The Supreme Court of Canada ("SCC") issued its judgment in Guindon v Canada1on July 31, 2015, concluding that Ms. Guindon was properly penalized under ss. 163.2(4) ("preparer penalty") of the Income Tax Act (Canada) ("ITA"). This is the first reported case dealing with the preparer penalty.
Ms. Guindon was assessed preparer penalties totaling $546,747 for making false statements in donation receipts issued on behalf of a charity in circumstances where she knew (or would have reasonably been expected to know) the receipts could be used to claim unsupportable tax credits under the ITA. At each level of Court she argued that the penalty was a criminal sanction attracting procedural safeguards under s. 11 of the Charter of Rights and Freedoms ("Charter"). Consequently, she argued that the penalty should have been vacated because the matter should not have proceeded before the Tax Court of Canada ("TCC"). The TCC agreed, but the Federal Court of Appeal ("FCA") reversed the TCC judgment, leading to Ms. Guindon's further unsuccessful SCC appeal.
Ms. Guindon is a lawyer practicing primarily family law and wills and estates, with no background in income tax. In 2001, she was approached by promoters of a "leveraged donation" tax scheme which involved timeshare units in a Turks and Caicos resort. Participants would donate their timeshare units for an amount greater than they paid.2 She opined on the tax consequences based on a precedent provided by the promoter, knowing the opinion would be relied on to promote the scheme. The opinion included the false statement that she had reviewed supporting documents. She was also the president and administrator of the registered charity that received the donated timeshare units, which would be sold on the charity's behalf with the charity receiving $500 per unit.
The SCC described the leveraged donation tax scheme as a sham.3 The charity issued and Ms. Guindon signed 135 tax receipts in the aggregate amount of $3,972,775, which credits were denied when claimed by the donors, ultimately leading to the preparer penalty assessment against her. The penalty was calculated by summing the ss. 163(2) gross negligence penalties for which each of the donors would have been liable.
The SCC considered two issues. The first was procedural and the other substantive. The procedural issue arose from Ms. Guindon's failure in the TCC and FCA to provide notice of a constitutional question to the federal and provincial Attorneys General ("AGs").4 Notice to the AGs was provided in the SCC appeal.
The substantive issue was whether the preparer penalty was a criminal sanction or a civil/administrative penalty.
The SCC's majority reasons5 held that the Court should exercise its narrow discretion to address the constitutional question even though the issue was not properly raised in the lower Courts. However, the SCC decided the substantive issue in favour of the government of Canada, concluding that preparer penalties are civil/administrative in nature, thus Charter protections did not apply. The minority reasons6 considered only the procedural issue and, having concluded that the failure to put the AGs on notice was fatal, did not provide reasons for the substantive issue.
Procedural issue: Notice to the AGs
The issue of notice to the AGs of a constitutional question concerned whether notification provisions are mandatory or directory. The purpose of the notification provisions in the Tax Court of Canada Act and the Federal Courts Act requiring notice to the AGs is to ensure a Court has a full evidentiary record before invalidating legislation, and governments should be given full and fair opportunity to argue impugned legislation is valid. In Guindon, it was conceded that no prejudice occurred and no AG argued that additional evidence was required, or requested the opportunity to supplement the record.
Substantive issue: The nature of preparer penalties
The substantive issue was whether a person assessed a preparer penalty is a "person charged with an offense", thus engaging s. 11 of the Charter, which turns on whether the provision is a civil or criminal sanction.7
The preparer penalty reads as follows:
(4) Every person who makes, or participates in, assents to or acquiesces in the making of, a statement to, or by or on behalf of, another person … 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 or on behalf of the other person for a purpose of this Act is liable to a penalty in respect of the false statement.
Culpable conduct is defined in ss. 163.2(1) as "conduct, whether an act or a failure to act, that is tantamount to intentional conduct; shows an indifference as to whether this Act is complied with; or shows a wilful, reckless or wanton disregard of the law."
The SCC relied on R v Wigglesworth8 and Martineau v MNR,9 confirming that:
"A proceeding is criminal by its very nature when it is aimed at promoting public order and welfare within a public sphere of activity. Proceedings of an administrative nature, on the other hand, are primarily intended to maintain compliance or to regulate conduct within a limited sphere of activity …
The focus of the inquiry is not on the nature of the act which is the subject of the proceedings, but on the nature of the proceedings themselves, taking into account their purpose as well as their procedure …
Proceedings have a criminal purpose when they seek to bring the subject of the proceedings ‘to account to society' for conduct ‘violating the public interest'.10
A "true penal consequence" is "imprisonment or a fine which by its magnitude would appear to be imposed for the purpose of redressing the wrong done to society at large rather than to the maintenance of internal discipline within [a] limited sphere of activity…"11
The Wigglesworth/Martineau tests have been criticized as unclear and circular, which is likely one of the reasons why Guindon was heard by the SCC.
