Saturday, 6 December 2014

Guindon Penalty Upheld

I just realized that I never posted this article I co-authored with Professor Darcy MacPherson in July of 2013. Guindon was recently heard by the Supreme Court of Canada - its decision has not been released as yet. The reason Guindon is of such importance is that a criminal penalty under the Income Tax Act was invoked against Ms. Guindon for participating in a fraudulent donation scheme causing concern amongst tax practitioners.
Recently the FCA reversed the TCC in Guindon (2012 TCC 287; rev'd. 2013 FCA 153) and restored the CRA's assessment of third-party penalties under section 163.2 of the Act (see "Criminal Liability for Partnerships?" Canadian Tax Highlights, January 2013). The TCC had concluded that the provision had "true penal consequences" that triggered Charter section 11 protections, such as the requirement of proof beyond a reasonable doubt and the presumption of innocence.
Ms. Guindon had provided a legal opinion that vouched for a donation scheme (which represented that she had reviewed documentation that she had not reviewed) and also prepared 134 tax receipts issued to participants in the scheme. The government appealed the TCC's finding that section 163.2, which on the facts resulted in penalties totalling $564,747, created a criminal offence. The FCA decided several points. First, in order for Charter section 11 to invalidate section 163.2, a notice of constitutional question must be served (and it was not). Second, section 163.2 did not meet the test for a criminal provision under SCC case law. Third, the FCA rejected the idea that some Charter section 11 rights applied to the extent that they were not inconsistent with section 163.2. Fourth, having decided that the constitutional argument could not be made, the court concluded that the taxpayer was liable under section 163.2.
Although the federal Crown was the appellant in this case, a factor that arguably diminished its need for notice, a notice of constitutional question must be served on both the federal and provincial attorneys general when a party seeks a finding that a section of the Act is invalid, inoperative, or inapplicable. Notice gives the attorneys general a chance to intervene and participate in the process that may affect their own laws. Service of the notice is a statutory procedural requirement under both the Tax Court of Canada Act and the Federal Courts Act, and the absence of service took away the TCC's jurisdiction to consider the matter. The FCA noted that Ms. Guindon did not ask the TCC to exercise its discretion to adjourn proceedings to allow notice to be served, and she did not serve notice or ask for an adjournment in the FCA.
Although the FCA concluded that service of notice of constitutional question is required before the court can consider the matter, it concluded that section 163.2 was constitutional because it was not criminal in nature. This raises the interesting question of the line between obiter dicta and binding conclusions of a court. Although there is jurisprudence to the effect that even obiter of the SCC is binding on lower courts, the situation for pronouncements of the FCA is an open question. Arguably, the discussion of an issue should be reserved for a court that has jurisdiction to hear the matter and has the benefit of hearing from all interested parties. Nonetheless, the FCA's reasoning about whether section 163.2 creates an offence that is criminal in nature will no doubt be given significant weight.
The court dismissed as "overstated" the concerns of commentators about the fairness of section 163.2 and the potential for its misuse. It pointed out that the jurisprudence is "in an embryonic state. What now appears to some to be uncertain and worrying may later be addressed satisfactorily in the jurisprudence."
The FCA briefly distinguished criminal activity from culpable conduct on the basis that the latter term is defined in section 163.2, a "definition [that] does not bring within it the notion of 'guilt' or conduct violating some criminal standard." The court prefaced that comment by saying that each penalty provision in the Act, including section 163.2, "prescribes a non-discretionary fixed amount or a non-discretionary formula for the calculation of the penalty. . . . In no way does the Minister evaluate the moral blameworthiness or turpitude of the conduct." In contrast, "each of the offence provisions is punishable by a fine, imprisonment, or both, none of which is fixed or calculated by a rigid formula." Arguably, even the mechanical calculation of a potentially onerous penalty against a third party with a reference to his or her "culpable activity" (as described in Finance's original technical notes) may indicate that the targeted offence is considered more than administrative in nature. The triggering phrase itself, "culpable conduct," suggests moral blameworthiness and is defined in terms that evoke wrongdoing. The court appears to have analogized the section 163.2 penalty to the administrative penalty for late filing, which is a strict liability provision that does not inquire into the taxpayer's mental state.
The FCA cited the SCC as authority for the conclusion that either all or no section 11 Charter protections apply, depending on whether a person has been charged with a criminal offence. However, the court did not deal with a line of cases that gives a court the non-Charter authority to interpret a provision as requiring mens rea when it is silent concerning the mental element (see Beaver, [1957] SCR 531). Thus, apart from the Charter, the FCA could have interpreted section 163.2 to require a higher level of proof than other penalty provisions or a presumption of innocence, perhaps on the basis of an analysis of the term "culpable conduct."
The TCC concluded that as a question of fact Ms. Guindon had engaged in culpable conduct as defined in section 163.2 , and thus it was unnecessary for the FCA to decide the issue. The FCA went on to say that administrative penalties may be harsh, and the minister may be asked to exercise her discretion to cancel some or all of the penalty (subsection 220(3.1)). Perhaps anticipating criticism of this alternative-criticism that some would argue is warranted-the FCA pointed out that the minister must exercise her discretion on the basis of the fairness purpose behind subsection 200(3.1) and a rational assessment of all relevant circumstances. "Her discretion must be genuinely exercised and must not be fettered or dictated by policy statements such as Information Circular 07-1." The court also noted the possibility of a challenge under Charter section 12, which prohibits cruel and unusual punishment, but was skeptical-justifiably, in our view-of its success.

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