Guindon v. The Queen

Guindon v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2012-10-16
Neutral citation
2012 TCC 287
File numbers
2009-3368(IT)G
Judges and Taxing Officers
Paul Bédard
Subjects
Income Tax Act
Decision Content
Citation: 2012 TCC 287
Date: 20121016
Docket: 2009-3368(IT)G
BETWEEN:
JULIE GUINDON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Bédard J.
[1] The participants in a donation program (the “Program”) were to acquire timeshare units as beneficiaries of a trust for a fraction of their value and donate them to a charity in exchange for tax receipts for the actual value of the units. No donation ever took place as the timeshare units never existed and no trust was settled. The Minister of National Revenue (the “Minister”), on the basis that the Appellant made, participated in, assented to or acquiesced in the making of 135 tax receipts that she knew, or would reasonably be expected to have known, constituted false statements that could be used by the participants to claim an unwarranted tax credit under the Income Tax Act (the “Act”), assessed against the Appellant on August 1, 2008 penalties under section 163.2 of the Act in the amount of $546,747 in respect of false statements made in the context of that donation program. The Appellant appealed the assessment.
[2] I would point out immediately that the Minister admitted he was wrong in assessing the third party penalty against the Appellant in respect of the tax receipt that was issued in her name. The penalty associated with that tax receipt should have been assessed under subsection 163(2) of the Act and not under subsection 163.2(4) of the Act.
[3] The parties submitted in evidence the following Agreed Statement of Fact:
1. The appellant is a Canadian resident.
2. The appellant is a lawyer practising in Ontario since 1991.
3. While she did some real estate law when she first started her practice, the appellant’s main fields of practice were and remain family law and wills/estates law.
4. Aside from the legal opinion involved in this appeal, the appellant has not practiced nor does she have any expertise in income tax law.
5. Starting in May 2001, the appellant had various meetings with Lee Goudie, the representative of Tropical Development Ltd. (“TDL”), a company incorporated and established under the laws of Turks and Caicos Islands, and Richard St-Denis and Glen Ploughman, representatives of KGR Tax Services Ltd. (“KGR”). Goodie [sic], St-Denis and Ploughman are referred to collectively in this document as the “Principals”.
6. In some documents TDL is also referred to as Tropical Amusement Inc., Tropical Development International Inc. and Tropical Development International Ltd.
7. St-Denis is the appellant’s cousin and was the appellant’s financial advisor from 1991 to 2002.
8. The appellant was asked by the Principals to prepare a legal opinion (by reviewing a similar opinion on a different program) on a program involving a tax reduction through a leveraged donation structure which was called The Global Trust Charitable Donation Program (the “Program”).
9. The Program was planned by the Principals.
10. During the appellant’s discussions with the Principals, which discussions started in May 2001, the Program was verbally relayed to the appellant and outlined as follows:
a. Gordon Kerr, a lawyer and resident of Turks and Caicos Island [sic] (the “Settlor”) had agreed to be the settlor of a trust in Ontario called the Global Trust of Canada (the “Trust”);
b. The Trust was for the benefit of a class of individuals who were both residents and non-residents of Canada and who had indicated a willingness to support charitable organizations;
c. KGR had agreed to be the Trustee of the Trust;
d. The Settlor was going to acquire timeshare units called Biennial Vacation Ownership Weeks (“VOWs”) from TDL, which held the property of Hawkes Nest Plantation Resort/Arawak Inn in Turks and Caicos Island [sic];
e. After acquiring the VOWs the Settlor would gift the VOWs to the Trustee, who in turn would exchange the VOWs to the beneficiaries of the Trust, in return for the payment of a vendor take-back charge;
f. The amount of the vendor take-back charge that was to be paid by beneficiaries of the Trust was $3,248 per VOW;
g. It was anticipated that the beneficiaries would donate the VOWs to a registered Canadian charitable organization for a receipt for the fair market value of the donated VOWs; and
h. The VOWs were valued at $10,825 per VOW.
11. In a letter dated July 10, 2001 addressed to Goudie, the appellant accepted a retainer of one thousand dollars ($1,000) to prepare the opinion letter and confirmed inter alia that:
a. The area of tax law did not fall within her field of expertise and therefore recommended that the representative of TDL have a tax lawyer and an accountant review her opinion to ensure its accuracy;
b. That Gordon Kerr had accepted to be the settler [sic] of the Trust; and
c. That the appellant was waiting to review the documents establishing the Program in order to prepare her opinion.
