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SCC Grants Leave to Appeal in Guindon v. The Queen

The Supreme Court of Canada has granted leave to appeal in Guindon v. The Queen (Docket # 35519).  In this case, the Supreme Court of Canada will consider whether penalties imposed under section 163.2 of the Income Tax Act (Canada) constitute an “offence” within the meaning of s. 11 of the Charter.

The Tax Court found that the penalty imposed under section 163.2 of the Act is a
criminal penalty, not a civil one, and therefore subject to the same constitutional protections as other penal statutes enacted by the federal government.

The Federal Court of Appeal reversed the Tax Court’s ruling, first on the basis that Ms. Guindon had not followed the proper process in challenging section 163.2 by failing to provide notice of a constitutional question, and so the Tax Court lacked the jurisdiction to make the order it did. However, the Federal Court of Appeal considered the merits of the issue in any event, and held that advisor penalty proceedings are not criminal in nature and do not impose “true penal consequences.”

Our previous comments on the decisions are here and here.

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SCC Grants Leave to Appeal in Guindon v. The Queen

Imposition of GST on Criminal Defence Legal Fees Does Not Infringe Section 10(b) of the Charter: Stanley J. Tessmer Law Corporation v The Queen

In Stanley J. Tessmer Law Corporation v The Queen, 2013 TCC 27, Justice Paris of the Tax Court of Canada confirmed that the general GST charging provision in section 165 of the Excise Tax Act, R.S.C. 1985, c. E-15 (the “ETA”) does not infringe section 10(b) of the Canadian Charter of Rights and Freedoms (the “Charter”).  Section 10(b) of the Charter provides:

Everyone has the right on arrest or detention

to retain and instruct counsel without delay and to be informed of that right;

The Appellant (“Tessmer”) provides criminal defence legal services.  During the period July 1, 1999 to December 31, 2006, Tessmer did not collect GST (totaling $228,440.97) in respect of legal services for criminal defence work charged to clients who had been arrested or detained and who were either charged with a criminal offence or who had been arrested with criminal charges pending.

Tessmer did not conduct an independent review of the financial circumstances of its clients to determine the ability of its individual clients to afford its fees and any GST exigible on those fees.  In addition, no financial records of any of Tessmer’s individual clients were produced at the hearing.

The Minister of National Revenue (the “Minister”) assessed Tessmer for such GST plus interest and penalty, and Tessmer appealed those assessments to the Tax Court.  In the context of those appeals, the parties decided to bring a reference to the Tax Court, pursuant to section 310 of the ETA, to determine the following question raised by Tessmer in its appeals:

Whether, based on the facts set out in the Agreed Statement of Facts filed herewith, the goods and services tax (GST) imposed by s. 165 of the Excise Tax Act infringes or is inconsistent with the rights of the Appellant’s clients guaranteed by ss. 7 and ss. 10(b) of the Charter of Rights and Freedoms such that s. 165 of the Excise Tax Act is, to the extent of any such inconsistency and, subject to s.1 of the Charter, of no force and effect by reason of s. 52(1) of the Constitution Act.

Although the question put to the Tax Court referred to both sections 7 and 10(b) of the Charter, Tessmer’s counsel advised the Tax Court at the hearing that he was only relying on section 10(b) of the Charter, and the above question was amended accordingly.

Subsection 165(1) of the ETA, the general GST charging provision, read as follows during the periods at issue:

Subject to this Part, every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 7% [note: 6% for the period between July 1, 2006 through December 31, 2006 – Ed.] on the value of the consideration for the supply.

Tessmer argued that a tax on criminal defence legal services provided to a person who has been arrested or detained is inconsistent with that person’s right under section 10(b) of the Charter to retain or instruct counsel of choice, on the basis that the tax is an impediment to the exercise of that right and is therefore unconstitutional with respect to both purpose and effect.  Relying on a U.S. case (United States v. Stein, SI 05 Crim. 0888 LAK United States District Court, Southern District of New York June 26, 2006), Tessmer argued that a tax on criminal defence legal fees will interfere with the right to counsel since the additional cost of the tax to an accused will interfere with the financial resources available to mount a defence to the charges brought against him or her.

Tessmer also argued that it was not required to provide evidence that any of its clients were denied counsel of their choice as a result of the tax imposed on the services of counsel.  Instead, and relying on a series of past Charter cases, Tessmer argued that it only needed to show that the general effect of the tax is unconstitutional under reasonably hypothetical circumstances.

The Tax Court, therefore, was required to determine whether either of the purpose or the effect of subsection 165(1) of the ETA was contrary to section 10(b) of the Charter.

With respect to the purpose of subsection 165(1) of the ETA, the Tax Court readily found that the purpose of that provision was not unconstitutional:

[31]        The appellant contends that the general purpose of the GST legislation imposing the tax is to raise revenue but that it also has a specific purpose to tax an accused with respect to the provision of legal services in defence of a State-sponsored prosecution. Its only submission regarding the unconstitutionality of the purpose of the tax was that it is patently inconsistent to prosecute a person and at the same time tax the legal services that the person requires in order to defend against the prosecution.

