Tax Court of Canada Decides Third-Party Civil Penalty Assessments Come With Charter Protections

Décembre 2012 | Amanda J. Stacey

( Disponible en anglais seulement )

The Tax Court of Canada’s recent decision in
Guindon v. R. concerned an assessment
of third-party civil penalties pursuant to section 163.2 of the Income Tax Act (the “Act”).  For a primer on this type of penalty, please
see a previous issue of this Newsletter here.  Essentially, section 163.2 allows for
monetary penalties to be assessed against third parties who knowingly (or in
circumstances in which they should know) make or participate in the making of a
false statement on an income tax return.

This is an important and interesting case
as it stands for the proposition that third-party civil penalties are in fact
criminal in nature and attract the constitutional protections afforded by
section 11 of the Charter of Rights and
Those procedural and substantive protections include the presumption
of innocence and a raised burden of proof – from proof on a balance of
probabilities to proof beyond a reasonable doubt.  Subject to any successful appeal, CRA will
therefore have a higher threshold to meet in assessing and imposing third-party
civil penalties.

This case involved a tax shelter whereby
participants would buy timeshare units for a fraction of their value as
beneficiaries of a trust. They would then donate these interests to a charity
and receive a tax receipt for their full fair market value. The appellant, a
lawyer, was involved as both the signatory of the charitable recipient of the
timeshare donations, and as the legal advisor for the developers of the
timeshare/trust program.  The third party
assessment against the lawyer was the consequence of the fact that while tax receipts
were issued by the charity (and subsequently disallowed by the CRA), neither
the establishment of the trust nor transfers of the timeshares to the charity were
found to have actually occurred.

Justice Bédard relied on the Supreme Court
of Canada case R. v. Wigglesworth in
determining whether the matter is criminal and penal in nature, thereby
attracting the protection of section 11 of the Charter.

With respect to whether the matter at hand
was criminal and penal in nature, Justice Bédard interpreted section 163.2 to
have a broad purpose extending beyond the deterrence of specific behaviour and
ensuring compliance with the Act. He held that its purpose included promoting
public order and protecting the public at large:

“The individual
against whom a third party penalty is assessed is not one who himself or
herself made a representation in his or her return. Rather, section 163.2 of
the Act contemplates the harm that may be done by aid given by a person to the
taxpayer which could damage the integrity of the system of honest self
reporting.” (at paragraph 57)

In terms of true penal consequences,
Justice Bédard held that the penalties described in section 163.2(4) constituted
true penal consequences, due to their unlimited nature.  Penalties under section 163.2(4) are
calculated as a function of the tax avoided by the false statement(s).  In the context of donation tax shelters, in
which many participants may be found to have avoided significant tax by virtue
of donation receipts improperly claimed in their returns, third party penalties
can potentially be very substantial.

“The penalty under
subsection 163.2(5) thus has the potential of increasing ad infinitum depending on the number of “other persons” involved.
As the Appellant submitted, where the penalty is unlimited and is imposed on a
third party, it seems evident that its purpose is to redress a wrong done to
society and consequently ceases to be a purely administrative matter or one of
internal discipline.” (at paragraph 62)

Justice Bédard also commented that the
gravity of the penalty imposes a stigma on the person that cannot be ignored,
including damage to professional reputation and personal damage.

Based on this analysis, the section 163.2
penalty was held to be criminal in nature and therefore subject to the
protection of section 11 of the Charter. The implications of this protection
include the presumption of innocence, protection from self-incrimination, trial
held in provincial court in accordance with criminal (as opposed to tax)
procedure, as well as the raised burden of proof to that of beyond a reasonable

As an aside, Justice Bédard also stated
that the appellant would have been liable for the penalty if it had been found
to be a civil one. The lawyer had demonstrated culpable conduct, pursuant to
the definition in the Act (conduct that shows an indifference as to whether the
Act is complied with or shows a wilful, reckless or wanton disregard of the
law) in that it was reasonable to have expected that she knew that the tax
receipts issued to participants in the tax shelter program contained false
statements. By signing the tax receipts, the appellant had “participated,
assented to or acquiesced” in the making of false statements to the CRA.

This is an important case for various reasons.
On one hand it provides a lesson to lawyers, accountants and any other tax
advisors of the dangers in providing tax advice without the necessary
expertise. On the other hand, the criminal characterization of this penalty
provides the benefit of Charter protection to those advisors and has
established a higher hurdle for their imposition by the CRA.

The Crown filed its appeal on October 31,
2012.  We will continue to update you as this case progresses.

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