The Supreme Court of Canada’s 2015 decision in Guindon v. Canada concluded that “advisor penalties” found in s. 163.2 of the Income Tax Act are administrative and not penal in nature. The decision is not likely to end the controversy or the litigation surrounding AMPs, whether in the context of the ITA or otherwise.
In Guindon, a 4–3 majority held that administrative monetary penalties do not offend constitutional rights because they are not criminal in nature and do not lead to the imposition of true penal consequences. The minority declined to deal with the argument, ruling that the constitutional argument should not 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, AMPs have become an increasingly common feature of sanctions available under Canadian business statutes. Now that the SCC has definitively categorized offences giving rise to AMPs as civil proceedings, prosecutors and regulators will continue to have a much easier time proving them. Indeed, observers say that 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, such as disclosure rights, rights to an oral hearing and appeal rights.
Guindon involved “adviser penalties” found in s. 163.2 of the Income Tax Act. They are aimed at 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 were not analogous to criminal law because they were not 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 AMP process involved no charge, no arrest, no summons to a criminal court, and did not 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 that Guindon had read the underlying documents despite the fact that she had not 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 CRA 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 advisor penalties did not 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, or penalties, were the way in which deterrence was achieved.
The advisor penalties, then, were not about condemning “morally blameworthy conduct or inviting societal condemnation of the conduct” but about 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 FCA 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 in the Supreme Court concurred with this reasoning.
The demise of the constitutional argument, however, puts a renewed focus on compliance. Indeed, lawyers say that robust due diligence systems in support of such a defence are more important than ever because the constitutional argument is no longer available.
It took a ruling from the Tax Court of Canada to make the CRA retreat from its historical refusal to disclose the tax policy it was relying on when involved in litigation under the general anti-avoidance rule (GAAR) in the Income Tax Act.
The essence of GAAR is that the government can attack transactions that are otherwise in accordance with the law if the transaction “abuses” the policies underlying the ITA. As endless pronouncements from a frequently divided SCC have demonstrated, there are no bright lines here: when it comes to the thin strip between non-abusive avoidance and abusive evasion, abuse is often in the eyes of the beholder.
The authoritative beholder, at least until the courts rule on any particular case, is the CRA. To succeed in a GAAR case, the agency must prove that the policy abused did indeed exist and that the transactions in question abuse it. Until Birchcliff Energy Ltd. v. The Queen came along, however, there was no obligation on the CRA to disclose the core policy it was relying on until the case was actually heard.
In Birchcliff, the CRA alleged that certain transactions abused 10 sections of the ITA, but refused to identify the policy that the re-assessment relied on. In the court’s view, that defied common sense. “In a GAAR challenge why should a taxpayer not know what Policy the assessment was based on?” the court asked.
Unfortunately for taxpayers, the Court also ruled that the government was not ultimately bound at trial by the policy that the assessor relied on. “There will be, as in any GAAR litigation, a significant massaging of the issues and the argument, with the ultimate aim of ensuring at trial there are no surprises,” the court noted.