Supreme Court Grants Leave in Challenge to s.163.2 of the Income Tax Act

May 28th, 2014 by

Supreme Court Grants Leave in Challenge to s.163.2 of the Income Tax ActIra Marcovitch, Summer Law Student

The Supreme Court of Canada has recently granted leave to appeal in Guindon v. The Queen, where the court will determine whether penalties imposed under s.163.2 of the Income Tax Act (“the Act”), which prohibits the making of misrepresentations by a tax planner or preparer, constitute a criminal offence and thus trigger the protections under s.11 of the Charter of Rights and Freedoms. Simply put, the case involved a ‘leveraged donation plan,’ where participants purchased “vacation ownership weeks” (“VOW”) in a Caribbean time-share resort and then donated the weeks to a registered charity. In return, the participants would receive a charitable receipt which they could use to reduce their tax liability. Ms. Guidon, who was president of the charity and also a lawyer, had provided a legal opinion that was distributed as part of the VOW program’s promotional material. After reviewing the VOW program, the CRA disallowed nearly all the charitable receipts of the donors and levied nearly half a million dollars in fines against Ms. Guidon for her participation in the scheme.

At trial, the Tax Court had found that the actions of Ms. Guidon were severe enough to warrant the large penalties under s.163.2. However, the Tax Court found that the provision was in the nature of a criminal penalty and, because the Tax Court is not a criminal court, it ruled that it didn’t have the jurisdiction to hear the case.

On appeal, the Federal Court of Appeal reversed the Tax Court’s decision, first on the basis that Ms. Guidon had failed to furnish the Crown with adequate notice of her constitutional challenge and thus the Tax Court lacked the jurisdiction to make the order that it did. While this was sufficient to dispense with the appeal, the court proceeded to rule on the merits of Ms. Guidon’s claim and held that advisor penalty proceedings – those instituted under s.163.2, were not criminal in nature. They held that the penalties were administrative mechanisms to ensure discipline and compliance with the tax system, and as it lacked the true indicia of a criminal law – the suppression of morally repugnant behavior, the offence created was not a criminal one.

Although it remains to be seen how the Supreme Court will decide the issue, how they rule will have various implications for how penalties are levied under this, and potentially other sections. If the Court finds that the penalties are criminal in nature, then a host of protections under s.11 of the Charter, such as the right against self-incrimination and the right to be tried in a reasonable time, are triggered and a new arsenal of defences will be available to those charged under the section. Secondly, the burden of proof in a s.163.2 prosecution would be the criminal standard – proof beyond a reasonable doubt, rather than the lower civil standard of proof on a balance of probabilities applicable in most tax decisions. This would impose a significantly higher bar for the Crown to meet to gain a conviction. As well, since the Tax Court is not a criminal court, s.163.2 prosecutions would have to take place in a provincial court. Finally, there would be implications for how the CRA conducts its file reviews and investigations. As it stands, once a review of a taxpayer’s file turns from a civil audit into a criminal investigation (into fraud, for example), the CRA is no longer allowed to use its wide-ranging audit powers to garner information about the taxpayer. If the Supreme Court chooses to uphold the Tax Court’s initial decision that the provision is criminal in nature, then CRA would be prevented from using its audit powers under any s.163.2 investigation.

Find the full text of the Federal Court of Appeal’s decision here.

For more information about Tax Litigation or how we can help you with your tax related issues, please contact our Tax Litigation Group.


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