12. In a letter dated July 11, 2001 addressed to KGR, the appellant provided her first draft opinion on the tax consequences on [sic] the donation of VOWs by an individual Canadian taxpayer to a registered charitable organization.
13. Except for the removal of one paragraph that was initially in the July 11, 2001 version (top of p. 9 “In other words…”), additional versions of the draft opinion containing minor changes were issued by the appellant in July, August and September 2001.
14. Pressures [sic] were made by the Principals to have the appellant sign her legal opinion as soon as possible as they wanted to proceed with the Program in time for the 2001 taxation year.
15. The appellant decided to provide KGR with an executed version of her legal opinion on September 19, 2001 (the “legal opinion”) without having reviewed the documents listed on page 2 (the “Documents”) which related to the creation of various aspects of the Program, the existence of the VOWs and the donation of the same to a registered charity.
16. Despite the appellant’s recommendation stated in a separate letter dated July 10, 2001 to have her legal opinion reviewed by a tax lawyer and an accountant, she knew that the opinion could be used by the Principals and understood that potential participants in the Program could see it.
17. A promotional package, including the appellant’s legal opinion, was provided to potential participants in the Program in November and December of 2001.
18. In the event, as no VOWs were created and no trust settled, no VOWs were donated to the Charity in 2001.
Tax Receipts
19. From 1999 to 2004, the appellant was also the President of Les Guides Franco-Canadiennes District d’Ottawa (the “Charity”), a charity registered under the Income Tax Act.
20. In August 2001, the idea of involving the Charity as the potential recipient of the donated VOWs came up for the first time.
21. In October 2001, St-Denis and Ploughman discussed formally with the appellant their desire to involve the Charity as the potential recipient of the donated VOWs.
22. On information provided by the appellant during a meeting of the Charity’s board of directors in October, a resolution was adopted in favour of the Charity participating in the Program.
23. On November 21, 2001, TDL launched the Program involving the Charity.
24. No other charities were involved in the Program.
25. On November 22, 2001, the Charity entered into an agreement with TDL to engage the services of TDL to market and sell all donated VOWs on behalf of the Charity for cash proceeds. The Charity was to receive a minimum return of $500 per unit sold.
26. The creation and sale of VOWs to various individuals was to be handled by the Principals of the Program.
27. Prior to signing charitable donation tax receipts, the representatives of the Charity, including the appellant, were informed verbally by the Principals that the VOWs had been properly created and that the documentation effecting a gift of the VOWs from the ostensible donors to the Charity had been completed. In fact, no such documentation ever existed.
28. The appellant had general authority to sign tax receipts on behalf of the Charity.
29. On December 31, 2001, 135 tax receipts acknowledging the ostensible donation of VOWs were issued by the Charity in the amounts listed in Appendix A attached.
30. The information on the tax receipts were [sic] entered by St-Denis and Ploughman at KGR’s place of business. Subsequently, the charity was asked to sign the tax receipts.
31. The appellant, with the help of Micheline Roy-Lane, Treasurer of the Charity, came to KGR’s place of business, reviewed the tax receipts by cross-checking them with a list of information provided by St-Denis and Ploughman and took turns in signing the tax receipts.
32. The parties were only able to positively identify the signature of the appellant on certain of the tax receipts as shown in Appendix A.
Hawkes Nest Plantation Project
33. At the time, the Principals were also involved in a development project known as the Hawkes Nest Plantation Resort/Arawak Inn in Turks and Caicos Island [sic] (the “Project”) and owned by TDL.
34. St-Denis and Ploughman were tasked with seeking loans to assist in financing the Project.
35. On July 20, 2001, the appellant lent money to TDL in the context of the Project in the amount of $20,000 USD.
36. The next day, on July 21, 2001, the appellant transferred her $20,000 USD promissory note to her parents for no consideration.
