On Their Own: No Charter Protection for Penalized Tax Preparers & Planners in Income Tax Act ProceedingsGuindon v. Canada, 2015 SCC 41 (CanLII)
On July 31, 2015 the Supreme Court of Canada decided that proceedings under Canada’s Income Tax Act (ITA) are administrative, not criminal, and a penalty imposed under it is not a “true penal consequence” – and the person on whom such a penalty is imposed doesn’t get the protection of Canadian Charter of Rights and Freedoms’ (section 11(d)) guarantees of the presumption of innocence, proof of guilt beyond a reasonable doubt, and right to a fair and public hearing. The decision targets tax shelter schemes and the level of protection afforded those who administer tax arrangements, and confirms that tax preparers and planners, and likely donors too, are on their own when it comes to civil penalties imposed under the ITA.
Ms. Guindon, a lawyer and president of a charity, gave a misleading legal opinion about a tax shelter involving that charity and issued false income tax receipts on its behalf. The Minister of National Revenue decided she engaged in culpable conduct and imposed a $546,747 penalty against her under the ITA’s section 163.2 “preparer penalty”. Ms. Guindon appealed, arguing section 163.2 of the ITA imposes penal consequences of the nature to which section 11(d) of the Canadian Charter of Rights and Freedoms – and its guarantees of the presumption of innocence, requirement of proof of guilt beyond a reasonable doubt, and the right to a fair and public hearing by an independent and impartial tribunal – apply, and which she was denied. The Supreme Court of Canada, however, decided she wasn’t entitled to the Charter rights – and the penalty stands:
- Not criminal proceedings. The ITA’s penalties are administrative in nature, not penal. Criminal proceedings are aimed at promoting public order and welfare within a public sphere of activity; administrative proceedings are intended to ensure compliance and regulate conduct within a limited sphere of activity. This proceeding is administrative: it’s intended to promote honesty within the tax sphere. Furthermore, in ITA proceedings, there’s typically a CRA audit, information in writing of the audit, and a consideration of the individual’s representations before a penalty is imposed – but contrast this with criminal proceedings: no one is charged, no information is laid against anyone, no one is arrested or summoned to appear before a criminal court, and no criminal record will result from the proceedings.
- Not a “true penal consequence”. Section 11 of the Charter only applies to a “true penal consequence”. A monetary penalty may not be a true penal consequence, but if its purpose or effect is punitive, it will be. The ITA penalty is intended to deter certain conduct (in this case, endorsing information known to be false) – and isn’t a “true penal consequence”.
- Not limited financially. The SCC confirmed the ITA’s penalty sections don't have a maximum amount – and refused to impose one.
The decision impacts tax preparers and planners, and likely donors, with respect to ITA proceedings and could also have an effect on penalties under other administrative regulatory schemes:
- Tax advisors This decision directly applies to ITA “preparers” and “planners”. The ITA’s “preparer penalty” is narrow in scope: it applies to an individual that has made, participated, or acquiesced in making a statement it knew is false, or in the circumstance ought to have know is false. Charities, lawyers, accountants, and any other third parties conducting tax planning should be aware of the consequences of making a false statement. Notably, the Chartered Professional Accountants Canada intervened in this case on the basis CPA’s are potentially subject to ITA section 163.2 and in the hope that recognition of section 163.2’s criminal nature would reduce the risks of conflicts between a CPA’s tax and ethical obligations - but the SCC didn’t comment on the ethics of section 163.2 at all.
- Donors. Donors who provide incorrect information or make a false statement are also subject to gross negligence penalties under the ITA. This decision – and specifically, the lack of Charter protection – will likely apply to the donor penalty section of the ITA as well.
- Administrative Penalty Caps Generally. In rejecting a cap on the amount of the monetary penalties under the ITA, the SCC commented that an arbitrary upper limit on administrative penalties undermines the goals of administrative regimes, such as deterring non-compliance. This rejection also likely extends to administrative monetary penalties under other administrative regulatory schemes - like the securities regime, which the SCC specifically considered as a comparator in reaching this decision.
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