides a lesson to lawyers, accountants and any other tax advisors of the dangers in providing tax advice without the necessary expertise. On the other hand, the criminal characterization of this penalty provides the benefit of Charter protection to those advisors and has established a higher hurdle for their imposition by the CRA.
The Crown filed its appeal on October 31, 2012.