37. Friends and family members of the appellant and St-Denis who participated in the Program were at the time also involved in the Project as follows:
NAME
RELATIONSHIP
DATE
AMOUNT LENT
FOR THE PROJECT
Armand and
Jeannine Guindon
Father and mother
Of the Appellant
Aunt and Uncle of
Richard St-Denis
June 25, 2001
$50,000 USD
Chantal Perrier
Friend
June 28, 2001
$ 20,000 USD
Monique Trudel & André Henri
Monique is related
by marriage to the
Appellant’s sister
June 29, 2001
$ 50,000 USD
Laurette
Charlebois
Aunt to both the
Appellant and
Richard St-Denis
July 3, 2001
$ 30,000 USD
Luc & Hélène
Boileau
Cousins to both the
Appellant and
Richard St-Denis
July 5, 2001
$ 50,000 USD
Jean-Marc
Gaumond
Friend of Jacques
Charlebois
July 6, 2001
$ 50,000 USD
Noël & Réjeanne
Boileau
Uncle and aunt to
both the Appellant
and Richard St-Denis
July 16, 2001
$ 10,000 USD
Jacinthe Guindon
and Jeannot Trudel
Sister and brother-
in-law of the
Appellant
July 20, 2001
September 21, 2001
$ 60,000 USD
$ 40,000 USD
Jacques & Diane Charlebois
Cousins to both the
Appellant and
Richard St-Denis
July 27, 2001
$ 90,000 USD
TOTAL
$450,000 USD
38. As an incentive to encourage these individuals to cash in their RRSPs to loan monies for the Project, the Principals represented that they would also be allowed to participate in the Program which would provide them with generous tax refunds.
39. Their participation in the Program was as follows:
NAME
RELATIONSHIP
# OF VOWs
TAKE-BACK CHARGE
Armand and
Jeannine Guindon
Father and mother of
the Appellant Aunt
and Uncle of
Richard St‑Denis
3
$ 9,744
Chantal Perrier
Friend
4
$ 12,992
Monique Trudel & André Henri
Monique is related
by marriage to the
Appellant’s sister
4
$ 12,992
Laurette
Charlebois
Aunt to both the
Appellant and
Richard St‑Denis
1
$ 3,248
Luc & Hélène Boileau
Cousins
6
$ 19,488
Jean-Marc
Gaumond
Friend of Jacques
Charlebois
2
$ 6,496
Noël & Réjeanne
Boileau
Uncle and aunt to
both the Appellant
and Richard St-Denis
4
$ 12,992
Jacinthe Guindon
and Jeannot Trudel
Sister and brother-
in-law of the
Appellant
15
$ 48,720
Jacques & Diane Charlebois
Cousins to both the
Appellant and
Richard St-Denis
4
$ 12,992
TOTAL
$139,664
40. Other friends and family members of the appellant who did not lend money to the Project participated in the Program as follows:
NAME
RELATIONSHIP
#OF VOWs
TAKE-BACK CHARGE
Jacques Ferragne
Richard St-Denis’
nephew by marriage
5
$16,240
Denise Guibord
Richard St-Denis’
sister and cousin of
the appellant
2
$6,496
Nathalie Lefebvre
Richard St-Denis’
nephew’s wife
4
$12,992
Raymond Perrier
Friend of the
Appellant
1
$ 3,248
François St-Denis
Richard St-Denis’
son
1
$ 3,248
Jérôme St-Denis
Richard St-Denis’
son
2
$ 6,496
TOTAL
$48,720
41. Part of the appellant’s reasons for her involvement in the Program was that she wanted to help her cousin Richard St-Denis, who was her financial advisor. She also wanted to help friends and family members in saving money.
42. On March 17, 2002, the appellant met with St-Denis and Ploughman. The appellant was advised that the legal title deeds to the timeshares had not been finalized. Consequently, the purported Settlor had not acquired the deeds to the VOWs of the property held by TDL.
43. As of March 17, 2002, the appellant knew with certainty that no transfer of deeds had taken place on December 31, 2001 from the participants in the Program to the Charity as the participants did not have legal title of [sic] the VOWs.
44. In a letter dated March 18, 2002, addressed to all Global Trust of Canada 2001 Charitable Donors, the appellant and Ploughman signed a letter which:
a. Stated ‘the legal “deeded” title has not yet been finalized’ for the VOWs;
b. Recommended a delay in the filing of the charitable donation receipts until the issue could be resolved because the claim would be disallowed by the Canada Revenue Agency (“CRA”);
c. A recommendation to file a T1-adjustment form to eliminate the claim of donation receipts if they had already filed their 2001 tax returns.
