In a case with significant implications for lawyers, the Supreme Court of Canada has agreed to consider whether adviser penalties found in s. 163.2 of the Income Tax Act are penal or administrative in nature.
The penalties target professional tax advisers, planners, and preparers, including lawyers and accountants, who provide tax advice regarding matters that eventually prove unsustainable before the Canada Revenue Agency and the courts.
“The penalties are designed to have a chilling effect by inhibiting tax professionals from lending their credibility to aggressive tax schemes, particularly those marketed to the public as tax shelters,” says Claire Kennedy of Bennett Jones LLP’s Toronto office.
The difficulty with s. 163, which some lawyers have described as the “sword of Damocles,” is that the standard of misconduct is quite low, requiring only “culpable conduct” to attract liability. Indeed, the adviser penalty is equal to the amount a client who engaged in “gross negligence” would pay. Generally speaking, that amounts to about 50 per cent of the understated tax.
Compounding the problem is the fact that, so far, the courts have held that s. 163 adviser penalties are administrative in nature. What that means is that the burden of proof on the Crown is the general civil burden on a balance of probabilities rather than the criminal standard of beyond a reasonable doubt. Similarly, penal sanctions give those charged the benefit of other constitutional protections not available to individuals charged with administrative offences.
Julie Guindon v. Her Majesty The Queen, the case in which the Supreme Court granted leave in March, involved a family lawyer who wrote an opinion for a relative regarding a tax shelter program. The opinion stated the lawyer had read the underlying documents despite the fact she hadn’t done so.
The program involved the donation of Turks and Caicos time-share properties to a charity. The lawyer was also president of the charity and signed at least some of the tax receipts issued to investors. Although the promoters confirmed the transfer of the properties orally, the lawyer never saw documentation substantiating the conveyances.
As it turned out, the transfer of the properties didn’t happen. The CRA levied adviser penalties in excess of $500,000.
At first instance, the Tax Court of Canada ruled the penalties were criminal in nature and that it had no jurisdiction to hear what amounted to criminal charges. But the Federal Court of Appeal ruled adviser penalties didn’t constitute true penal sanctions.
As the Federal Court of Appeal saw it, the tax system required deterrents to ensure its proper functioning as a self-assessment system. Administrative sanctions or penalties were a way of achieving deterrence.
The adviser penalties, then, weren’t about condemning “morally blameworthy conduct or inviting societal condemnation of the conduct” but about ensuring the regulatory scheme worked properly.
“In my view, section 163.2 is mainly directed to ensuring the accuracy of information, honesty, and integrity within the administrative system of self-assessment and reporting under the act,” wrote appeal court Justice David Stratas on behalf of a unanimous bench also composed of justices Johanne Gauthier and Marc Noël.
“The imposition of a section 163.2 penalty by way of assessment and the subsequent procedures for challenging the assessment are proceedings of an administrative nature aimed at redressing conduct antithetical to the proper functioning of the administrative system of self-assessment and reporting under the act. Put another way, proceedings under section 163.2 aim at maintaining discipline, compliance or order within a discrete regulatory and administrative field of endeavour. They do not aim at redressing a public wrong done to society at large.”
William Innes of Toronto’s Rueter Scargall Bennett LLP says the Court of Appeal’s decision displays a great degree of deference to the administrative apparatus of the CRA.
“It may signal a shift in the court’s jurisprudence in the direction of greater administrative discretion for tax authorities,” he says.
However that may be, Kennedy is concerned Guindon won’t afford the top court an opportunity to clarify what she calls the “fuzzy line” between penal and administrative sanctions in the Income Tax Act.
“We don’t really have a crisp issue or a fact pattern that will help the court to clarify that fuzzy line,” she says. “Another problem is that, as the Federal Court of Appeal pointed out, no notice of constitutional issue was served in this case.”
For more, see "CRA penalty against lawyer equals criminal sanction: court."