[32]        I am unable to ascribe the specific purpose suggested by the appellant to subsection 165(1) of the ETA, ….

[33]        Subsection 165(1) is a provision of general application and covers an infinite variety of transactions. I do not believe that it can be said that a specific purpose of subsection 165(1) is to tax legal services in defence of a State-sponsored prosecution since Parliament has not singled out those particular services for different treatment under that provision. Therefore I find that the appellant has not shown that subsection 165(1) of the ETA has an invalid purpose.

With respect to the effect of subsection 165(1) of the ETA, the Tax Court rejected Tessmer’s arguments that no evidence of an impediment to section 10(b) Charter rights was required.  The Tax Court stated, in relevant part, as follows:

[54]        From my review of the Supreme Court decisions on point, it appears that a party may only rely on hypotheticals to establish a factual foundation for a Charter challenge where actual facts are not available to that party. In such cases, the Court has been willing to consider imaginable circumstances which could easily arise in day-to-day life. ….

[55]        A party will also be relieved from presenting any factual foundation at all in cases where the unconstitutionality of the impugned legislation is apparent on the face of the legislation.

[56]        Apart from these limited exceptions, a party challenging legislation will be required to bring evidence of the effects of the legislation. Therefore, I reject the appellant’s contention that in any Charter challenge the Court may rely on imaginable circumstances to establish the effects of impugned legislation.

[57]        Furthermore, since the appellant does not take the position that evidence of the effect of the GST on the ability of its clients who were detained or arrested to afford its services is unavailable, I find that this case does not fall within the exception set out in Mills and implicitly recognized in Seaboyer/Gayme.

[58]        It is also obvious that the section 12 Charter standard of review which was applied in Goltz and Ferguson is not relevant to this case.

[64]        In response to the appellant’s submission that prejudice to a person’s section 10(b) rights must be presumed in this case, I can only say that I am unable to easily imagine that a person who has been arrested or detained would be prevented or even deterred from retaining and instructing counsel in that situation by the additional GST payable on counsel fees.

[65]        Finally, I do not accept the appellant’s contention that the constitutionality of the GST on criminal legal defence services is a question of law alone and therefore that it is not required to produce any evidence because it is apparent on its face that the tax will impede access to counsel.

Therefore, in the absence of evidence that any of Tessmer’s clients were unable to retain counsel as a result of the GST payable on legal services, the Tax Court found that the GST imposed under section 165 of the ETA does not infringe section 10(b) of the Charter.

Interestingly, the Tax Court hearing took place on December 15, 2011, and the decision was released on January 28, 2013.  Tessmer is still within the time limit to file an appeal with the Federal Court of Appeal, so it remains to be determined whether the Tax Court’s judgment remains the final word on this issue.

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Imposition of GST on Criminal Defence Legal Fees Does Not Infringe Section 10(b) of the Charter: Stanley J. Tessmer Law Corporation v The Queen

From the intrusive to the abusive – what happens when the CRA goes too far?

In order to administer and enforce the self-reporting system of tax assessment in Canada, the Income Tax Act (ITA) and Excise Tax Act (ETA) provide the CRA with the power to demand certain information from taxpayers. Generally, this information is collected for the purposes of auditing a taxpayer, but may also be obtained where no audit is conducted. For example, the CRA may access such information for the purpose of evaluating whether record-keeping requirements have been complied with. Higher statutory thresholds are imposed on the CRA – such as requiring a search warrant issued by a judge – where the information sought would not normally be required for an audit.

Despite the broad statutory powers conferred on the CRA to ensure compliance, the courts are wary of the potential for abuse and have been careful to circumscribe their application. In James Richardson & Sons v. M.N.R., the Supreme Court of Canada clarified that when requiring the production of documentation there must be a “genuine and serious inquiry” into the tax liability of a specific taxpayer (or taxpayers). Richardson was decided in the context of what is now section 231.2 of the ITA, which requires taxpayers to provide documents or information to the CRA for the enforcement or administration of the Act. In its recent decision in R. v. He, the British Columbia Court of Appeal confirmed that the same principle should be applied to section 231.1 of the ITA (and the corresponding section 288 of the ETA) when inspecting records at the taxpayer’s place of business.

R. v. He concerned a CRA program called the Electronic Records Evaluation Pilot Project (“ERE”) that targeted specific businesses for research purposes – including restaurants, convenience stores and small supermarkets – to evaluate their record-keeping compliance. One business chosen for the program was the restaurant, Sushi Man, run by the He family in Vancouver. Although the initial contact by the CRA indicated that its review would not be an audit, certain inconsistencies were found that led to an audit, investigation and, ultimately, criminal charges. Apparently, CRA thought that Sushi Man had been using some form of sales suppression software (known as a “zapper”) to erase the record of certain transactions and thereby evade taxes. The taxpayer alleged that the CRA’s real purpose was to conduct a criminal investigation into establishments using the zapper software and, therefore, it had strayed outside the scope of section 231 of the ITA (and 288 of the ETA) thereby violating his right against unreasonable search and seizure under section 8 of the Canadian Charter of Rights and Freedoms.