"Criminal in nature" test
The SCC held that the "criminal in nature" test queries whether the proceedings rather than the underlying act are criminal in nature. The indicia for determining if proceedings are criminal are: the objectives of the legislation; the objectives of the sanction; and the process.12 Regarding the legislative scheme for third-party ITA penalties, the SCC confirmed that the standard for culpable conduct is higher than simple negligence and more closely associated with the mens rea concept in criminal law, but concluded that the purpose of a proceeding involving preparer penalties was to "promote honesty and deter gross negligence, or worse, on the part of [tax] preparers, qualities that are essential to the self-reporting system of income taxation assessment".13
Regarding the adjudicative process, indicia of criminal processes include charges, an arrest, a summons to criminal court and risk of a criminal record. Further indicia include the use of words associated with crime, including guilt, acquittal, indictment, summary conviction, prosecution and accused. Additionally, whether a proceeding is criminal does not depend on the penalty amount: a traffic ticket may result in a small fine, but is imposed in the context of a criminal process. The SCC contrasted the indicia of a criminal process with the preparer penalty process, stating that an ITA tax preparer penalty arises after an audit, taking into account the planner or preparer's representations, before a recommendation is made to the CRA's Third-Party Penalty Review Committee, which would receive further submissions from the planner or preparer. This process is entirely distinct from the criminal process engaged by s. 238 and 239 of the ITA.
The SCC dispensed with the argument that the conduct resulting in a preparer penalty could be the same as that required for a s. 239 criminal conviction, noting that prosecution risk is irrelevant to the issue of civil penalties. The SCC also gave short-shrift to the argument that preparer penalties are not administrative in nature because they depart from the general purpose of the ITA, being the collection of tax. In the SCC's view, the ITA's regulatory scheme encompasses more people than taxpayers, including entities that must file information returns and produce information to verify tax compliance: provisions including administrative penalties encourage compliance by non-taxpayers and are integral to the regulatory regime. The SCC also dispensed with the argument that the term "culpable conduct" confirms that mens rea is required, which is typically a criminal requirement, holding that this argument is irrelevant because the "criminal in nature" analysis is concerned not with the underlying act, but the legal process. The "mental element" aspect of ITA third-party penalties does not make them criminal in nature.
"True penal consequences" test
The SCC then considered whether preparer penalties were a "true penal consequence" and concluded that they were not. The SCC stated that imprisonment is obviously a true penal consequence, but a monetary penalty may or may not be. It would be a penal consequence where in purpose or effect it is punitive, taking into account the magnitude, to whom it is paid, whether its magnitude depends on regulatory considerations rather than criminal sentencing principles and whether there is stigma attached with the penalty.
While magnitude is not determinative, a disproportionate penalty may suggest it is a true penal consequence. However, the SCC stated that significant penalties could be necessary to deter non-compliance in an administrative regime.14 In any case, the SCC stated that an administrative penalty should reflect the deterrence objective within an administrative or regulatory context. Ms. Guindon argued that an administrative penalty should have an upper limit, but the SCC disagreed, holding that an arbitrary limit could undermine the deterrence goal of the penalty. The proper analysis according to the SCC was whether the amount is consonant with the misconduct and the need to serve regulatory purposes – an arbitrary threshold might not suit the regime or its goals.
The SCC stated that the purpose of the preparer penalty was to deter people from making false statements on behalf of others or from counseling false statements, thus promoting tax compliance, and that deterrence objectives do not take penalties out of the administrative arena. Tying the amount of the penalty to the magnitude of tax and the "violator's" personal compensation is relevant to deterring misconduct, the amount is fixed without regard to general sentencing principles and no stigma attaches as compared to a criminal conviction. Although the penalty against Ms. Guindon was quite high for an individual, the SCC held that it did not constitute a true penal consequence, since there were 135 violations, a dishonest legal opinion and a compounding of the dishonesty by signing charitable receipts that she should have known were tainted. This dishonesty cannot be allowed in a self-reporting system and, as the FCA noted, administrative penalties may sometimes need to be large to deter misconduct.