45. In a letter dated April 5, 2002, addressed to all Global Trust of Canada Beneficiaries for Tax Year 2001, Ploughman without the consent or the involvement of the appellant, informed the beneficiaries that Kerr, legal counsel to TDL would personally ensure that all the steps that had to be taken to resolve the issue with the title would be completed prior to April 30, 2002. Ploughman also advised the participants that he felt comfortable enough with the progress made to recommend that the beneficiaries go ahead and submit their charitable donation receipt with their 2001 tax returns.
46. As a participant in the Program, the appellant received the letter dated April 5, 2002 from Ploughman.
47. On May 13, 2002, the appellant filed her 2001 tax return and submitted a charitable donation receipt for her ostensible donation of VOWs to the Charity.
48. By July 9, 2002, at the latest, the appellant knew that the charitable donations associated with the program would not be accepted by the CRA.
49. On June 12, 2003, the appellant made representations to the CRA in respect of her claim for a donation of VOWs to the Charity in respect of her 2001 taxation year.
50. Except for four participants whose donations were missed by the CRA officer who conducted the audit of the donation claims, the charitable donation tax credits that were claimed as a result of the receipts issued for the ostensible donations of VOWs were entirely disallowed.
51. No participants were assessed for penalties under subsection 163(2) of the Act, for making false statements in their 2001 income tax returns.
52. On August 1, 2008, the Minister assessed the appellant for penalties under s. 163.2 of the Act, in the amount of $546,747 in respect of false statements made in the context of a charitable donation arrangement.
53. The parties are in agreement with the information contained in Appendix A.
54. On July 28, 2009 the Minister confirmed the assessment.
Issues
[4] Two main issues emerge from the facts of this case and from the assessment.
[5] The first issue is whether the third party penalty imposed under section 163.2 of the Act involves by its very nature a criminal proceeding. Such a finding would entail far‑reaching consequences. In fact, if it is found that section 163.2 of the Act leads to a true penal consequence, then the protection of section 11 of the Canadian Charter of Rights and Freedoms[1] (the “Charter”) will apply to guarantee fundamental substantive and procedural legal rights to any individual charged with an offence under section 163.2. Notably, the right to be presumed innocent[2] would raise the burden of proof from that of proof on a balance of probabilities to proof beyond a reasonable doubt.[3]
[6] Furthermore, if this Court finds that section 163.2 of the Act creates an offence, that offence would, pursuant to subsection 34(2) of the Interpretation Act, [4] need to be prosecuted in provincial court under the criminal procedure provided for in the Criminal Code. [5]
[7] If the penalty under section 163.2 of the Act is a civil penalty, a second issue arises as to whether the Appellant should be found liable to a third party penalty pursuant to subsection 163.2(4) of the Act in respect of false statements — i.e., the tax receipts — made in the context of the Program. In other words, did the Appellant know, or would she reasonably have been expected to know but for circumstances amounting to culpable conduct, that the VOWs and the Trust did not exist.
[8] However, even if I do find that the penalties set out in section 163.2 of the Act amount to genuine criminal consequences within the contemplation of section 11 of the Charter, I will still make a determination on the second issue.
Arguments
[9] Pursuant to subsection 163(3) of the Act, the burden of establishing the facts justifying the assessment of the penalty is on the Minister. Therefore, the Respondent’s arguments in respect of both issues as previously described will be presented first, followed by the Appellant’s.
[10] The Respondent argues that section 163.2 of the Act creates a civil penalty which should be applied when a person is found liable on a balance of probabilities. That section was enacted in response to the Report of the Technical Committee on Business Taxation[6] (the “Mintz Report”), which noted that the imposition of broader civil penalties was justified to defend the integrity of the tax system by holding third parties accountable for obviously faulty advice.[7]
[11] In addition, the concept of “culpable conduct” under section 163.2 was intended to be similar to if not the same as, “gross negligence” under subsection 163(2) of the Act.[8] The enacted version of the penalty provision substituted the words “culpable conduct” for “gross negligence” because concerns were expressed by professional bodies that the penalty could apply in cases where a tax professional made an honest error of judgment or where there was an honest difference of opinion.[9] Parliament defined “culpable conduct” by reference to the types of conduct to which the courts have, in the past, applied a civil penalty under the tax law.
