1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar

SCC Dismisses Appeal in Tax Advisor Penalty Case

The Supreme Court of Canada has dismissed the appeal of the taxpayer and determined that the tax advisor penalty in section 163.2 of the Income Tax Act is administrative in nature.

The Court’s 4-3 decision in Guindon v. The Queen (2015 SCC 41) (Docket No. 35519) has far-reaching implications for Canadian taxpayers and their professional advisors.

While the majority of the Court (Rothstein, Cromwell, Moldaver and Gascon) exercised its discretion to consider the taxpayer’s constitutional arguments despite the taxpayer’s failure to provide notice of constitutional question, the Court held that the penalty under section 163.2 was not criminal in nature:

[89] We conclude that the proceeding under s. 163.2  is not criminal in nature and does not lead to the imposition of true penal consequences. We agree with Stratas J.A., writing for the Federal Court of Appeal, that “the assessment of a penalty under s. 163.2  is not the equivalent of being ‘charged with a [criminal] offence.’ Accordingly, none of the s. 11  rights apply in s. 163.2  proceedings”: para. 37.

[90] Finally, we note that even though s. 11  of the Charter  is not engaged by s. 163.2  of the ITA , those against whom penalties are assessed are not left without recourse or protection. They have a full right of appeal to the Tax Court of Canada and, as the respondent pointed out in her factum, have access to other administrative remedies: R.F., at para. 99; see, e.g., ITA , s. 220(3.1) .

In a concurring opinion that dissented on the issue of the notice requirement, Justices Abella, Karakatsanis and Wagner held that the taxpayer’s failure to provide notice of constitutional question in the Tax Court or Federal Court of Appeal was fatal to her appeal.

See our previous posts on the Guindon case here and here.

, , , ,

SCC Dismisses Appeal in Tax Advisor Penalty Case

SCC to Decide Tax Advisor Penalty Case on July 31

What is the nature of the third-party penalty in section 163.2 of the Income Tax Act? That question will be answered by the Supreme Court of Canada when it decides the case of Guindon v. The Queen (Docket No. 35519) on Friday July 31.

See our previous posts on the Guindon case here and here.

In Guindon, the Tax Court found that the penalty imposed under section 163.2 is a criminal penalty, not a civil one, and therefore subject to the protection of (inter alia) section 11 of the Charter of Rights and Freedoms.

The Federal Court of Appeal reversed on the basis that Ms. Guindon did not provide notice of a constitutional question, and thus the Tax Court lacked jurisdiction to make an order on the nature of section 163.2. In any event, the Federal Court of Appeal also stated that the penalty under section 163.2 was not criminal in nature, and hence, was not subject to Charter protections.

The Supreme Court heard arguments in Guindon in December 2014, and the Court’s decision will have significant implications for tax professionals across Canada.

, , , ,

SCC to Decide Tax Advisor Penalty Case on July 31

CRA Update: Aggressive Tax Planning

At the Toronto Centre Canada Revenue Agency & Tax Professionals Breakfast Seminar on June 10, 2014, the Canada Revenue Agency (“CRA”) provided an update on selected CRA Compliance Measures in the Aggressive Tax Planning Division. The update was provided by Len Lubbers, Manager, GAAR and Technical Support, Aggressive Tax Planning Division of the Compliance Programs Branch.

Mr. Lubbers displayed and referred to a collection of powerpoint slides (some of which contained detailed statistics), but unlike previous seminars the CRA did not distribute copies of the slides during or after the presentation.

The CRA provided updates on (i) reportable tax avoidance transactions, (ii) the CRA’s related party initiative, (iii) the T1135 foreign income verification statement, (iv) gifting tax shelters, and (v) third party penalties. Here is a brief recap of some of the highlights from the presentation:

Reportable Tax Avoidance Transactions

  • New subsection 237.3 of the Income Tax Act, which addresses reportable transactions, became effective as of June 26, 2013, with retroactive effect to January 1, 2011;
  • Taxpayers who must report a transaction under subsection 237.3 must file form RC312 “Reportable Transaction Information Return“;
  • The deadline for 2012 and earlier years was October 23, 2013, and for subsequent years the RC312 information return is due by June 30 of the year following the transaction;
  • The CRA is currently reviewing the forms filed as of October 2013. The CRA did not disclose the number of RC312 forms that have been filed.

