In a presentation made to members of the Canadian Bar Association Tax Subsection in November of 2011, the CRA provided statistics and information on the application of third-party advisor penalties under section 163.2 of the Income Tax Act. Six categories of false statements were presented as of interest to the CRA for the purposes of the section:
- Fictitious expenses/amounts
- Appropriation of funds and invalid journal entries
- Donation arrangements
- RRSP strips
- Valuation misrepresentations
- SR&ED claims
At the time (the CRA’s stats dating to September 2011), only three of the 52 cases assessed by the CRA had proceeded through the Appeals Division to the Tax Court of Canada, and no appeals had yet been decided. The first judgment of the Tax Court on section 163.2 was recently released on October 2, 2012 (Guindon v. The Queen, 2012 TCC 287).
In Guindon, the court conducted a constitutional analysis of s.163.2 and concluded that the section should be considered as criminal offence rather than a civil proceeding. Though the court did not elaborate, the court in Guindon acknowledged that this conclusion has “far-reaching consequences” in that the conclusion requires that Charter of Rights protections are engaged in s.163.2 proceedings.
The Guindon decision has far reaching consequences for those who may be subject to third party penalty proceedings. More particularly professional advisors must give careful consideration to the decision before giving advice upon the defence against third party penalty proceedings. To ensure that all available defences are used to object to these proceedings and to defend against the severe penalties that may flow from these proceedings, it is necessary to carefully determine which Charter of Rights protections are engaged and how best to advance a defence through those protections.