Tax Preparer Penalties Not Criminal Sanction: The SCC Judgment In Guindon

The Supreme Court of Canada ("SCC") issued its judgment in Guindon v Canada1 on July 31, 2015, concluding that Ms. Guindon was properly penalized under ss. 163.2(4) ("preparer penalty") of the Income Tax Act (Canada) ("ITA"). This is the first reported case dealing with the preparer penalty.

Ms. Guindon was assessed preparer penalties totaling $546,747 for making false statements in donation receipts issued on behalf of a charity in circumstances where she knew (or would have reasonably been expected to know) the receipts could be used to claim unsupportable tax credits under the ITA. At each level of Court she argued that the penalty was a criminal sanction attracting procedural safeguards under s. 11 of the Charter of Rights and Freedoms ("Charter"). Consequently, she argued that the penalty should have been vacated because the matter should not have proceeded before the Tax Court of Canada ("TCC"). The TCC agreed, but the Federal Court of Appeal ("FCA") reversed the TCC judgment, leading to Ms. Guindon's further unsuccessful SCC appeal.

Facts

Ms. Guindon is a lawyer practicing primarily family law and wills and estates, with no background in income tax. In 2001, she was approached by promoters of a "leveraged donation" tax scheme which involved timeshare units in a Turks and Caicos resort. Participants would donate their timeshare units for an amount greater than they paid.2 She opined on the tax consequences based on a precedent provided by the promoter, knowing the opinion would be relied on to promote the scheme. The opinion included the false statement that she had reviewed supporting documents. She was also the president and administrator of the registered charity that received the donated timeshare units, which would be sold on the charity's behalf with the charity receiving $500 per unit.

The SCC described the leveraged donation tax scheme as a sham.3 The charity issued and Ms. Guindon signed 135 tax receipts in the aggregate amount of $3,972,775, which credits were denied when claimed by the donors, ultimately leading to the preparer penalty assessment against her. The penalty was calculated by summing the ss. 163(2) gross negligence penalties for which each of the donors would have been liable.

Issues

The SCC considered two issues. The first was procedural and the other substantive. The procedural issue arose from Ms. Guindon's failure in the TCC and FCA to provide notice of a constitutional question to the federal and provincial Attorneys General ("AGs").4 Notice to the AGs was provided in the SCC appeal.

The substantive issue was whether the preparer penalty was a criminal sanction or a civil/administrative penalty.

Decision(s)

The SCC's majority reasons5 held that the Court should exercise its narrow discretion to address the constitutional question even though the issue was not properly raised in the lower Courts. However, the SCC decided the substantive issue in favour of the government of Canada, concluding that preparer penalties are civil/administrative in nature, thus Charterprotections did not apply. The minority reasons6 considered only the procedural issue and, having concluded that the failure to put the AGs on notice was fatal, did not provide reasons for the substantive issue.

Procedural issue: Notice to the AGs

The issue of notice to the AGs of a constitutional question concerned whether notification provisions are mandatory or directory. The purpose of the notification provisions in the Tax Court of Canada Act and the Federal Courts Act requiring notice to the AGs is to ensure a Court has a full evidentiary record before invalidating legislation, and governments should be given full and fair...