Third Party Penalties in Income Tax Act Do Not Attract Charter Protection: Supreme Court of Canada Affirms Federal Court of Appeal Decision in Guindon v. Canada

August 13, 2015 | Andrew Valentine

On July 31, 2015, the Supreme Court of Canada released its decision in Guindon v. Canada.  At issue was whether the third party penalties in section 163.2 of the Income Tax Act (the “Act”) amount to criminal sanctions to which protections under the Charter of Rights and Freedoms (the “Charter”) apply.  The Court held that these protections do not apply.

The facts of the case involved a lawyer, Julie Guindon, who issued a legal opinion as part of a promotional package for a charitable donation tax shelter arrangement, which involved the purported donation of timeshare units.  Ms. Guindon also acted as president and administrator of a charity that participated in the shelter and issued official donation receipts to individual donors.  The total value on the receipts issued by the charity was just under $4 million. 

CRA disallowed the tax credits claimed by the donors on the basis that the scheme was a sham and no real donations to the charity had occurred.  CRA assessed Ms. Guindon for penalties under section 163.2 of the Act for the tax receipts issued by the charity.  Section 163.2 allows penalties to be imposed on third parties who participate in the making of a false statement that is used by another person to gain an improper tax advantage, in circumstances in which the third party knew or should have known (but for circumstances amounting to culpable conduct – i.e., intentional, wilful or reckless disregard of the law) that the statement was false.  CRA assessed Ms. Guindon a total of $546,747 in respect of the false receipts issued as part of the shelter.

Ms. Guindon challenged the imposition of the penalties on the basis that they are criminal in nature and should therefore attract the protections of section 11 of the Charter.  Section 11 affords various procedural protections to persons charged with criminal offences, including the right to a presumption of innocence and the right to be tried within a reasonable period of time.  Among other things, this would mean that the matter should not have proceeded in the Tax Court of Canada.  The Tax Court of Canada agreed with Ms. Guindon and vacated the assessment on the basis that section 163.2 penalties are criminal in nature.  CRA then appealed the Tax Court decision to the Federal Court of Appeal, which overturned the Tax Court decision.  Ms. Guindon was granted to leave to appeal to the Supreme Court of Canada.

After addressing a procedural matter related to the application, the Supreme Court of Canada considered the merits of the taxpayer’s position.  In their written decision, Rothstein and Cromwell JJ. confirmed that the procedural protections in section 11 of the Charter apply to proceedings that are “criminal in nature” and to proceedings that carry “true penal consequences,” as opposed to merely administrative proceedings.  The Court stated that criminal proceedings are aimed at promoting public order and welfare within a public sphere of activity, while administrative proceedings are intended to maintain compliance or regulate conduct within a limited sphere of activity.  Similarly, a “true penal consequence” is understood to mean imprisonment or a fine of sufficient magnitude that it appears to be imposed to redress a wrong done to society as a whole rather than to maintain internal discipline within a limited sphere. Although the Court acknowledged the difficulties in applying these tests, it proceeded to analyze section 163.2 in this light.

The Court reviewed the purpose of the third party penalties in section 163.2 and held that these penalties were enacted to promote honesty and to deter gross negligence on the part of tax planners and preparers, which objectives are essential to the self-reporting scheme of the Act.  The Court concluded that the proceedings were not criminal in nature.  It also held that the administrative monetary penalties in section 163.2 did not amount to true penal consequences, as their purpose was merely to secure compliance with the Act.  Notwithstanding their magnitude, their purpose was simply to deter conduct of the type in which Ms. Guindon engaged.  As a result, the Charter protections could not be invoked by Ms. Guindon in order to attempt to avoid the application of the penalties in this instance.

This decision affirms that third party monetary penalties under section 163.2 will continue to be imposed through the normal assessment procedure.  Appeals from such assessments will continue to be heard in the Tax Court of Canada and the Federal Court of Appeal.  Tax planners and preparers should take great care when advising on tax matters, as the penalties in section 163.2 were enacted with a view to ensuring compliance by tax advisors.  It is also vital that the directors of registered charities ensure that all tax receipts are issued properly, as CRA may assess section 163.2 penalties against directors of registered charities that have issued what CRA believes to be false receipts.  It is clear from the Guindon decision that personal liability arising from the issuing of false receipts can be extremely high.  The importance of care and diligence in ensuring compliance with the Act cannot be overstated, particularly in light of this decision.


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