Canada: The Last Word: Advisor Penalties Are Not Criminal

Last Updated: August 7 2015
Article by Riley R. Burr and Catherine A. Brayley

On Friday, July 31, 2015 the Supreme Court of Canada sent a clear message to tax advisors: the advisor penalties provided for in section 163.2 of the Income Tax Act ("Advisor Penalties") are administrative in nature, not criminal. Even a penalty of $546,747 to an advisor who made false statements in circumstances amounting to gross negligence will not attract the enhanced procedural safeguards of a criminal process afforded by the Charter.

At the centre of Guindon v. Canada, 2015 SCC 41 is a family law lawyer who signed a legal opinion relating to the tax effects of a leveraged donation program involving the donation of timeshare units. It was an agreed fact that she knew that the opinion would be used as part of the promotional materials for the leveraged donation scheme. Her opinion included a statement that the transactions described in the plan would be implemented based on supporting documents she had seen and reviewed. However, she had not reviewed the supporting documents.

The appellant was also the president and administrator of the charity who agreed to be the recipient of the donated timeshare units. No timeshare units were ever created or donated to the charity. Nonetheless, 135 donation receipts were signed by the appellant and the treasurer of the charity totalling $3,972,775.

As a result, the appellant was assessed for Advisor Penalties on the grounds that she knew or would have known but for wilful disregard of the Income Tax Act, that the tax receipts constituted false statements.

In the Tax Court of Canada, the appellant argued that the Advisor Penalties are criminal and that she was therefore a person "charged with an offence" who is entitled to the procedural safeguards of the Charter. She made this argument without raising any Charter issues in her notice of appeal and without providing notice of constitutional questions to the federal and provincial attorneys general as required by the Tax Court of Canada Act. Regardless of these technical deficiencies, she prevailed at the Tax Court level, but the penalties were restored at the Federal Court of Appeal.

The Supreme Court of Canada denied the appellant's appeal in concurring judgments. The majority held that the Advisor Penalties are administrative and not criminal. The minority found that the appellant did not satisfy the notice requirements to plead a constitutional question in the Tax Court of Canada.

The majority distinguishes administrative and criminal proceedings and penalties by their various purposes.

Criminal proceedings are aimed at promoting public order and welfare within a public sphere of activity. Administrative proceedings are intended to maintain compliance or to regulate conduct within a limited sphere of activity. Criminal penalties involve imprisonment or a fine which, having regard to its magnitude and other relevant factors, is imposed to redress the wrong done to society at large rather than simply to secure compliance. Monetary penalties can be criminal but only when they are punitive in purpose or effect.

The majority held that the Advisor Penalties were administrative because they did not impose a true penal consequence notwithstanding the quantum of them. The court held that the purpose of the penalties is "to promote honesty and deter gross negligence, or worse, on the part of preparers, qualities that are essential to the self-reporting system of income taxation assessment". The amount of the penalty in this case reflected the objective of deterring the very serious and culpable conduct in which the appellant was engaged -- intentional acting, and a wilful blindness or indifference as to whether the law is complied with. They are not intended to address ordinary negligence or simple mistakes on the part of a tax preparer or planner.

The appellant argued that the sheer size of the penalty caused it to be criminal in nature. The court noted that the penalty was calculated with regard to the amount of tax that could potentially be avoided by the person to or for whom the false statements are made and the amount of the violator's potential personal gain. None of the other criminal sentencing principles are engaged in calculating the penalty. Furthermore, the court held that no stigma comparable to a criminal conviction flows from the imposition of the penalty. The only factor that the court found to support the argument that the fine was criminal was that it was paid into the Consolidated Revenue Fund. That alone was not enough to characterize the fine as criminal instead of administrative.

The Supreme Court's decision also has implications for the Excise Tax Act. Section 285.1 of that statute imposes a similar penalty.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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