Focus On

Lawyer fears top court ruling will ease path for prosecutors

Thursday, August 20, 2015 @ 8:00 PM | By Cristin Schmitz

Governments are expected to amp up their use of Charter-exempt administrative money penalties after the Supreme Court green- lighted hefty fines for misrepresentation by tax professionals.

The top court’s July 31 decision, in Guindon v. Canada [2015] S.C.J. No. 41, upheld a $546,747 penalty assessed by the Canada Revenue Agency against Julie Guindon of Ottawa. The lawyer was found to have made false statements in 135 charitable donation receipts she signed but should have known would be used by donors to claim unwarranted tax credits for resort timeshares in the Turks and Caicos Islands.

Justice Marshall Rothstein and Thomas Cromwell’s ruling on behalf of four judges marks the Supreme Court’s first pronouncement on s. 163.2 of the Income Tax Act, enacted in 2000 and exposing tax preparers involved in a false statement that could be used by another person for tax purposes to a maximum penalty per statement of $100,000 plus gross related compensation.

The court concluded the section was constitutionally proper, preserving for Ottawa a powerful weapon against abusive tax shelters. The decision also comes as a relief for federal and provincial governments increasingly reliant on administrative money penalties (AMPs), some into the millions of dollars, to ensure compliance in areas including securities, competition and environmental regulation.

“The CRA will apply the terms outlined in the decision from the Supreme Court of Canada to any similar cases,” CRA spokesman Philippe Brideau said by e-mail.

Although Brideau declined to say how many cases Guindon will affect, counsel said scores of them are ongoing and the ruling would embolden governments.

“I would anticipate that federal and provincial governments will legislate more AMPs,” said Guindon’s counsel Adam Aptowitzer of Drache Aptowitzer, an Ottawa boutique specializing in tax and charities law.

Given the high test the court applied for when Charter protection is triggered, Aptowitzer said it will be difficult to challenge other AMPs imposed in the absence of procedural safeguards.

“I think one of the difficulties that we’re going to have to struggle with is the idea that Parliament, by prescribing an administrative sanction for what would otherwise be a criminal type of an issue, has basically found a way to ensure that the Charter does not apply in a given circumstance. If I’m a prosecutor and I’m not seeking, for whatever reason, a jail sentence, and I have the option of proceeding with an AMP, why would I ever not proceed with the AMP?

“The size of the penalty may in fact be as large, or larger, than the potential criminal fine, and I don’t have to give the individual their Charter rights — so it’s always an easier case for the prosecutor to make out.”

The intervener Canadian Constitution Foundation (CCF) unsuccessfully urged the court to cap AMPs at $10,000 for individuals and $100,000 for corporations.

“There are hundreds of AMP provisions in Canadian federal and provincial legislation and they’re in every sector…and they’re very serious, so we’re obviously disappointed,” said CCF counsel Darryl Cruz of Toronto’s McCarthy Tétrault, adding that the court stuck to older Supreme Court case law on when Charter safeguards are triggered.

“They’re saying it’s very difficult to defeat one of these [AMPs] on the basis that it’s a ‘true penal consequence,’” Cruz said. “I don’t think they’re excluding the possibility, but when this result happens, and this particular legislation is not considered to be contrary to s. 11 of the Charter, then it’s hard to see” other AMPS being successfully attacked.

The intervener Chartered Professional Accountants of Canada welcomed the court’s statement that the “culpable conduct” of a tax preparer targeted by s. 163.2 “must be at least as high as gross negligence,” and not simple mistakes or ordinary negligence.

“I think accountants have the protection they need,” said CPA Canada’s counsel, Dominic Belley of Norton Rose Fulbright in Montreal. “The [culpability] standard is pretty high, and the court’s words are very clear in this respect.”

While CPAs assessed under s. 163.2 will not enjoy Charter protections, accountants are “entitled to civil protections in the context of a civil trial,” Belley noted, “and since Tax Court judges are independent arbiters, we’re comfortable with this conclusion.”

