Some tax prosecutions by the Canada Revenue Agency (CRA) now require a higher standard of proof, according to a precedent-setting Tax Court of Canada ruling. The decision says that the advisor penalties created under section 163.2 of the Income Tax Act (ITA) are for criminal rather than civil offences.
That means taxpayers and their advisors will have the benefit of constitutional protection in such cases, including a standard of proof beyond a reasonable doubt, says William Innes, a tax lawyer with Fraser Milner Casgrain LLP in Toronto.
The Oct. 2 decision in Guindon v. The Queen “takes a large cloud of uncertainty over tax planning and replaces it with a much more remote prospect of attack by the CRA,” says Innes. “In many respects, it’s a technical and complex decision. But the fundamental issue is that in order to impose these penalties, CRA has to prove its case to a criminal standard and that is typically very hard to do.”
The ITA’s third-party civil penalties, introduced as a tool available to the CRA to combat abusive tax shelters, were designed to punish tax advisors, planners and preparers for leading clients into tax structures that ended up being disallowed by the CRA.
The legislation, which was introduced in 2000, has been very controversial, says Innes: “It casts a very, very broad net. [The basic test is] culpable conduct -anything from tantamount to intentional conduct, indifference as to whether the act is complied with, or willful reckless or wanton disregard.”
The penalty is based on gross compensation or gross revenue rather than net, Innes adds: “So, depending on [the] margins, it could easily put an advisor out of business.
“If this were just a normal civil penalty,” he adds, “anybody involved in marketing any sort of product that had a tax aspect to it could theoretically be exposed based on their gross receipts as opposed to their profits. With this finding, CRA has to maintain these penalties to a criminal standard, which is a much higher threshold to meet than the civil-law standard.”
The Guindon case involved a tax-avoidance scheme that had been set up as a donation program. According to the judgment, participants “were to acquire time-share units as beneficiaries of a trust for a fraction of their value and donate them to a charity in exchange for tax receipts for the actual value of the units. No donation ever took place, as the time-share units never existed and no trust was settled.”
Julie Guindon, a family law and wills/estates lawyer in Ottawa, had acted as president of the charity. Guindon had no expertise in tax law but had prepared a legal opinion for a promotional package that the program’s promoters used to attract potential donors. Her opinion was flawed and claimed to rely on documentation that did not exist.
According to the judgment, Guindon was assessed penalties of $546,747 by the minister of national revenue on the basis that Guindon “made, participated in, assented to or acquiesced in the making of 135 tax receipts that she knew, or would reasonably be expected to have known, constituted false statements that could be used by the participants to claim an unwarranted tax credit under the Income Tax Act.”
Justice Paul Bédard of the tax court analyzed sec. 163.2 and found that the penalties were, in fact, criminal offences as opposed to civil ones. The section, Bédard ruled, “should be considered as creating a criminal offence because it is so far-reaching and broad in scope that its intent is to promote public order and protect the public at large rather than to deter specific behaviour and ensure compliance with the regulatory scheme of the act.”
The ruling adds that Guindon’s “conduct is indicative either of complete disregard of the law and whether it was complied with or not, or of wilful blindness. The appellant [Guindon] should have refrained from involving the charity and signing the tax receipts until she had either reviewed the documents herself or had another professional approve the program’s activities. When [Guindon] issued the tax receipts, she could have reasonably been expected to know that those receipts were tainted by an omission, namely, that no professional had ever verified the legal basis of the program.”
John Loukidelis, a tax lawyer with SimpsonWigle LLP in Hamilton, Ont., finds it interesting that the judge, despite the fact he found that the civil penalties were actually criminal sanctions, went on to consider whether Guindon would be liable for the civil penalty if the judge’s analysis was wrong. Says Loukidelis: “And he had no difficulty finding that [Guindon] was liable for the penalties. So, but for [the judge] holding that these were criminal sanctions, {Guindon] would have been liable to pay the rather hefty penalties – over $500,000.”
Loukidelis expects the government will appeal the decision: “This was an important part of the strategy for combating tax shelters. To lose it or, at least, to have it severely constrained like this has got to be a real concern for the CRA and the Department of Finance.”
If the decision stands, he adds, it will create “a significant issue for the government in terms of its strategy for combating tax shelters.” If the case is overturned on the criminal sanction question, he says, “instead of an important defeat for the government, it will turn into an important victory.”
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