publication date: Dec 5, 2012
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author/source: Adam Aptowitzer
For years, tax professionals have faced potentially massive
fines for leading their clients into tax arrangements to which the
Canada Revenue Agency afterwards took
issue. The threat of the "Third Party Civil Penalties" of the
Income Tax Act has hung over the heads
of tax advisors, planners, and preparers like the sword of Damocles. What Canadians
didn't consider was that the same provision could be applied to the directors
of charities as well.
In a recent decision successfully argued by the author, the
Tax Court of Canada has come to their rescue.
In Guindon, the
third party was a lawyer who signed charitable donation tax receipts in her
capacity as the director of a charity. When the receipts turned out to be
false, she was assessed a penalty of $546,747.
Infinite penalties
The law states that anyone who makes, participates in,
assents to or acquiesces in the making of a false statement in a tax return by
someone else can be liable to a penalty. The penalty is based on the amount the
individual who filed the return could be fined by the CRA. What is not obvious is that the penalties are
cumulative. If there are a large number of people who filed returns with the
false statement, then the penalty is potentially very large. As there is no cap on the penalty, it will be
added to time and again by each person who uses the plan.
Even worse, there is no limitation period. In effect, the CRA
can assess charities and directors of a charity with enormous penalties decades
after the infraction.
To make matters still worse, the CRA proceeded on the basis that
these were civil penalties. In effect,
this denies the benefit of Charter protections to anyone assessed a penalty
under that provision.
New protections
In Guindon, the Tax Court agreed with the director of the
charity that these ruinous penalties are not civil, but rather penal in nature.
This has major implications for everyone involved with preparing tax statements
or signing charitable donation tax receipts. Anyone assessed such a penalty will
now receive protections under the Charter, such as presumed innocence and the
right to be proven guilty by the criminal standard of "beyond a reasonable
doubt."
Principles that apply in other criminal investigations will
presumably kick in as well, such as the requirement to seek a warrant to seize
additional information.
Given the potentially infinite nature of these penalties and
the limitless time the CRA has to assess them, it seems only reasonable that
there be some protections for Canadian citizens facing financial and professional
ruin. Nevertheless, it's likely the CRA will appeal Guindon. Hopefully Ms. Guindon will be able to continue the fight
on behalf of all of us who may one day face a similar situation. In the
meantime, it appears the "Third Party ‘Civil' Penalties" are due to be renamed.
Adam Aptowitzer
of Drache Aptowitzer LLP is a
charity law lawyer with a national practice based in Ottawa. He has been
published in Canadian Taxpayer, Canadian Fundraising & Philanthropy and the
Not-for-Profit News. He has also published a widely distributed study on the regulation
of Canadian charities with the C.D. Howe Institute.
As a speaker, he has presented to the National Symposium
of Charity Law, the C.D. Howe Institute, the Association of Fundraising
Professionals, the Canadian Association of Gift Planners, the Ottawa Estate
Planning Council and various large and small Canadian charities. He has also
given expert advice on Parliament Hill. Adam is an executive member of the
Canadian Bar Association's Charity and Not-for-Profit Law section.
For speaking engagements and consultations, contact him
at 613-237-3300 or visit http://www.drache.ca.
