The following article on the tax preparer penalties appeared in a recent issue of the HLA Journal.
The “third-party civil penalties” in the Income Tax Act (the “Act”) have been with us for some time now. When they were first introduced, they caused some consternation because they made tax advisers potentially liable with their clients for penalties for misstatements on tax returns. In my experience, these penalties have had the effect Finance was looking for when it introduced the penalties: most of the accountants with whom I deal are quite cautious when it comes to circumstances that might involve the application of the penalties. Perhaps they would be cautious anyway, but it is a rare discussion about a questionable or aggressive filing position for which a client is advocating where the accountant does not mention these penalties.
The courts have now had a chance to consider the civil penalties, and, in the Federal Court of Appeal decision in Canada v Guindon, 2013 FCA 153, rev’g 2012 TCC 287, we have a strong statement about the serious consequences for an adviser who runs afoul of the rules. Tax advisers who are less than careful about the opinions they give, the persons to whom they give them and the uses to which they will be put should beware.
Ms Guidon was a lawyer who practised primarily in the family law and trusts and estates area. Nonetheless, she gave an opinion on tax matters for a charity donation scheme that turned out to be a sham and a scam. In the opinion, she stated that she had reviewed certain documentation, which she had not. And, from the “What was she thinking?!” file, she also signed donation receipts on behalf of the charity. When the CRA came after the donation scheme, it came after her too for the opinion she had given. Subsection 163.2(4) of the Act provides as follows:
(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 CRA assessed penalties against Ms Guindon under this subsection in a total amount equal to $564,747 in respect of 134 receipts issued by the bogus charity.
Before the Tax Court, Ms Guindon’s lawyer argued that the penalty under subsection 163.2(4) was, in substance, a criminal sanction and that, therefore, the assessments against her should be set aside because they were imposed without her having had the benefit of Charter protection. The Tax Court, after reviewing R v Wigglesworth, 1987 CanLII 41 (SCC), [1987] 2 S.C.R. 541, and Martineau v MNR, 2004 SCC 81 (CanLII), 2004 SCC 81, [2004] 3 S.C.R. 737 (among others), concluded that the penalties imposed on Ms Guindon were criminal in nature, and it set aside the assessments (although it found she had engaged in culpable conduct when she gave an opinion outside her field of expertise and failed to review key documents that supposedly supported the scheme). The Crown promptly appealed.
The Federal Court of Appeal first held that the Tax Court decision was wrong because a notice of a constitutional question had not been served before the argument was raised in the Court, as required by the Act. The Court of Appeal, however, for greater certainty, went on to conclude that the preparer penalties were not criminal in nature and that Ms Guindon was liable for them.
The Court of Appeal held that the third-party penalties were civil in nature. In the Court’s view
[41] Seen in this way, penalties under the Act are not about condemning morally blameworthy conduct or inviting societal condemnation of the conduct. They are not among the “most serious offences known to our law”: Wigglesworth, supra, at page 558. Rather, the penalties are about ensuring that this discrete regulatory and administrative field of endeavour works properly.
[42] In my view, section 163.2 is mainly directed to ensuring the accuracy of information, honesty and integrity within the administrative system of self-assessment and reporting under the Act. The imposition of a section 163.2 penalty by way of assessment and the subsequent procedures for challenging the assessment are proceedings of an administrative nature aimed at redressing conduct antithetical to the proper functioning of the administrative system of self-assessment and reporting under the Act. Put another way, proceedings under section 163.2 aim at maintaining discipline, compliance or order within a discrete regulatory and administrative field of endeavour. They do not aim at redressing a public wrong done to society at large.
The Court pointed out that civil penalties under the Act, unlike the criminal sanctions in it, prescribe
a non-discretionary fixed amount or a non-discretionary formula for the calculation of the penalty to be included in the assessment. In no way does the Minister evaluate the moral blameworthiness or turpitude of the conduct, including any mitigating circumstances. Indeed, based on the rather mechanical nature of the task of preparing an assessment and the type of information available to the Minister, the Minister is not equipped to do such a thing.
That the penalties might be large, by itself, did not change their nature.
Ms Guindon also argued that the fact the penalties were applicable only if the person assessed had engaged in “culpable conduct” suggested that the person was “guilty” of something, that something being more akin to an offence. “Culpable conduct” is defined in section 163.2 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 wilful, reckless or wanton disregard of the law.
The Court of Appeal simply referred to this definition and concluded that it “does not bring within it the notion of ‘guilt’ or conduct violating some criminal standard.”
After concluding that section 163.2 was not criminal in nature, and upholding the Tax Court’s finding that Ms Guindon had engaged in culpable conduct that made her liable for the third-party penalties, the Court allowed the Crown’s appeal and reinstated them.
I must admit that I did not find the Court of Appeal’s reasoning persuasive. I have little sympathy for Ms Guindon. She received only $1,000 for her “opinion”, but she also signed donation receipts from which she and some of her family members benefited. Maybe the penalties are out of proportion to the blameworthiness of her conduct, but not by much I think. Moreover, I’m glad that, after Guindon, lawyers and others might think twice about facilitating tax scams that cost all of us literally billions of dollars and cause untold heartache for their (often unwitting or naive) participants.
That said, the penalties imposed were large, and that should mean something in this analysis. Apparently, the size of a penalty is something the European Court of Justice considers carefully in trying to make the distinction at issue in Guindon. The Court of Appeal, however, simply referred to other case law on this point without further analysis. Even more importantly, I found counterintuitive the notion that a taxpayer is entitled to Charter protection where a sanction is imposed after the exercise of discretion and after taking into account mitigating circumstances but not where a “penalty” is imposed that is a “non-discretionary fixed amount” where “the Minister [does not] evaluate the moral blameworthiness or turpitude of the conduct, including any mitigating circumstances.” What is wrong with that picture?
In any case, we’ll get a chance to see whether the Supreme Court of Canada shares these concerns or has some others: it granted leave to appeal to Ms. Guindon on March 27, 2014.
