Advisor Penalties Not Criminal in Nature Says Federal Court of Appeal

On June 12, 2013, the Federal Court of Appeal released its decision in Canada v. Guindon (2013 FCA 153). The issue to be determined was whether advisor penalties levied under Section 163.2 of the Income Tax Act (the “Act”) created an “offence” within the purview of Section 11 of the Canadian Charter of Rights and Freedoms (the “Charter”).

Initially, the Tax Court of Canada held that people assessed under the provisions were entitled to Charter protection under Section 11, which includes the right to be presumed innocent and the right to be tried within a reasonable time. The Federal Court of Appeal felt otherwise, however.

The relevant portion of Section 162.3 reads:

(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 disagreed with the initial ruling of the Tax Court essentially for the reason stated at paragraph five by the Honourable Justice Stratas: “proceedings under section 163.2 are not criminal by their nature, nor do they impose true penal consequences.”

The advisor penalties in question were viewed by the Court as a fundamental aspect of the self-compliance administration of Canada’s tax system. The fact that the penalties in section 163.2 allow for more judicial discretion in the sentencing process also seemed to be a reason to distinguish them from other penalties in the Act that remain “truly criminal in nature” and thus attract Charter protection.

Sounds reasonable. But the amount of the penalty in question in this case was not small: Ms. Guindon was charged with a $564, 747 penalty! “Sometimes administrative penalties must be large in order to deter conduct detrimental to the administrative scheme and the policies furthered by it,” said the Court.

The test used by the Supreme Court of Canada (“SCC”) to determine whether a penalty is or is not “truly criminal” was developed in the 1987 case of R v. Wigglesworth. Many hope that Guindon will find its way to the SCC so that this test can be re-evaluated. The Federal Court of Appeal stated that the distinction it draws is a little bit “fuzzy” at times, so this could well be re-evaluated at the highest level.

If the SCC does not get the chance to have a say however, the CRA will not have to abide by traditional criminal law standards in charging advisors with sanctions and penalties. So is that a good thing for advisors? Your opinions are welcome.

Greer Jacks is updating jurisprudence in EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.ta