On July 31, a 4-3 majority held that administrative monetary penalties don’t offend constitutional rights because they’re not criminal in nature and don’t lead to the imposition of true penal consequences. The minority declined to deal with the argument, ruling that the constitutional issue shouldn’t even be considered because Julie Guindon, the lawyer who launched the appeal, failed to give proper notice to federal and provincial authorities.
In recent years, administrative monetary penalties have become an increasingly common feature of the sanctions available under Canadian business statutes. Now that the top court has definitively categorized offences giving rise to them as civil proceedings, regulators will continue to have a much easier time proving them.
“In a practical sense, the battleground has now shifted from arguments about the constitutionality of AMPs to a determination of the procedural rights available to litigants exposed to such penalties,” says Ken Jull of Baker & McKenzie LLP in Toronto.
“Arguments in cases involving AMP sanctions will now focus on such things as disclosure rights, rights to an oral hearing, and appeal rights.”
By way of example, Jull points to the administrative monetary penalty scheme under Canada’s anti-spam law that allows appeals only if leave is first granted.
“The legislation is not at all clear about the procedure to be followed after the [Canadian Radio-television and Telecommunications Commission] imposes penalties,” he says. “It remains to be seen whether the rules will be up to administrative snuff when they’re developed.”
The Competition Act uses administrative monetary penalties as sanctions for abuse of dominance and misleading advertising. “So far, AMPs have been imposed exclusively in the context of consent agreements,” says Anita Banicevic of Davies Ward Phillips & Vineberg LLP in Toronto.
Guindon, Jull points out, dealt with a Tax Court of Canada ruling. “But most of the legislative and regulatory schemes to which the case applies envisage a tribunal as the adjudicator, not a court,” he says.
“And that creates all sorts of issues, including ones relating to the official separation of prosecutor and judge.”
Guindon involved adviser penalties found in s. 163.2 of the Income Tax Act. They deal with 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.
As the majority saw it, the adviser penalties weren’t analogous to criminal law because they weren’t aimed at promoting public order and welfare within a public sphere of activity; rather, they were primarily intended to maintain compliance or regulate conduct within a limited sphere. The adviser penalties, aimed at promoting honesty and deterring gross negligence on the part of tax preparers, did precisely that.
Unlike the criminal process, the administrative monetary process involved no charge, arrest or summons to a criminal court, and it didn’t result in a criminal record. At most, the penalties involved being forced to pay by way of a civil action.
Guindon arose after the lawyer wrote an opinion for a relative regarding a tax shelter program. The opinion stated Guindon had read the underlying documents despite the fact that she hadn’t done so.
The program involved the donation of Turks and Caicos timeshare 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 orally that the property had been transferred, the lawyer never saw documentation substantiating the conveyances. As it turned out, the properties were never transferred. The Canada Revenue Agency levied adviser penalties in excess of $500,000.
At first instance, the Tax Court of Canada ruled that 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 that the adviser penalties didn’t constitute true penal sanctions.
As the Court of Appeal saw it, the tax system required deterrents to ensure its proper functioning as a self-assessment system. Administrative sanctions were the way of achieving deterrence.
The adviser penalties, then, weren’t about condemning “morally blameworthy conduct or inviting societal condemnation of the conduct” but ensuring that 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 Justice David Stratas on behalf of a unanimous appeal court bench composed also of justices Johanne Gauthier and Simon 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.”
In the final analysis, the majority of the Supreme Court concurred with this reasoning.
The demise of the constitutional argument, however, puts a renewed focus on compliance. “Guindon emphasizes that robust due-diligence systems should be in place to support such a defence because the constitutional argument is no longer available,” says Jull.
For more, see "CRA penalty against lawyer equals criminal sanction: court" and "SCC consideration of adviser penalties significant for lawyers."