Related Party Initiative/High Net Worth Individual Program

  • The related party initiative program was piloted in 2005 and fully adopted in 2009;
  • The CRA considers that the title “Related Party Initiative” was “not particularly descriptive” of the program;
  • Initially, the program was targeted at individuals with a net worth of $50 million or more and where a taxpayer had 30 or more entities in a corporate group;
  • Several recent changes have expanded the scope of this initiative – namely, the CRA eliminated the requirement that the taxpayer’s wealth be held in 30 or more corporate entities;
  • Additionally, the $50 million threshold for individuals will be relaxed to include corporate groups where there are significant assets held by a group of individuals. For example, consider three individuals that own companies valued at $100 million. Separately, these individuals would not meet the $50 million threshold, but under the new parameters these individuals will be included in the audit program if there is sufficient “economic interdependence”;
  • Further, the long-form “questionnaire” issued by the CRA to taxpayers under audit in the program will now be used by the CRA to gather information from high-net worth individuals who are not under audit;
  • The CRA has formed audit teams in the Aggressive Tax Planning Division to handle these files (previously, these files were handled by audit teams in the Large Business Audit Division).

T1135 Foreign Income Verification Statement

  • The T1135 Foreign Income Verification Statement was introduced in 1995 as a response to concerns about the growing popularity of the use of international tax havens;
  • A revised T1135 form was issued in June 2013;
  • Given the severity of penalties which result from failure to file the T1135 information form, the CRA recommends a voluntary disclosure be made by taxpayers.

Gifting Tax Shelters

  • The CRA continues to monitor and reassess gifting tax shelters;
  • As of 2014, the CRA has reassessed 189,000 taxpayers and denied more than $3 billion of donation tax credit claims;
  • The CRA has revoked the registration of charities that were involved in gifting tax shelters, and the CRA has imposed $162 million of third-party penalties;
  • The CRA noted that the number of participants in tax shelters has been decreasing (i.e., 2012: 8,410 participants vs. 2013: 2,517 participants). The total donations to gifting tax shelters has also decreased (i.e., 2012: $266,675,953 vs. 2013: $7,518,712);
  • The CRA noted the new rule in subsection 225.1(7) that requires a taxpayer to pay 50% of the amount assessed (or the amount in dispute);
  • As of 2013, for taxpayers who participate in a tax shelter, the CRA will not assess a taxpayer’s return until the CRA has audited the tax shelter. In such cases, the CRA will assess a taxpayer’s return if he/she agrees to have the tax shelter credit claim removed from the return.

Third-Party Civil Penalties

  • Section 163.2 was introduced in 2000 (section 285.1 of the Excise Tax Act contains a similar penalty);
  • The CRA’s views on third party penalties is found in Information Circular IC-01-1 “Third Party Civil Penalties” (September 18, 2001);
  • Under section 163.2 there are two types of penalties: a tax planner penalty (under subsection 163.2(2)) and a tax preparer penalty (under subsection 163.2(4)). The CRA noted that both could apply to a taxpayer, but the maximum amount of the penalty in such a case would be the greater of the two amounts (i.e., the penalties are not combined (see subsection 163.2(14));
  • The process for the (potential) application of a penalty under section 163.2 is as follows: The local CRA auditor will gather facts of the taxpayer’s activities and circumstances. If a third party penalty may be applied, the auditor will refer the file to his/her senior manager in the local office. If the senior manager agrees that a penalty may be applied, the file will be referred to the CRA’s Third Party Penalty Review Committee at the CRA’s Ottawa headquarters. A third party penalty will only be applied upon the approval of the Third Party Penalty Review Committee;
  • 195 files have been referred to the Third Party Penalty Review Committee. Of these files, the CRA has applied a penalty in 92 files (for penalties totalling $181 million), has declined to apply a penalty in 87 files, and 16 files remain on-going;
  • The CRA awaits the Supreme Court of Canada’s decision in Guindon v. The Queen (Docket # 35519), which is tentatively scheduled to be heard on December 5, 2014. See our earlier blog posts on the Guindon case here and here.