The issue before the courts was whether, under the circumstances, the CRA was entitled to seize information from Sushi Man under section 231.1 of the ITA and 288 of the ETA. The Provincial Court Judge found that there had been no “genuine and serious” inquiry into that taxpayer’s tax liability and concluded that the seizure of information by the CRA was unlawful, implying that the ERE program had been used improperly for an undercover investigation into restaurants using zappers. On appeal, both the Supreme Court of British Columbia and the British Columbia Court of Appeal agreed with the Provincial Court that the rule established in Richardson should be applied to section 231.1 of the ITA (and by extension to section 288 of the ETA).

Writing for the Court of Appeal, Justice Hinkson remarked as follows:

[54] In my opinion, s. 231.1 of the ITA, if interpreted too broadly, is open to that same possibility of abuse. It and its parallel section in the ETA permit the same broad authority to the CRA as does  s. 231.2 and its parallel section in the ETA. Further, as discussed by the appeal judge, s. 231.1 allows for a more intrusive power than that permitted under s. 231.2. It is my opinion that the correct interpretation of s. 231.1 requires that the reasoning in Richardson must therefore be applied to that section.

With respect to the conduct of the CRA investigation, Justice Hinkson deferred to the Provincial Court Judge’s conclusion that the ERE’s true purpose was not to review books and records nor to audit the individual businesses selected. Therefore, the seizure of information was not permissible under section 231.1 of the ITA (or section 288 of the ETA).

While it is not yet certain whether the Crown will seek leave to appeal to the Supreme Court of Canada (no leave application has been filed at the time of this post), it seems clear that unless it has secured prior judicial authorization, the CRA cannot obtain information from a taxpayer in the absence of a “genuine and serious” inquiry into the taxpayer’s tax liability.

From the intrusive to the abusive – what happens when the CRA goes too far?

Swim Lessons and Religion: The Federal Court of Appeal Rejects Amendment to Pleadings to Raise Charter Issue in Fluevog v. The Queen

On December 5, 2011, the Federal Court of Appeal released its decision in John Fluevog v. The Queen (2011 FCA 338).  In a unanimous judgment, Justices Nadon, Sharlow, and Mainville allowed the Crown’s appeal, reversing an interlocutory decision of Justice Margeson of the Tax Court of Canada (2010 TCC 617).  In that decision, the Tax Court had permitted the taxpayer, Mr. Fluevog, to amend his Notice of Appeal to add a claim of discrimination under section 15 of the Canadian Charter of Rights and Freedoms.

Mr. Fluevog made payments to Swim Canada, an organization that is a “registered Canadian amateur athletic association”, as that term is defined in section 248(1) of the Income Tax Act (the “ITA”).  He claimed a tax credit in respect of these payments under section 118.1 of the ITA as an eligible gift.  The credit was denied by the Minister of National Revenue (the “Minister”), on the basis that Mr. Fluevog had received consideration in the form of swimming lessons for his children.  As such, the payment was not a gift at law.

The proposed Charter claim arose from an administrative position of the Canada Revenue Agency (“CRA”) that permits a tax credit for payments to religious schools that solely provide religious instruction.  This position is described in Information Circular IC 75-23, which states that “it has been the Agency’s practice not to view religious instruction provided at parochial schools as consideration”.  Mr. Fluevog sought to argue that this administrative position was discriminatory on religious grounds and prohibited under section 15 of the Charter.  He took the position that the administrative policy should therefore be extended to the receipt of non-religious consideration such as swimming lessons.

The arguments at the Tax Court of Canada on the motion to amend the pleadings focused primarily on the question of whether the policy discriminated against Mr. Fluevog, such that the proposed amendments may disclose a cause of action.  As noted above, Justice Margeson ruled in favour of the taxpayer, holding that the amendment presented “at least an arguable case”.

Writing for the panel, Justice Nadon stated that the decision to grant or deny an amendment to pleadings is discretionary and is entitled to deference, barring an error in law or an improper use of discretion.  In this case, however, the decision at the Tax Court of Canada was based on an error of law.  In a brief paragraph, the Federal Court of Appeal concluded:

It is not open to the Minister to determine that a payment that is not a gift as a matter of law will nevertheless be treated as a gift for income tax purposes. If that is what the Minister has done by adopting the impugned assessing policy (and I express no opinion on that point), then the policy is wrong in law and cannot stand. But that is of no assistance to Mr. Fluevog. The remedy for adopting a policy that is wrong in law is to reject the policy, not extend it to everyone who pays for swimming lessons for their children.

As a result, Mr. Fluevog’s motion to amend his pleadings was dismissed.  There has been no word on whether Mr. Fluevog will seek leave to appeal the decision to the Supreme Court of Canada.

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Swim Lessons and Religion: The Federal Court of Appeal Rejects Amendment to Pleadings to Raise Charter Issue in Fluevog v. The Queen