[12] The recommendation of the Mintz Report and the legislative intent as to the meaning of “culpable conduct” are evidence of the civil nature of the penalty.
[13] Furthermore, on the basis of the Federal Court of Appeal’s decision in Martineau v. M.N.R.,[10] the Respondent contends that penalties imposed in fiscal matters are, in a system of voluntary reporting, designed to govern the conduct of taxpayers with a view to preventively ensuring compliance with the tax legislation and are civil, not criminal, penalties.[11] This rationale has been applied by the Tax Court of Canada in cases where it was asked to determine whether subsection 163(2) of the Act entailed genuine criminal consequences.[12]
[14] Like the penalty prescribed in subsection 163(2) of the Act, the third party penalty under section 163.2 of the Act was designed to safeguard the integrity of the tax system.[13] It does not purport to punish the offender but rather is intended to maintain internal discipline within the sphere of the Act.[14]
[15] The Respondent argues that the Appellant should be liable to a penalty under subsection 163.2(4) of the Act for each of the 134 tax receipts other than her own because:[15]
a. The appellant made, participated in, assented to and acquiesced in the making of all 134 tax receipts.
b. Each tax receipt reflected the donation of a property that did not exist.
c. Once issued, each tax receipt could be used by another person to claim unwarranted non-refundable tax credits.
[16] The Appellant knew with certainty as of March 17, 2002 that the participants did not have legal title to the VOWs on December 31, 2001.[16] Also, by July 9, 2002, she knew that the tax receipts would not be accepted by the CRA and therefore knew that the recommendation made by Glenn Ploughman in April 2002 to go ahead and submit the tax receipts to the CRA was incorrect.[17] Despite what she knew, the Appellant did not inform the other participants of the situation and even attempted to convince the CRA that her own donation was valid.[18]
[17] If in fact the Appellant did not know the true state of affairs, it is reasonable to expect that she would have known that the VOWs and Trust did not exist had she compelled the Principals to provide her with the documents listed on page 2 of her legal opinion[19] as a precondition for the release either of that opinion or of the tax receipts.[20] Also, when Ploughman stated in his letter of April 2002 that the title issues had been resolved, the Appellant could have demanded that she be provided with supporting evidence.[21]
[18] In this case, the Appellant was not only the president of the Charity but also the lawyer who signed the misleading opinion. She knew that no supporting documents were ever provided by the Principals and, thus, that she could not rely on the legal opinion.[22] Her responsibilities as an officer of a charity did not cease to exist at the time the legal opinion was signed or the tax receipts issued.[23] On the contrary, the Appellant had ongoing responsibilities which required that proper actions be taken to disclose to the participants and to the CRA any false statement those documents may have contained.
[19] In these circumstances, the Respondent argues, the Appellant was wilfully blind [24] and her conduct clearly showed indifference as to whether the Act was complied with.[25] The Appellant’s conduct was that of a person showing a wilful, reckless or, at least, a wanton disregard of the law.[26]
The Appellant
First Issue
[20] The Appellant submits that section 163.2 of the Act is a provision with true penal consequences and thus falls within the ambit of section 11 of the Charter. In R. v. Wigglesworth, [27] the Supreme Court of Canada held that proceedings will be subject to section 11 protection where the consequences include “imprisonment or a fine which by its magnitude would appear to be imposed for the purpose of redressing the wrong done to society at large rather than to [sic] the maintenance of internal discipline within the limited sphere of activity.”[28] Following this rationale, the Appellant argues that section 163.2 of the Act attracts the protection of section 11 by its unlimited terms as regards both the magnitude of the punishment and the time limit in which it can be imposed.[29] The Appellant further argues that the wrong done to society contemplated by the Wigglesworth test does not require harm to the fisc.[30] In the context of section 163.2 of the Act, the harm contemplated is aid given by one person to a taxpayer which damages the integrity of our system of honest self-reporting.