, , , ,

CRA Update: Aggressive Tax Planning

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.

, ,

SCC Grants Leave to Appeal in Guindon v. The Queen

Too Much Wiggle Room in Wigglesworth? Advisor penalties under Income Tax Act not criminal offences in nature and don’t engage protections under s. 11 of the Charter, says Federal Court of Appeal in Guindon

*This is the first guest post written for the blog. We are honoured to have one of Canada’s leading criminal defence counsel, Brian Heller of Heller Rubel, as the author (with the valued assistance of Graham Jenner).

On June 12, 2013, the Federal Court of Appeal released its decision in Canada v. Guindon (2013 FCA 153).

The court was tasked with examining the nature of advisor penalties, which are sanctions imposed under s. 163.2 of the Income Tax Act on tax planners engaged in “culpable conduct”. At first instance, the Tax Court of Canada (2012 TCC 287) had set aside one such penalty assessed against Ms. Guindon, holding that s. 163.2 created an “offence” within the meaning of s. 11 of the Charter. Consequently, according to the Tax Court, persons assessed under the provision were entitled to s. 11 protections, which apply to persons “charged with an offence”, and include fundamental principles applicable to criminal prosecutions such as the right to be presumed innocent, and the right to be tried within a reasonable time.

The key portion of s. 163.2 reads as follows, and it is easy to see how the Tax Court drew its particular interpretation:

(4) Every person who makes or furnishes, participates in the making of or causes another person to make or furnish a statement that the person knows, or would reasonably be expected to know but for circumstances amounting to culpable conduct, is a false statement that could be used by another person (in subsections (6) and (15) referred to as the “other person”) for a purpose of this Act is liable to a penalty in respect of the false statement.

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 s. 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.”

The Federal Court of Appeal applied the test set down by the Supreme Court of Canada in R. v. Wigglesworth ([1987] 2 S.C.R. 541), which dictates that a provision will engage s. 11 Charter protections if (1) the matter is “by its very nature, intended to promote public order and welfare within a public sphere of activity” rather than being “of an administrative nature instituted for the protection of the public in accordance with the policy of a statute”; or (2) the provision exposes persons to the possibility of a “true penal consequence” such as imprisonment or a fine meant to redress wrong done to society.

The Federal Court of Appeal viewed advisor penalties for the provision of false information as an aspect of the self-compliance that is fundamental to the administration of the tax system. The penalties were not to condemn morally blameworthy conduct, but to ensure that the tax system works properly by maintaining discipline and compliance. Section 163.2 is also, the court observed, distinguishable from the clear offence provisions in the Income Tax Act because it contains only fixed sanctions rather than a range of penalties that allow for the exercise of judicial discretion in sentencing an offender.

The court also rejected Ms. Guindon’s argument that the sheer size of the penalty – in her case a fine of $564,747 – demonstrates the criminal nature of the sanctions, pointing to an array of cases in which very severe penalties were held to be administrative in nature. “Sometimes”, the court commented, “administrative penalties must be large in order to deter conduct detrimental to the administrative scheme and the policies furthered by it.”

If you have difficulty comprehending the distinctions that the Wigglesworth test draws between administrative and criminal provisions, you are not alone. The Federal Court of Appeal acknowledged that the line drawn by the test is “sometimes a fuzzy one”.

That is an understatement. At a time when substantial penalties can be leveled under provisions that appear to be aimed at protecting a public interest (such as the fair and proper administration of the tax system) by deterring culpable conduct, the Wigglesworth test is becoming increasingly difficult to apply. The difficulty is not limited to the sphere of tax law. Just one year ago, in Rowan v. Ontario Securities Commission (2012 ONCA 208), the Court of Appeal for Ontario had to apply the test to administrative monetary penalties (“AMPs”) under the Ontario Securities Act, which carry a maximum fine of $1,000,000. The court held that the specific fines at issue in that case were administrative rather than penal, but held also that s. 11(d) of the Charter limited the authority of the Securities Commission to impose AMPs that did not transgress the barrier from administrative to criminal. In other words, presumably, an overly severe AMP could, in the context of another case, indicate that the Commission had overstepped its regulatory mandate by imposing a truly penal consequence.