Off-the-shelf tax-reduction products based on untenable interpretations of the ITA (or worse, shams) erode the tax base while lining the pockets of people willing to structure tax schemes. These schemes typically result in little or no benefit to participants after the scheme is discovered by the CRA. Disincentives should be strong, to increase the economic risk associated with creating or advising on untenable schemes in a self-reporting tax system.
Further, although ITA penalties such as preparer penalties can become extraordinarily high, they are not unbounded: the penalty against Ms. Guindon would have been lower if there had been fewer instances of non-compliance. Stated another way, it is untenable to argue about the magnitude of a penalty when the penalty is composed of over one hundred instances of "culpable conduct". If one tax preparer is penalized for a single instance of culpable conduct, another for a hundred instances of culpable conduct, and another for a thousand instances of culpable conduct, is there a point at which the magnitude of the penalty becomes a true penal consequence? To suggest that there is a point where the magnitude becomes unjust may be tantamount to saying that a prolific bad actor should be treated more leniently.
The Charter position in this case was worth testing, particularly since there was seemingly no other defense against the preparer penalty and there was at least some chance that the Charter challenge may have succeeded. On one hand, the presumption of innocence is a practical principle. No one wants to live in a society where they may be arbitrarily punished by the state. A free and democratic society requires procedural safeguards when the state doles out its harshest punishments. It should not be contentious that punishment should be proportionate to the impugned act and that the associated process of meting out a penalty should appropriately reflect the nature and severity of the penalty. Where a person's liberty interests are at stake, it makes sense that the state's strongest procedural protections would apply, including the presumption of innocence and the requirement of proof beyond a reasonable doubt. On the other hand, the legal system may grind to a halt if every allegation of misconduct could be tested in a full criminal proceeding. Thus, a functioning regulatory system should include a range of procedural options and defenses against state-imposed sanctions, from absolute liability (no defense), strict liability (subject to a due diligence defense) to mens rea penalties (in which the state bears the burden of proof). The questions to ponder following Guindon are whether we are genuinely concerned about:
- The presumption of innocence: the reverse onus provision in ss. 163(3) requires the Crown to prove its case in a preparer penalty assessment. Thus, there is a kind of presumption of innocence established in the ITA. Therefore, being presumed to have engaged in culpable conduct is not an issue.
- Proof beyond a reasonable doubt: the standard of proof in civil tax cases, including penalties cases, is "balance of probabilities", which is a more relaxed standard than the criminal standard. Rhetorically, should tax professionals feel at risk because the assessment of preparer penalties is based on a civil standard? Arguably, if tax preparation or planning is "more likely than not" misconduct under s. 163.2, wouldn't most of us agree that the preparer or planner should be punished? Would we feel more or less comfortable if tax-related misconduct had to be proven beyond a reasonable doubt?
- Procedure: the procedure for challenging a third-party penalty assessment allows for submissions to the CRA before and after the matter is referred to the Third-Party Penalty Review Committee. The penalty can then be challenged in the TCC. Arguably, a tax professional might be more comfortable having tax preparation or advising issues considered by the TCC in the context of a civil proceeding, rather than before a Superior Court Justice in a criminal proceeding who, respectfully, may not be as well versed in the underlying substantive issues.
1 2015 SCC 41 ("Guindon").
2 Time share units were acquired for $3,248 per unit, but donation receipts were issued for $10,825 per unit.
3 Ms. Guindon and another charity representative signed and issued 135 tax receipts dated December 31, 2001, acknowledging donations of the time-share units. However, no time-share units were created, acquired or donated to the charity in 2001.
4 The TCC notice of appeal did not raise a Charter issue, notice was not provided to the AGs as required by s. 19.2 of the Tax Court of Canada Act and notice was not given in the FCA appeal.
5 Written by Rothstein and Cromwell JJ with Moldaver and Gascon JJ concurring.
6 Written by Abella and Wagner JJ with Karakatsanis J concurring.
7 The FCA mentioned in passing that s. 12 of the Charter (prohibiting cruel and unusual punishment) was untested in administrative law and may provide an alternative basis for challenging s. 163.2 of the ITA, while expressing some doubt about whether a s. 12 challenge might work.
8  2 SCR 541 ("Wigglesworth").
9  3 SCR 737 ("Martineau").
14 See also Rowan v Ontario Securities Commission, 2012 ONCA 208.