Tax Court Decision of Major Impact to Charity Directors and Tax Professionals Alike
By: Adam Aptowitzer
A recent decision of the Tax Court of Canada in the Guindon[1] matter has completely changed the way the CRA can assess people who provide advice, information or paperwork related to a filed income tax return. As a result of the decision tax lawyers, accountants, charity signing officers and others will have the benefit of constitutional protections for those charged with a criminal offence.
For years, the so-called ‘Third Party Civil Penalties’ (the “Penalties”) of the Income Tax Act have hung over the heads of tax professionals like the proverbial sword of Damocles. By way of reminder the Penalties[2] were instituted as a way to punish tax advisors, planners and preparers for leading their clients into tax structures which were eventually disallowed by the CRA and the courts.
Technically, there are two parts to the Penalties, the tax planner and the tax preparer, and while the Court in Guindon dealt mostly with the latter, the decision would seemingly apply to both.
The preparer penalty applies to anyone that “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 . for a purpose of this Act is liable to a penalty in respect of the false statement”.
In Guindon, the third party involved a lawyer who wore two hats – one of which was as the lawyer who wrote the tax opinion involved, the other was as the director of a charity. In that capacity she signed charitable donation tax receipts which turned out to be false. And it was in that role that she was assessed the $546,747 penalty which served as the primary basis of the appeal.
The third party penalty is calculated as the gross negligence[3] penalty that his or her client would pay[4] and reads as follows:
The penalty to which a person is liable under subsection (4) in respect of a false statement is the greater of
(a) $1,000, and
(b) the lesser of
(i) the penalty to which the other person would be liable under subsection 163(2) if the other person made the statement in a return filed for the purposes of this Act and knew that the statement was false, and
(ii) the total of $100,000 and the person’s gross compensation, at the time at which the notice of assessment of the penalty is sent to the person, in respect of the false statement that could be used by or on behalf of the other person.
Subsection 163(2) penalties are generally 50% of the understated tax. But what is not apparent from the provision is that the penalties are cumulative. In the current era, where tax plans are marketed widely to Canadians, the calculation of the penalty is effectively unlimited. To make matters worse, there is no limitation period after which the CRA could no longer assess the third party involved.
In effect then, the CRA has the tools to assess any third party from a taxi driver to a tax lawyer an unlimited penalty in with no limitation period. And until the Guindon decision the CRA only had to prove the liability of the third party on the balance of probabilities rather than the more stringent beyond a reasonable doubt. Moreover, (again until the Guindon decision), the third party did not have the benefit of Charter protections.
The reason for the lower standard of proof and the lack of Charter application resulted from the characterization of the Penalties as being civil in nature rather than criminal. This was more a matter of title and press though than actual law – for example the title as the ‘Third Party Civil Penalties’ attempted to prejudge the issue. The critical aspect of the Guindon decision involved a review of the nature of the provision and an application of the test as to whether the Penalties were civil or criminal in nature. In the result, the Court agreed with us that the Penalties are indeed in the nature of criminal penalty and the benefit of the Charter protections must necessarily follow – and in the Provincial court system rather than the Tax Court.
The facts of the Guindon matter are not complicated. Ms. Guindon is a family law lawyer who was approached by her cousin to write an opinion for a tax shelter program he was planning to promote. Her drafts of the letter included a clause that she had read the underlying documents and approved of the structure. The reference to having read all of the documents made it into the final signed version of the letter even though she had not read them.
As with most shelters nowadays the plan involved the donation of property (Turks and Caicos time shares) to a charity. Ms. Guindon was also the president of the charity in question and signed at least a portion of the receipts issued. Before signing the receipts she asked for confirmation from the promoters that the property had been transferred, which they gave, but even to that point she had never seen any documentation to the effect.
In assessing penalties, the CRA levied a $1000 penalty for her role in writing the opinion but a cumulative $546,747 penalty for her role in signing the receipts.
The reasoning behind the decision though is not as important as the impact. Not only does this mean that third parties assessed with these penalties receive the benefit of Charter protection[5] but also that the Tax Court of Canada does not even have jurisdiction to hear these appeals – which now must go to the relevant Provincial Criminal court. Moreover, one would assume that the principles that apply in other criminal CRA investigations would apply here as well such as the requirement to inform the taxpayer when the CRA is considering levying penalties and the requirement to seek a warrant to seize additional information.
Given the limitless time the CRA has to make an assessment under this provision and the infinite nature of the potential penalty it seems only reasonable that there be some protections for Canadian citizens facing financial and professional ruin. Nevertheless, it seems that the CRA is likely to appeal the matter to the Federal Court of Appeal. Hopefully, the Appellant will be able to continue the fight on behalf of all of us who may one day face a similar situation. In the meantime, it seems that the time has come to rename the Third Party Civil Penalties as the Third Party Criminal Penalties.
[1] As of writing the Guindon decision has not been published, but as counsel for Ms. Guindon we have been provided with a copy.
[2] Section 163.2 of the Income Tax Act.
[3] S.163 of the Income Tax Act.
[4] To calculate the penalty of the preparer the law assumes that the client would have been subject to the penalty. It is irrelevant whether gross negligence penalties were actually levied against the taxpayer.
[5] Such as the right of presumed innocence and the right to be proven guilty beyond a reasonable doubt.