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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

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.

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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

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.

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