[21] Again relying on Wigglesworth, the Appellant notes that section 11 of the Charter would apply to a matter where it is “intended to promote public order and welfare within a public sphere of activity.”[31] Indeed, the Appellant agrees with the Respondent’s characterization of the Canadian tax collection system as one of honest self-reporting, one which involves a relationship between the taxpayer and the Crown to the exclusion of all others. Consequently, penalties assessed against a taxpayer for misrepresentation in his or her return are of a private nature.[32] However, third parties are not part of that private relationship and so, by default, they form part of the public, to which measures intended to promote public order and welfare within a public sphere of activity apply.[33] By expanding liability beyond the taxpayer to third parties, Parliament sought to denounce, punish and deter wrongdoers and would‑be wrongdoers.[34] These are principles of sentencing that apply to criminal and quasi‑criminal penalties, not to matters that are merely civil or administrative in nature.
[22] Finally, a penalty imposed under section 163.2 of the Act can burden the third party with the weight of a significant stigma. Specifically, in the case at bar, a finding under section 163.2 of the Act against the Appellant could form the basis for professional sanctions, including disciplinary proceedings.[35] Even in the absence of formal sanctions, unlike penalties under subsection 163(2) of the Act, penalties under section 163.2 will entail grave damage to the professional character and reputation of a professional found to have engaged in the conduct covered by this section.[36]
Second issue
[23] The Appellant divided her argument into three points:[37]
a. The issuance of the charitable donation tax receipts by the Charity.
b. The issuance of the March 18th letter.
c. The time period after Mr. Ploughman sent the letter of April 5th.
[24] With respect to the issuance of the charitable donation tax receipts, the Appellant argues that the evidence shows that, at the time the receipts were issued, the Appellant was informed by her advisors that the property had been properly created and that the documentation effecting a gift of the VOWs had been completed.[38] It was beyond the Appellant’s ability to conduct an investigation regarding the underlying title to the property in the Turks and Caicos Islands. Thus, she had no choice but to rely on her advisors with regard to the underlying title and was reasonably entitled to do so.
[25] In fact, the Appellant submits that the case law on gross negligence indicates that if a subject matter is such that it is beyond the ability of the taxpayer to properly prepare statements for the purpose of the Act, he or she is mandated to retain an advisor.[39] The taxpayer is then entitled to rely on this advisor, except where the advisor’s advice would be, subject to the taxpayer’s own understanding and intellect, readily apparent.
[26] The Appellant argues that she should not be held to a standard which requires the signatories of charitable donation tax receipts to review legal documents to ensure that legal structures are properly created.[40] This is especially true in cases, like this one, where there is reliance on professional advice indicating that the property existed and had been transferred.
[27] With respect to the letter of March 18, 2002, the Appellant argues that her belief that the defect respecting the gift could have been remedied retroactively was an error of law rather than an error of fact.[41] Despite her being a lawyer, the Appellant maintains an error of law does not rise to the level of culpable conduct within the meaning of section 163.2 of the Act.
[28] Moreover, the fact that the Appellant co-signed a letter to each of the participants in the Program advising them not to use the charitable donation receipts is evidence that she was neither indifferent as to whether the Act was complied with nor acting with reckless disregard of the law.[42] The letter itself could not be used by any third party for a purpose of the Act. Since the letter advised participants not to use the receipts, there can be no liability of the Appellant under subsection 163.2(4) of the Act in respect of statements intended to help maintain the integrity of the Act.
[29] Finally, with respect to the letter of April 5, 2002, the Appellant argues that any communication from her contradicting that letter would necessarily have been in the nature of legal advice to correct the previous error of law conveyed in the March letter.[43] The Appellant asserts that she cannot be mandated to provide unsolicited legal advice by virtue of the Act. The Appellant says that she misunderstood the law and believed that the defect respecting the gift could be remedied. Absent any evidence of fraud, of which the Appellant contends there is none, the Appellant can be taken not to have known of the errors of law and fact contained in the April letter. The Appellant relied on the opinion of Ploughman, her advisor, that the receipts could be properly submitted.
[30] Finally, the Appellant submits that she cannot be required to know every element of the law and that it was up to each individual participant to review the matters discussed in the April letter with his or her own advisor.
Standard of Proof
[31] Along the lines of her previous arguments, the Appellant submits that the burden to be met by the Respondent is that of proof beyond a reasonable doubt rather than proof on the balance of probabilities.[44] This change in the burden of proof results from the application of the protection of the Charter, specifically under paragraph 11(d), to a provision which is, the Appellant submits, by its nature a penal provision.
