This article was written also in 2013 by Professor Darcy MacPherson and myself was triggered by the thought that a criminal act by a partner in an accounting partnership or a legal partnership could extend to the other partners vicariously. Here are our thoughts:
Although the lawyer in Guidon (2012 TCC 287) was a sole practitioner, the TCC's decision to characterize the section 163.2 penalties as criminal raises the question of whether a criminal penalty can extend to the partners of an adviser who is charged. Tax advisers who practise in a partnership should be cognizant of the potential reach of section 163.2 of the Act and the fraud provisions in the federal Criminal Code (Bill C-45, effective March 31, 2004).
A partnership comprises two or more persons who carry on a business together with a view to profit; it is not a separate legal entity, and every partner in a general partnership is deemed to be an agent of both the general partnership and the other partners. The doctrine of vicarious liability governs partners, and the courts have not hesitated to apply section 11 of the Ontario Partnerships Act in imposing civil penalties on a partnership because of the negligent actions of one partner. In Allen v. Aspen Group Resources Corp. (2012 ONSC 3498), the Ontario Superior Court concluded that the language of section 11 was broad enough to encompass the statutory wrong of misrepresentation created by section 131 of the Ontario Securities Act. However, Canadian and English courts have rejected a common-law doctrine of vicarious liability for a criminal offence on the principle that one should be held criminally responsible only for one's own criminal wrongdoing. Statutory law in Canada has sought to remedy that position by extending the potential imposition of criminal liabilities on partnerships.
Although a general partnership does not have a separate legal identity, it is subject to the Criminal Code and to the Act. For example, the preparer penalties with which the lawyer was charged in extend to a partnership. The lawyer in that case was assessed under the subsection 163.2(4) preparer penalty, which provides that "[e]very person [specifically defined to include a partnership] who makes, or participates in, assents to or acquiesces in the making of, a statement to, or by or on behalf of, another person . . . that the person knows, or would reasonably be expected to know but for circumstances amounting to culpable conduct, is a false statement that could be used by or on behalf of the other person for a purpose of this Act is liable to a penalty in respect of the false statement." Culpable conduct is defined in subsection 163.2(1) to mean an act or a failure to act that (1) is tantamount to intentional conduct; (2) shows an indifference to whether the Act is complied with; or (3) shows a wilful, reckless, or wanton disregard of the law.
Under the Bill C-45 amendments to the Criminal Code, the actions and mental state of a partnership's senior officers determine whether it has committed a prohibited act or has the requisite mental state (sections 22.1 and 22.2). A senior officer is defined to include any person who plays an important role in the establishment of a partnership's policies or is responsible for managing an important aspect of the partnership's activities (section 2). A partnership is liable for an offence requiring proof of mental fault other than negligence if (1) a senior officer is party to the offence, (2) a senior officer has the intent to commit the offence but causes a subordinate to carry out the offence, or (3) a representative is about to carry out the offence and the senior officer has knowledge of the act but does not stop it (section 22.2).
Even if the promoter in had been found to be a partner of the lawyer charged, the relevant facts occurred in 2001 before the effective date of Bill C-45 in 2004: criminal law has no retrospective application. However, the courts now have to consider the fate of an innocent partner of a partnership charged with a criminal penalty based on the Code and on the Act, which seek in certain circumstances to impose criminal liability on a partnership's members.
A partnership is generally considered to be a collective of all of the business's partners. Are partners innocent if they are uninvolved in the criminal activities? Whose money is at risk? (A partnership has no separate legal personality, and thus there is no partnership money per se.) Can the personal assets of a partner who is not involved in the offence be seized to pay the fine assessed by the court against the partnership? Can that partner claim the presumption of innocence? Is the imposition of criminal liability on an innocent partner a violation of freedom of association under the Charter? Can the criminal law attribute separate legal personality to a partnership for these limited purposes?
Exploring these questions is beyond the scope of this article, but they must be considered and acted on when a client's interests are at risk. Practically speaking, the inherent uncertainties in this area may create a unique opportunity for tax preparers and promoters to structure their operations to adequately allocate the risks associated with their activities. It may be possible to achieve this allocation through the isolation or quarantine of the partners and employees who engage in higher-risk promotion and other activities that may potentially attract liability under section 163.2. The challenges related to these uncertainties may alter the manner in which partners carry on business.