Under the Revised Statutes of Canada 1985 section 163.2, tax advisors, accountants, and other third parties can be held responsible and seriously penalized for helping taxpayers make false statements. In the case of Guindon v. Canada in 2015, the Supreme Court of Canada effectively ruled that this part of the law is not criminal in nature, and as a result, the Canada Revenue Agency does not have to follow the laws or procedures related to criminal cases. This SCC decision makes it easier for the CRA to go after accountants and tax professionals who lure taxpayers into fraudulent schemes. As a tax professional, you should understand the basics of this case.
Background of the Case
In 2001, Richard St-Denis approached his cousin Julie Guindon, a lawyer, about helping with a tax scheme. Under the scheme, taxpayers would buy timeshares in Turks and Caicos. Then, they would donate the timeshares to a registered charity and receive a receipt for the fair market value of their donation. The amount on the receipt would exceed the original cost of the timeshares and allow the taxpayers to get a deduction on their income tax return. Even though she was not a tax specialist, Ms. Guindon agreed to draft a letter about the tax implications of the scheme, and her cousin used that letter in his group’s marketing materials. On top of that, the donations were also issued to a charity led by Ms. Guindon, and she personally signed nearly $4 million in false gift receipts, many of which went to her friends and family. At the same time, no one ever actually purchased or donated any timeshares. When the CRA noticed the fraudulent receipts, it denied the deductions claimed by the taxpayers, and it assessed Ms. Guindon a preparer penalty of $546,747 under section 163.2 of the law.
Tax Court Appeal
Guindon’s lawyers appealed the penalty and claimed that the large penalty turned the issue into a criminal offense, rather than a civil issue, and that Guindon was entitled to rights under section 11, the Canadian Charter of Rights and Freedom. This section of the charter includes the right to be informed of the offense, tried in a reasonable time with a jury, and not be compelled to testify against yourself. These rights don’t apply in civil cases where the issue is simply a tax offense.
The Tax Court agreed with the lawyers, reversed the penalty, and noted that she was entitled to due process. Then, the case went to the Federal Court of Appeal. That court reversed the Tax Court’s ruling and upheld the fine. The court also noted that the tax advisor penalty is not criminal in nature.
Supreme Court of Canada Ruling
Guindon appealed again, and the case went before the Supreme Court of Canada. The SCC unanimously ruled that she deserved the penalty. The judges in the case issued a statement that when an offense carries imprisonment as a potential penalty, it is automatically a criminal offense, rather than a civil one, but unfortunately, the court did not issue any new statements on the distinction between criminal and civil penalties.
Rather, the court deferred to the distinction from Martineau v. Minister of National Revenue. Based on the ruling in that case, there are two ways to determine if a penalty is criminal or civil:
- Procedural differences: Tax advisor penalties can fall under section 163 or 239, and the minister gets to choose the section that applies to each case. Section 239 mentions imprisonment as a potential penalty. That automatically makes penalties under that section criminal, and tax preparers or advisors charged under that section get to appear in criminal court rather than tax court.
- If the penalty is large enough to be punitive, the case is also criminal. That is subjective, but in Guindon’s case in particular, the penalties were so much more than she gained from the tax scheme that they were arguably punitive in nature.
Importance of the Civil-Criminal Distinction
Beyond the different rights of the defendant in civil and criminal proceedings, it’s also important to note the differences involved in arguing and deciding these cases. Namely, in a criminal case, the accused must be found guilty beyond a reasonable doubt. In contrast, civil cases rely on the balance of probabilities. Basically, if guilt is probable, the court can apply penalties.
Implications for Accountants
As an accountant, you may be wondering how this affects you. This case underscores the importance of honesty and integrity in tax planning and preparation. Beyond that, it shows that if the CRA brings forward a tax advisor penalty under section 239 or if the case is criminal for any other reason, you have rights under section 11 of the Canadian Charter of Rights and Freedoms. Regardless of whether the case is civil or criminal, tax advisors and preparers can face very significant fines and penalties. These penalties can vastly exceed any gains an individual makes from the fraudulent statements.
The Guindon case makes it easier for the Ministry of National Revenue and the Canada Revenue Agency to go after people who run fraudulent tax schemes. If you believe your clients are involved in this type of scheme, warn them about the risk of an audit and the potential for penalties. Also, excuse yourself from the issue, as you too may be held responsible.