[32] Additionally, even if this Court chooses not to apply the standard of proof beyond reasonable doubt, the applicable standard is at least higher than that of proof on the balance of probabilities.[45]
Analysis
Does section 163.2 of the Act create a criminal offence? Legislative Intent
[33] The third party penalty under section 163.2 of the Act was enacted following the Mintz Report recommendation to add a new civil penalty provision that would expand the scope of the provisions contained in subsection 163(2) of the Act.[46] The report emphasized the gap existing between the criminal liability under subsection 239(1) of the Act, to which could be subject any number of persons who participate in the offence, and the civil penalties contained in section 163 of the Act, which only apply to a taxpayer whose liabilities or entitlements under the Act are affected by the improper conduct. Thus, it was suggested that a new penalty be created, one that would apply to third parties who knowingly, or under circumstances amounting to gross negligence, participate in, promote or assist conduct that results in the making of a false statement or omission in a return. The Committee that produced the report explained its recommendation as follows:
It is the Committee’s view that the imposition of broader civil penalties is justified to defend the integrity of the tax system. Such penalties would aim to deter transactions, arrangements and methods of reporting that do not genuinely yield the result claimed by a taxpayer, and would hold advisors and promoters accountable for obviously faulty advice.
[Emphasis added.]
[34] The Respondent submits that the comments in the report are indicative of the civil nature of the penalty. However, important discrepancies can be seen between the recommendation of the Mintz Report and the third party penalty enacted in section 163.2 of the Act. As will be discussed below, the penalty under section 163.2 of the Act appears to be much broader than that originally recommended by the Committee. For example, some are of the opinion that it was clear from a reading of the Committee’s recommendation and comments that, in order for the penalty to apply, the false statement or omission needed to be one that affected a taxpayer’s “liabilities or entitlements” under the Act.[47] This does not appear to be the case under section 163.2 of the Act. The discrepancy between the report’s recommendation and the enacted version of the third party penalty will be elaborated upon below and it will be demonstrated why the Committee’s recommendation to create a civil penalty should not be taken as evidence that the actual penalty is of that same nature.
[35] Furthermore, in enacting the penalty, Parliament substituted the concept of “culpable conduct” for “gross negligence”. This substitution was intended to address concerns expressed by professional bodies on behalf of their members that the proposed civil penalty might apply in cases where tax professionals made an honest error of judgment or where there were an honest differences of opinion.[48] In the technical notes of December 7, 1999, it is stated:
… The gross negligence standard has been used elsewhere in the tax law and has been judicially interpreted in a number of cases. In the government's view there is a great deal of difference between “ordinary” negligence and “gross” negligence. It is not the government's policy intent to apply a third party penalty under new section 163.2 in cases of conduct that is an honest error of judgment, or an honest difference of opinion. Rather the gross negligence standard was selected because it addresses this legitimate concern while ensuring that participants in otherwise culpable activity do not escape liability.
Nevertheless, in response to representations of professional bodies, section 163.2 substitutes for “gross negligence” the concept “culpable conduct” which is defined with reference to the types of conduct to which the courts have, in the past, applied a civil penalty under the tax law.[49]
[36] In other words, through the concept of “culpable conduct” it was sought to fix a higher standard of culpability and to counteract a tendency of court decisions to lower the requirements under the gross negligence test.[50] Thus, “culpable conduct” was defined by reference to the type of conduct to which the courts had, in the past, applied a civil penalty under the Act.[51] More precisely, “culpable conduct” was defined as conduct that is tantamount to intentional conduct, or that shows an indifference as to whether the Act is complied with, or that shows a wilful, reckless or wanton disregard of the law.[52]
[37] By explaining its intention of assimilating the concept of “culpable conduct” to the concept of “gross negligence,” Parliament attempts to emphasize that section 163.2 of the Act introduces a “civil” penalty. Also, section 163.2 is included with the other clearly civil penalties of section 163 of the Act. Clearly, Parliament intended to create a civil penalty comparable to that under subsection 163(2) of the Act, but applicable to third parties.
[38] Nevertheless, taking into account Parliament’s intention with regard to section 163.2 of the Act is insufficient to eliminate the possibility of the third party penalty being penal in nature. To come to a conclusion on this issue, other compelling arguments should be taken into consideration, such as the unlimited terms in which both the magnitude of the punishment and the time limit in which the penalty can be imposed are set out. Both of these aspects will be addressed later on.