CPA Canada urged the court that interpreting s. 163.2 as criminal in nature, and thus attracting full s. 11 Charter protection including the requirement for search warrants, would reduce the potential conflict risks CPAs face between their duties of confidentiality and undivided loyalty to their clients and their own personal interests when the CRA uses its audit powers against them under s. 163.2. However, the court did not take up CPA Canada’s invitation to issue interpretive guidelines for s. 163.2, requiring the provision to be construed and applied in harmony with CPAs’ provincial rules of ethics.

In Guindon, the court ruled on the principles that guide the two-part legal test for determining which statutory infractions amount to crimes and which are administrative sanctions (as established by R. v. Wigglesworth [1987] S.C.J. No. 71 and Martineau v. Canada (M.N.R.) [2004] S.C.J. No. 58).

The distinction is critical because in order to benefit from the Charter’s s. 11 protections — such as the presumption of innocence, the guarantee against self-incrimination, and a fair trial — one must be “charged with an offence,” as the section notes.

Guindon argued that the penalty levied against her under the ITA was so large she was effectively charged with an offence, and therefore her case should not have proceeded in the Tax Court and the AMP affirmed by the Federal Court of Appeal should be vacated.

The court unanimously dismissed her appeal, although three judges did so on the basis that the constitutional issue should not be dealt with because Guindon failed, in the lower courts, to give Ottawa and the provincial attorneys general the required notice of a constitutional question.

The four-judge majority led by Justices Rothstein and Cromwell determined the constitutional issue should be decided.

The majority acknowledged Guindon’s penalty was “very high for an individual.” However, they held that s. 11 does not apply to s. 163.2 because the two parts of the Wigglesworth/Martineau test were not met: the administrative proceedings by which the AMP was imposed were not criminal in nature, and the AMP did not provide “for true penal consequences.”

Although the AMP reflects the objective of deterring false statements and ensuring compliance with the ITA, it does not reflect the additional purposes of denunciation and punishment for the wrong done to society that characterize true penal consequences, the court reasoned.

Whether or not a monetary penalty is deemed punitive depends on its magnitude, to whom it is paid, whether its magnitude is determined by regulatory considerations rather than principles of criminal sentencing, and whether a stigma is associated with the penalty. While magnitude alone is not determinative, “if the amount at issue is out of proportion to the amount required to achieve regulatory purposes, this consideration suggests that it will constitute a true penal consequence and that the provision will attract the protection of s. 11 of the Charter.”

The court held that the purpose of the AMP proceeding “is to promote honesty and deter gross negligence, or worse, on the part of the preparers, qualities that are essential to the self-reporting system of income taxation assessment.”

It concluded “the magnitude of penalties under s. 163.2(4) is directly tied to the objective of deterring non-compliance with the ITA” and to “the magnitude of the tax that could potentially be avoided and the violator’s personal gain.” The amount “was fixed without regard to other criminal sentencing principles, and no stigma comparable to that attached to a criminal conviction flew from the imposition of the penalty.”

The Supreme Court held that the AMP was not a true penal consequence in Guindon’s circumstances. The estates and family law lawyer, with no special tax expertise, signed a legal opinion on the tax consequences of a leveraged charitable donation program that she knew would be part of the promotional package of the scheme. Participants were to acquire timeshare units to donate to charity at a fair market value greater than their cash payment for the timeshares.

The court said Guindon falsely indicated she had reviewed the supporting documents supplied by the promoters. She was paid $1,000 for her opinion. As president of a charity that agreed to receive the donated timeshares, she also signed 135 tax receipts totaling nearly $4 million.

Ultimately, the timeshare scheme turned out to be a scam, the judgment says. No timeshare units were created and thus no transfers from the donors to the charity occurred.

In 2008, Guindon was assessed for penalties under s. 163.2 for each of the issued tax receipts on the basis that she knew, or would have known but for wilful disregard of the ITA, that the tax receipts constituted false statements.