On October 2, 2012, the Tax Court of Canada released its
decision in Guindon v. The Queen.
The case dealt with whether the third party penalties provided under section 163.2
of the Income Tax Act could be assessed against the appellant. The
basic purpose of s. 163.2 is to provide for monetary penalties assessable
against third parties who knowingly, or in circumstances amounting to gross
negligence, participate in, promote, or assist conduct that results in another
taxpayer making a false statement or omission in a tax return.
In a decision that bodes enormous implications for the
future of s. 163.2, Justice Bédard
concluded that the provision creates a criminal sanction that can only be
prosecuted in provincial court in accordance with criminal procedure and Charter protections. This Charity Law Bulletin reviews the decision and its
implications for charities.
B. THE FACTS
case dealt with a buy-low, donate-high arrangement involving time share units.
Like other donation arrangements of this nature, the arrangement was fairly
complex, involving a number of foreign and domestic entities. The bottom line
was that donors could in effect purchase time share units for a low price and
then donate them to a particular charity for a donation receipt reflecting a
much a higher value.
the appellant lacked expertise in tax law, she agreed to provide the promoters
with a legal opinion representing that participants in the donation arrangement
would be considered for income tax purposes to have made charitable gifts
(presumably at the higher value, though the facts are not explicit on this
point). Although the appellant knew that the opinion would very likely be
relied upon by participants in the arrangement, she provided it without ever
having reviewed all of the underlying documentation.
the appellant was the president of the charitable donee participating in the
arrangement. She signed 135 donation receipts acknowledging that the time
share units had been donated to the charity under the arrangement. In signing
the gift receipts, the appellant relied upon the verbal representations of the
promoters that title to the time share units had been transferred to the
charity. As it turns out, the transfers never occurred.
Minister of National Revenue assessed penalties against the appellant under s.
163.2 totalling $546,747 for making false statements that she either knew, or,
in effect, should have known, would result in other taxpayers making false
statements or omissions in their tax returns. The alleged false statements
included her legal opinion and the improperly issued 135 donation receipts.
C. THE HOLDING
concluded that if the penalties under s. 163.2 were civil in nature then
they were properly assessed. Two issues were highlighted as being of
particular concern to the court.
first issue was that the appellant prepared her legal opinion in support of the
donation arrangement without reading all of the relevant documentation. This
was problematic because she knew that participants in the program would be
relying upon an improperly prepared opinion. The appellant could not deny
knowing that the opinion was misleading because it contained the express
statement that she had reviewed all of the principal documents even though she
second issue was that appellant (in her capacity as an officer of the
participating charity) issued donation receipts solely in reliance upon the
representations of the promoters of the donation arrangement that the property
transfers to the charity had indeed occurred. No steps were taken to
independently verify the advice received. Justice Bédard held that, although s. 163.2 does
not create an across the board requirement for charities issuing gift receipts
to confirm representations of advisors that title transfers have occurred, it
was inappropriate in these circumstances for the appellant to take no steps to
confirm the information received. The court’s reasoning on this point was not
entirely clear. The concern appeared to be that the appellant had reason to be
suspicious of the promoters because they pressured her into providing a
supportive legal opinion without providing her all of the background
however, the court concluded that none of these were controlling considerations
because s. 163.2 created what was in substance a criminal rather than a civil
sanction. The penalties would therefore have to be prosecuted not in a tax
court but instead in a provincial court in accordance with criminal procedure
and applicable Charter protections.
coming to the conclusion that the penalties under s. 163.2 are criminal in
nature, the court relied upon the following considerations:
penalties are not subject to an express time limit;
penalties are of a potentially enormous magnitude (as evidenced by the $546,747
penalty assessed against the appellant); and
breadth of s. 163.2 suggests that it is more akin to a statutory provision
aimed at promoting public order and welfare (that is, a penal provision) than a
regulatory scheme designed to ensure compliance with tax legislation (that is,
a civil penalty).
the last point, the court emphasized that s. 163.2 applies where a third party
makes a false statement that “could” be relied upon regardless of whether it
was ever actually relied upon by anyone. It is difficult to interpret s. 163.2
as a scheme designed to ensure compliance with tax legislation, the court
reasoned, when the provision is broad enough to apply even where a false
statement had not resulted in non-compliance
holding in Guindon will almost certainly be appealed.
the decision is left to stand, it will become significantly more difficult to
impose penalties on advisors backing abusive donation schemes (or other forms
of excessively aggressive tax planning). It means that such penalties can only
be prosecuted in provincial court in accordance with criminal procedure and
applicable Charter rights. Further, the standard of proof will be
raised from that of proof on a balance of probabilities to proof beyond a
reasonable doubt. The outcome is so significantly damaging to the future
viability of s. 163.2 that a failure to appeal would be shocking.
the decision is not appealed (or an appeal is unsuccessful) it is likely that
s. 163.2 will be amended. The provision was very broadly drafted, presumably
so that it could be applied to abusive circumstances not specifically within
the contemplation of Parliament at the time it was adopted. That strategy has
now come back to haunt the architects of the provision. Nevertheless, the Guindon decision contains a number of clues regarding how the provision could be
narrowed so as to avoid the character of a penal provision.
timing of the judgment is somewhat unfortunate in that it was released while
the Standing Committee on Finance is completing its study of donation
incentives. The decision not only brings attention to abuses of donation
incentives at a crucial moment of policymaking in this area of law, it also
calls into question the current capacity of the Canada Revenue Agency to police
The Guindon decision was no doubt received with some element of frustration by tax
authorities. One might have thought that the facts, involving as they did a
lawyer lacking expertise in tax law providing a supportive tax opinion for a
donation scheme without ever reading all of the background documentation, represented
exactly the kind of circumstance within the contemplation of s. 163.2. But as
is so often the case, there is more than one side to this story. Assessing
well over a half million dollars of fines against the appellant personally was
more or less an invitation for the court to very carefully consider whether
proper protections are in place. The case tells a story of overreach as much
as anything else.