Rowan, then, demonstrates the difficulty and unpredictability of determining, under Wigglesworth, whether a specific sanction is penal or administrative. Guindon presents a related, but distinct practical problem: there exist provisions, such as s. 163.2 of the Income Tax Act, which can be described fairly as both intending to promote public order and welfare within a public sphere of activity (a criminal purpose) and intending to protect the public in respect of a policy of a statute (an administrative purpose). While advisor penalties clearly contemplate the promotion of tax policy objectives, they are equally concerned with persons who, through intentional conduct or willful blindness furnish false statements that are contrary to an important public interest. There is real concern raised by this case that a court can easily, using the language of Wigglesworth, justify opposite results. At the cost of certainty and predictability – important principles when constitutional protections are at stake – there is just too much ‘wiggle room’.

The narrow implication of Guindon is that unless the Supreme Court of Canada is called upon and reverses the result, the CRA will not have to govern itself by traditional criminal law standards in assigning culpability and sanctions for advisors. This could well have a chilling effect on the tax planning community. Speaking more broadly however, because advisor penalties straddle the “fuzzy” line between criminal and administrative law, Guindon is an ideal case for the Supreme Court of Canada to confront the practical unworkabilities of the Wigglesworth test.

, ,

Too Much Wiggle Room in Wigglesworth? Advisor penalties under Income Tax Act not criminal offences in nature and don’t engage protections under s. 11 of the Charter, says Federal Court of Appeal in Guindon

Crown Appeals Tax Court Decision in Guindon – Are Advisor Penalties “Criminal”?

On October 31, 2012, the Crown filed a Notice of Appeal with the Federal Court of Appeal against the judgment of the Tax Court of Canada in Julie Guindon v. The Queen (2012 TCC 287). In that decision, the Tax Court held that the advisor penalties imposed under section 163.2 of the Income Tax Act were criminal in nature, and therefore attract constitutional protection under the Canadian Charter of Rights and Freedoms. The Court also held that the standard of “culpable conduct” in section 163.2 was a higher standard than “gross negligence” as the latter has been interpreted in the context of subsection 163(2) penalties. For a more detailed review of the Tax Court decision, see our previous post here.

In particular, the Crown has appealed the Tax Court’s finding that the Charter applies to section 163.2 penalties, and the determination of the Court that “culpable conduct” is a different standard than “gross negligence”.

The advisor, who was found to have engaged in culpable conduct (and therefore would have been subject to the assessed penalty had the court not found the penalty to be criminal in nature) has yet to file a cross-appeal on that point.

Stay tuned to www.canadiantaxlitigation.com for further updates on this important appeal.

, , , , ,

Crown Appeals Tax Court Decision in Guindon – Are Advisor Penalties “Criminal”?

Crime And (No) Punishment: Guindon v. The Queen

The Tax Court of Canada recently released its decision in Guindon, a case concerning the application of third-party penalties under section 163.2 of the Income Tax Act (the
“Act”). The 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.

Click here to read more.

, , , , ,

Crime And (No) Punishment: Guindon v. The Queen

Tax Court holds that advisor penalties under section 163.2 of the ITA constitute criminal offences

In what is certain to be the first step in a very important precedent, the Tax Court of Canada held on October 2, 2012 that the advisor penalties created under section 163.2 of the Income Tax Act constitute criminal offences and entitle the taxpayer to all of the constitutional protections that entails, including a standard of proof beyond a reasonable doubt: Guindon v. The Queen, 2012 TCC 287.

The case involved a tax avoidance scheme that was deeply flawed from a technical perspective:

[1] The participants in a donation program (the “Program”) were to acquire timeshare units as beneficiaries of a trust for a fraction of their value and donate them to a charity in exchange for tax receipts for the actual value of the units. No donation ever took place as the timeshare units never existed and no trust was settled. The Minister of National Revenue (the “Minister”), on the basis that the Appellant made, participated in, assented to or acquiesced in the making of 135 tax receipts that she knew, or would reasonably be expected to have known, constituted false statements that could be used by the participants to claim an unwarranted tax credit under the Income Tax Act (the “Act”), assessed against the Appellant on August 1, 2008 penalties under section 163.2 of the Act in the amount of $546,747 in respect of false statements made in the context of that donation program. The Appellant appealed the assessment.

