Tax Court of Canada Finds That Third Party Penalties Are Criminal Sanctions
On October 2, 2012 the Tax Court of Canada released its decision in Guindon v. R., 2012 TCC 287 (“Guindon”).
This decision has dramatic implications for any Canadians who have been assessed third party penalties pursuant to section 163.2 of the Income Tax Act (the “Tax Act”). If you have been assessed a penalty pursuant to section 163.2 or such an assessment has been proposed by a Canada Revenue Agency auditor, you can breathe a sigh of relief - at least temporarily.
The facts of Guindon involve a lawyer who practiced primarily family law and wills and estates law in Ontario. Ms. Guindon became involved in a charitable donation arrangement called The Global Trust Charitable Donation Program. Ms. Guindon provided a legal opinion and signed tax receipts on behalf of the charity. Ms. Guindon provided the opinion and signed the tax receipts without reviewing documentation she purported to have reviewed and without the requisite tax expertise. Ms. Guindon was assessed a penalty pursuant to 163.2 for false statements that were made on tax returns filed by the participants in the charitable donation arrangement.
Section 163.2 of the Tax Act contains two penalties known in tax community as the “planner penalty” and the “preparer penalty”. Ms. Guindon was assessed the preparer penalty. The preparer penalty allows the Canada Revenue Agency to assess a penalty to a third party (usually a professional) for false statements made by the professional’s client. The penalty can be assessed where the professional knew the statement made by the client was false or “would reasonably be expected to know but for circumstances amounting to culpable conduct”.
The Canada Revenue Agency assessed Ms. Guindon a preparer penalty in the amount of $564,747 on the basis that she knew, or would have known but for wilful disregard of the law, that the tax receipts issued and signed by her constituted false statements.
The Canada Revenue Agency has always proceeded on the basis that the 163.2 penalties are civil penalties. The Canada Revenue Agency reassessed Ms. Guindon on the basis that the 163.2 penalty is a civil penalty.
However, since the penalty was introduced in the 1999 Federal Budget there have been tax practitioners who have speculated and argued that the penalty is potentially so onerous that it is, in substance, a criminal penalty as opposed to a civil penalty.
The Guindon decision was the first time that the Tax Court of Canada had to consider whether penalties pursuant to section 163.2 are in substance civil or criminal penalties.
After considerable analysis, the Tax Court of Canada found that the 163.2 penalties create in substance a criminal offence because section 163.2:
“is so far-reaching and broad in scope that its intent is to promote public order and protect the public at larger rather than to deter specific behaviour and ensure compliance with the regulatory scheme of the Act. Furthermore, the substantial penalty imposed on the third party – a penalty which can potentially be even greater than the fine imposed under the criminal provisions of section 239 of the Act, without the third party even benefiting from the protection of the Charter – qualifies as a true penal consequence.”
This finding that the 163.2 penalties are, by their nature, criminal sanctions has far-reaching consequences.
• Taxpayers charged with an offence under section 163.2 are guaranteed the protections afforded by section 11 of the Charter of Rights and Freedoms which guarantees fundamental substantive and procedural legal rights. A taxpayer assessed a civil penalty under the Act is not afforded or guaranteed such protection.
• The Canada Revenue Agency would be precluded from using its broad and powerful civil audit powers to gather information to support the assessment of a 163.2 penalty. Once a 163.2 penalty is contemplated the Canada Revenue Agency will be constrained by the Charter of Rights and Freedoms and will have to obtain a warrant to gather information to be used to support the penalty assessment.
• The taxpayer accused of an offence under 163.2 will be presumed innocent until proven guilty and the Canada Revenue Agency must prove its case beyond a reasonable doubt. When assessing a civil penalty the burden of proof is “proof on a balance of probabilities”.
• A criminal offence must be prosecuted in provincial court under the criminal procedure provided for in the Criminal Code as opposed to a civil penalty that is assessed and disputed in the Tax Court of Canada.
In this case, the Tax Court of Canada found that the penalties provided for in section 163.2 are criminal in nature and allowed Ms. Guindon’s appeal on that basis. The Tax Court was careful to point out that if the penalty were a civil one, the court would have upheld the assessment of the penalty.
The Department of Justice, on behalf of the Canada Revenue Agency, has appealed the decision of the Tax Court of Canada to the Federal Court of Appeal.
Any Canadians who are being audited for a section 163.2 penalty or who have been assessed a section 163.2 penalty will be very interested in the pending Federal Court of Appeal decision.