Supreme Court of Canada Weighs in on Civil Tax Penalties

Tax Advisors take note: the Supreme Court of Canada has allowed an appeal from the Federal Court of Appeal (FCA) to decide on when civil tax penalties are in fact criminal in nature, and as a result, should be protected under the Canadian Charter of Rights and Freedoms.

The appellant, Ms. Guindon, is a lawyer who gave a legal opinion and signed tax receipts as part of a tax shelter scheme allegedly involving the donation of time-share units. She was assessed large penalties under s.163.2 of the Income Tax Act (the Act), calculated on the basis of all the tax saved by the shelter participants. The magnitude of the penalties lead the appellant to argue that they were in fact criminal in nature.

The penalties at issue in Guindon v. The Queen are applicable to tax advisors, charities issuing official donation receipts, and to their staff authorizing such receipts. 

Third party civil penalties can be levied to an advisor who knowingly makes a false statement, or does so with gross negligence, and intends that statement to be relied upon by someone else to reduce their taxes. Under section 163.2 of the Act, this person can be liable for all of the tax saved by anyone who acts in reliance on it.

The Tax Court originally decided in Guindon v. The Queen that Charter protections do attach to civil tax penalties, while the Federal Court of Appeal (FCA) decided that they do not.

The Charter provides elevated protections for those who face criminal sanctions as the onus of proof is  beyond a reasonable doubt rather than the civil balance of probabilities. 

In addition, various Charter protections apply at the investigation stage, none of which had been provided to Ms. Guindon. The FCA suggested that Parliament, in creating the penalties at issue, was attempting to protect the integrity of the tax system, not simply punish offenders, and therefore the discretion of the CRA to reduce penalties could be relied upon to avoid unfairness.

The Supreme Court of Canada’s ruling will have a profound effect on those involved in such activities and the KBR will be sure to keep you informed on the result. 

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.