The appellant was a lawyer with no experience or expertise in tax law. Nevertheless she prepared an opinion that was used by the Program promoters to attract potential donors. The opinion was found to be badly flawed and purported to rely upon documentation which the appellant had never examined (and which, in fact, did not exist):

[105] The Appellant wrote and endorsed a legal opinion regarding the Program, an opinion which she knew would be part of a promotional package intended for potential participants in the Program. Her legal opinion clearly states that she reviewed the principal documents relating to the Program when these documents had in fact never been provided to her. She knew, therefore, that her legal opinion was flawed and misleading.

[106] The Appellant chose to rely on the Program’s Principals. They pressured her into providing them with an executed version of the legal opinion without providing her with the supporting documents on which to found her opinion. Yet her legal opinion does not reflect this reality. Rather, it indicates that the documents were reviewed.

[107] When the Appellant chose to involve the Charity in the Program and, later, to sign the tax receipts, she knew she could not rely on her legal opinion. She again decided to rely on the Principals. However, the Principals had relied on the Appellant to attest the legality of the Program. The Appellant knew her legal opinion could not be relied on and, for that reason, she could not be entitled to blindly rely on the Principals. In other words, the Appellant would have been entitled to rely on the Principals if a different professional had signed the legal opinion. She could not, however, rely on her own legal opinion which she knew to be incomplete.

[108] Her conduct is indicative either of complete disregard of the law and whether it was complied with or not or of wilful blindness. The Appellant should have refrained from involving the Charity and signing the tax receipts until she had either reviewed the documents herself or had another professional approve the Program’s activities. When the Appellant issued the tax receipts, she could have reasonably been expected to know that those receipts were tainted by an omission, namely, that no professional had ever verified the legal basis of the Program.

[109] The Appellant cannot agree to endorse a legal opinion and then justify her wrongful conduct by saying she did not have the necessary knowledge — either of tax law or of foreign law — to write that opinion.

[110] Moreover, the Appellant’s conduct after the tax receipts were signed negatively affects her credibility and reflects badly on her character. When the Appellant was informed, after the tax receipts had been issued, that the legal titles were not in order, she co-signed a letter informing the participants of the situation. At that point, the Appellant knew she could not rely on the Principals — the same individuals who had never provided her with the documents she was supposed to review and the same individuals she had trusted in signing the tax receipts. Yet when Ploughman sent out a letter, days before the end of the fiscal year, stating that all was in order and that the participants could submit their receipts, the Appellant blindly relied on him again, without asking any further questions.

Thus, it is reasonably clear that if the test under section 163.2 were a normal burden of “balance of probabilities” the advisor penalties against the appellant would have been sustained.

Justice Bédard, however, performed a very thorough and detailed analysis of section 163.2 to determine whether the penalties imposed amounted to criminal sanctions. At the end of that careful analysis he concluded that they did create criminal offences and allowed the appeal:

[69] The Respondent submits that it is not the penalty that would stigmatize the Appellant but rather her unlawful conduct and the professional sanctions that could result from it. What the Respondent fails to recognize is that this judgment, when rendered, will be public. That professional sanctions may be imposed subsequently does not alter the fact that there will be a public document setting out all the details of the Appellant’s conduct, whether that conduct was found to qualify as culpable conduct or not, and indicating the amount of the penalty that she is being assessed. This constitutes a form of stigma which one should not fail to consider.

[70] In conclusion, applying the rationale enunciated in Wigglesworth, section 163.2 of the Act should be considered as creating a criminal offence because it is so far-reaching and broad in scope that its intent is to promote public order and protect the public at large 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 case will almost undoubtedly be appealed, quite possibly to the Supreme Court of Canada. Nevertheless, the rationale of the decision seems balanced and well-reasoned. If it is sustained on appeal it may very well sound the death knell for advisor penalties under section 163.2 since the burden of proof on the Crown, i.e., proof beyond a reasonable doubt, will normally be far too onerous to justify prosecuting such penalties.

, ,

Tax Court holds that advisor penalties under section 163.2 of the ITA constitute criminal offences