Case Law on Penal Sanctions in the Act
[39] Although cases such as Martineau[53] have concluded that the penalty under subsection 163(2) of the Act is not penal in nature, there have been many judgments affirming the penal nature of provisions using the expression “knowingly or under circumstances amounting to gross negligence.” These cases are worth mentioning given that section 163.2 of the Act sets an even higher standard by substituting “culpable conduct” for the terms “gross negligence”.
[40] First, the Supreme Court of Canada recognized in The Queen v. Sault Ste‑Marie (City)[54] three categories of offences. The first category consists of “[o]ffences in which mens rea, consisting of some positive state of mind such as intent, knowledge, or recklessness, must be proved by the prosecution either as an inference from the nature of the act committed, or by additional evidence.”[55] The Court then added that offences which are criminal in the true sense fall in this category.[56]
[41] Second, in Udell v. M.N.R., [57] the Exchequer Court of Canada wrote in respect to subsection 56(2), which preceded subsection 163(2): “There is no doubt that section 56(2) is a penal section.”[58]
[42] Third, in Boileau v. M.N.R., [59] Judge Lamarre Proulx of this Court referred to the statement of the Exchequer Court in Udell and applied it directly to subsection 163(2): “… I believe that a proceeding under subsection 163(2) is of a penal nature. This aspect has already been discussed by Mr. Justice Cattanach in Udell v. M.N.R. …”[60]
[43] The last and most interesting case, is this Court’s decision in Colangelo Estate v. R.[61] In that case, the Court was asked to determine whether subsections 163(2) and 110.6(6) applied. Each provision applied in cases where the taxpayer had “knowingly or under circumstances amounting to gross negligence” carried out the actions described therein. The Court wrote:
It is trite, of course, that ignorance of a penal law does not excuse the breach of it. The mental element is directed to the doing of the act; it does not require knowledge of the law that is being breached. Although the provisions in issue here are penal in their nature, I am not persuaded that Parliament intended them to apply in such a way that a person who fails to report a gain because of ignorance of the requirement in the Act to do so must in every case suffer the penal consequences.[62]
Comparison with section 239
[44] The infractions and penalties in section 163.2 of the Act share some similarities with the criminal offences and punishments found in section 239 of the Act. Section 239 states the following:
Other offences and punishment
239. (1) Every person who has
(a) made, or participated in, assented to or acquiesced in the making of, false or deceptive statements in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation,
(b) to evade payment of a tax imposed by this Act, destroyed, altered, mutilated, secreted or otherwise disposed of the records or books of account of a taxpayer,
(c) made, or assented to or acquiesced in the making of, false or deceptive entries, or omitted, or assented to or acquiesced in the omission, to enter a material particular, in records or books of account of a taxpayer,
(d) wilfully, in any manner, evaded or attempted to evade compliance with this Act or payment of taxes imposed by this Act, or
(e) conspired with any person to commit an offence described in paragraphs 239(1)(a) to 239(1)(d),
is guilty of an offence and, in addition to any penalty otherwise provided, is liable on summary conviction to
(f) a fine of not less than 50%, and not more than 200%, of the amount of the tax that was sought to be evaded, or
(g) both the fine described in paragraph 239(1)(f) and imprisonment for a term not exceeding 2 years.
[45] The conduct referred to in section 239 of the Act, and especially in paragraph 239(1)(a), is strikingly similar to the conduct described in section 163.2 of the Act. Although section 239 may be much broader in scope than section 163.2, Warren J. A. Mitchell notes the following:
In both sections 163.2 and 239 the basis of the charge is the making of false statements; in both the standard is culpability, either by way of “culpable conduct” or “evasion,” and in both the charge can be invoked not only for falsely reporting one’s own income, but also for third-party misfeasance.[63]
[46] In this context and because of the similarities between the two sections, the author says that one suspects that section 163.2 of the Act was enacted as an alternative to section 239, which has proven to be cumbersome for the Crown.[64] Indeed, section 239 of the Act requires proof beyond a reasonable doubt at trial as well as strict observation of the Charter provisions when conducting the investigation that leads up to the imposition of the prescribed penalty.
[47] However, while section 239 of the Act can clearly be described as creating a criminal offence, and section 163.2 as providing for a civil penalty, it is worth noting that the fine imposed by section 239 of the Act can pote