Half $Million Penalty Comes with Vast Implications for Tax Advisors

A recent decision of the Supreme Court of Canada was extremely costly for the appellant and has vast implications for tax preparers and tax advisors across Canada.

A recent decision of the Supreme Court of Canada (Guindon v. The Queen (2015) SCC 41)  was extremely costly for the appellant and has vast implications for tax preparers and tax advisors across Canada.

KBR first reported on the lower court decision on April 19, 2014, and again on April 24, 2015, when the Supreme Court allowed the appeal of Ms. Guindon, 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 penalties under S.163.2 of the Income Tax Act as a result. The penalties were large under the circumstances ($546,747 to be exact), calculated on the basis of all the tax saved by the participants in the shelter, as allowed under the subsection.

The magnitude of the penalties led the appellant to argue that they were in fact criminal in nature. At issue for the Supreme Court: whether the penalty found at section 163.2 of the Income Tax Act (the Act) was criminal or administrative in nature. The key distinction is that criminal proceedings afford protection from the Canadian Charter of Rights and Freedoms (the Charter) and must be proven beyond a reasonable doubt, rather than the civil standard of a balance of probabilities.

If the penalties at issue were construed as criminal penalties, Ms. Guindon’s chances of not having to pay them would be much higher. This is as a result of the higher standard of proof necessary for criminal proceedings, as mentioned above. Furthermore, the Charter provides certain procedural protections for individuals charged with criminal acts, including the right not to be compelled to testify at their own trial.

Section 163.2 was enacted in 2000 and contains two penalties: the “planner penalty” in subsection (2) and the “preparer penalty” in subsection (4). The preparer penalty was the one at issue in Guindon.

If an individual has made, participated in, assented to, or acquiesced in the making of a false statement they are liable to be charged under that provision if the false statement is made knowingly or in circumstances amounting to culpable conduct. Culpable conduct is defined in S. 163.2(1) as:

“conduct, whether an act or a failure to act, that (a) is tantamount to intentional conduct; (b) shows an indifference as to whether this Act is complied with; or (c) shows a willful, reckless or wanton disregard of the law.”

The Supreme Court of Canada upheld the decision of the Federal Court of Appeal in holding that the penalty in S.163.2 is an administrative penalty and, therefore, Ms. Guindon was not “charged with an offence” and section 11 of the Charter did not apply. “A proceeding is criminal in nature when it is aimed at promoting public order and welfare within a public sphere of activity. Proceedings of an administrative nature, on the other hand, are primarily intended to maintain compliance or to regulate conduct within a limited sphere of activity,” stated the Court, which was split 4-3 in its decision.

This is the highest authority in the country and, therefore, establishes a clear precedent that tax advisors and tax preparers should take note of: Beware of your intentional culpable conduct in giving opinions or making false statements; acting, failing to act, or acting with wanton disregard for the law can be very expensive.

The Court did state, however, that the third party penalties created by S.163.2 are meant to capture serious misconduct, not ordinary negligence or simple mistakes on the part of a tax preparer or planner. Nonetheless, it always pays to sharpen your knowledge of the law if you’re in the tax advice, planning or preparation business.

Greer Jacks practices law in Victoria and is a regular contributor to Knowledge Bureau Report and EverGreen Explanatory Notes.