Guindon v Canada: It’s just a fine

Why We Should Be Suspicious of Timeshares

Julie Guindon is the family and estate lawyer at the heart of Guindon v Canada, 2015 SCC 41 [Guindon] in which the Supreme Court of Canada (“SCC”) confirmed that penalties under s.163.2 of the Income Tax Act, RSC 1985, c 1 (5^th Supp) [ITA] are not criminal in nature, and hence, do not trigger the procedural safeguards guaranteed under s.11 of the Charter.

In 2001, Ms. Guindon was approached by promoters of a leveraged donation program to provide a legal opinion on a timeshare tax scheme. Each participant of the program would acquire timeshare units in the Turks and Caicos and would then donate these units to a charity at a fair market value greater than their cash payment. Ms. Guindon, not having any tax law expertise, provided an opinion letter on the tax consequences of this program that was included in promotional packages for the scheme (Guindon, para 6). To make matters worse for herself, Ms. Guindon was also the president of the registered charity that became the recipient of the donated timeshares, which the promoters would then sell.

The 135 tax receipts issued by Ms. Guindon were disallowed by the Minister of National Revenue, and Ms. Guindon was charged under s. 163.2 of the ITA with the fine set at $546,747 (para 2). On appealing the Minister’s penalties before the Tax Court of Canada (“TCC”), Ms. Guindon’s counsel first argued that s.163.2 of the ITA created a criminal offence (para 9). The TCC found that the provision was by its nature a criminal proceeding and the sanction was a true penal consequence (para 10).

During the appeal to the Federal Court of Appeal (“FCA”), Ms. Guindon’s counsel did not raise the Charter question. The FCA, set aside the TCC judgment and restored the fine against Ms. Guindon (para 12).

Two issues came before the SCC, one procedural and one substantial. The procedural issue was whether Ms. Guindon’s failure to give the required notice of constitutional question was fatal (para 4). On this question the court split, with Rothstein and Cromwell of the opinion that they should look at the Charter issue despite failure to raise it at the lower court. Whereas, Abella and Wagner found that the lack of notice meant the issue should not be considered. Only Rothstein and Cromwell spoke on the substantive issue, finding that s. 163.2(4) of the ITA does not create a true criminal offence, and does not engage s.11 of the Charter.

Should the Court Exercise Its Discretion in Considering the Charter Question?

Justice Abella and Wagner outlined why the constitutional aspect should not be considered at all and stopped their analysis there. In their opinion, the failure to raise the constitutional issue at the lower court was done without explanation and without the consent of the Attorney General (para 94). As such, Abella and Wagner did not consider the nature of ITA provision.

Rothstein and Wagner were of the opinion that the issue being raised on appeal was important enough to the administration of the ITA, and thus, there was no indication that any Attorney General had suffered prejudice (para 35). As such, the SCC should use its discretion to look at the constitutional issue presented in this case, even though it was not presented at the lower court. Rothstein and Wagner’s part of the judgment was the only part that considered whether the Charter would apply to the penalties set out in the ITA.

Guilty Beyond Reasonable Doubt?

Section 11 of the Charter provides procedural safeguards to protect those accused of an offence. If s.11 were found to be applicable in the case of Ms. Guindon, it would shift the burden of proof from balance of probabilities to proof beyond a reasonable doubt.

An individual is entitled to the protections set out in s.11 of the Charter where the proceeding is, by its very nature criminal, or, where a “true penal consequence” flows from the sanctions (para 44). Proceedings have a criminal purpose when they seek to bring the subject of the proceedings to account to society for conduct violating the public interest (para 45). A true penal consequence is imprisonment, or a fine which by its magnitude, would appear imposed for the purpose of redressing the wrong done to society (para 46). The SCC looked at both whether the proceeding was criminal in nature and if true penal consequences flowed from it.

As outlined in R v McKinlay Transport Ltd, [1990] 1 SCR 627, the ITA is a “self-reporting and self-assessing [scheme] which depends upon the honesty and integrity of the taxpayers for its success” in order to raise revenues for the Government, which is the ultimate purpose of the ITA (Guindon, para 54). In the case at hand, the SCC looked at 163.2 (4) of ITA specifically, which deals with the planer penalty, and stated:

(4) Every person who makes, or participates in, assents to or acquiesces in the making of, a statement to, or by or on behalf of, another person (in this subsection, subsections (5) and (6), paragraph (12)(c) and subsection (15) referred to as the “other 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.

The court found that even though the regulatory penalty took into consideration the person’s state of mind, this component did not detract from the administrative nature of the penalty, and was not criminal in purpose (para 72).

When looking at the true penal consequence test a provision that includes imprisonment can easily be identified as criminal. Whereas, to determine if a fine has a true penal consequence the Court must look at factors such as: the magnitude of the fine, to whom it is paid, whether its magnitude is determined by regulatory considerations rather than principles of criminal sentencing, and whether stigma is associated with the penalty (para 76). In theory, the amount of penalty in an administrative process should only reflect the amount required to deter non-compliance with the regulatory scheme. Ms. Guindon and the intervener, Canadian Constitution Foundation, suggested that there should be a ceiling to the administrative penalties, and that this ceiling should be one-fifth of the criminal penalties (para 78). This was an arbitrary number chosen by the intervener, which was not accepted by the SCC.

The SCC established that the analysis must ask whether the amount of the penalty, along with the other relevant factors, is in keeping with the nature of the misconduct, and that the amount should reflect the necessity of serving regulatory purposes (para 78).  As such, Rothstein and Cromwell determined that the penalty was meant to deter non-compliance, and that even though the amount with which Ms. Guindon was penalized was high, it did not constitute a true penal consequence (para 85). The Charter then, does not apply, and the Minister’s penalty was upheld.

Tax Consequences 

In re-instating the decision of the Minister of National Revenue, the SCC decision will make it easier for the Ministry and Canada Revenue Agency (“CRA”) to go after tax schemes that promoted inflated donation to tax charities. According to a Globe and Mail article, as of 2014, the CRA had investigated 180,00 tax payers that participated in such schemes. A ruling of the SCC that the provision was criminal in nature would have required the CRA to prosecute this case differently. It would have required that the Crown prove beyond a reasonable doubt that Ms. Guindon had the intention to defraud the system. It would also have required abiding by rules for criminal procedure, putting major roadblocks in the way of going after other parties that lure clients in such fraudulent schemes.