SCC Denies Charter Protection to Tax Adviser Hit with a Huge Monetary Penalty

The Supreme Court of Canada’s (“SCC”) decision in Guindon v Canada, 2015 SCC 41 [Guindon] has been eagerly awaited by lawyers in the area of taxation. It deals with a relatively new provision in the Income Tax Act, RSC 1985, c 1 (5^th Supp), s. 163.2, that allows third parties, such as tax advisers or promoters of tax deduction schemes, to be penalized for helping a taxpayer make “a false statement.” Bogus charitable donation schemes, in particular, have been a growing problem for the tax authorities.

Julie Guindon is a lawyer who was also the head of a small charity in the Ottawa area. She signed charitable donation receipts totalling nearly $4 million (many of them to her friends and relatives) in a scheme that the Canada Revenue Agency concluded was false. Penalties totalling $565,000 were imposed on her personally. She appealed to the Tax Court where she successfully argued that a penalty this large was a criminal penalty. That would make it invalid, as she had not been accorded the procedural safeguards that are constitutionally required for a person charged with a criminal offence.

The SCC unanimously rejected Guindon’s appeal, affirming the earlier reversal of the Tax Court’s decision by the Federal Court of Appeal (“FCA”) in Canada v Guindon, 2013 FCA 153 [Guindon, FCA]. The SCC has provided clarity on the validity of the specific penalties found in s. 163.2. However, the decision is somewhat disappointing as the SCC did not use the opportunity to provide any new insights into the complex issue of how to distinguish between civil and criminal penalties.

The Fine Line between Criminal and Civil Offences

The majority at the SCC allowed Ms. Guindon to proceed with her Charter appeal, even though she had not notified the Attorney General of the Charter challenge in the lower court. The SCC has discretion to allow this in exceptional cases. Here, it was warranted because it permitted the adjudication of an issue of considerable public interest, and the Attorney General acknowledged that it was not prejudiced by the lack of notice in the courts below.

The focus of Ms. Guindon’s appeal was the safeguards provided in s. 11 of the Charter. When somebody is charged with a criminal or penal offence, they are entitled to specific rights, including the s. 11(d) Charter right “to be presumed innocent until proven guilty according to law in a fair and public hearing by an independent and impartial tribunal.” Hence, Ms. Guindon argued that the Crown ought to have been required to prove her culpability on the criminal standard of “beyond a reasonable doubt.”

However, the distinction between criminal and other offences has always been vague, and the Constitution Act, 1867 itself only serves to confuse: Section 91 declares that criminal law is under the exclusive jurisdiction of the federal Parliament, but then s. 92(15) goes on to allow the “Imposition of Punishment by Fine, Penalty, or Imprisonment for enforcing any Law of the Province made in relation to any Matter coming within any of the Classes of Subjects enumerated in this Section.” In fact, some provincial statutes, such as Ontario’s Securities Act, RSO 1990, c S.5, s. 122(1), may impose prison terms of up to five years. The SCC in Guindon did not hesitate to state that any statutory offence that allows the “possibility of imprisonment” is always criminal in nature (para 76).  That dictum could have a significant impact if it is taken seriously in future regulatory offence cases.

The SCC’s jurisprudence on the distinction was enunciated in the earlier decisions in R v Wigglesworth, [1987] 2 SCR 541 and Martineau v MNR, [2004] 3 SCR 737. In Guindon, it affirmed the tests developed in these earlier cases, without adding anything further.

One test is procedural. The Income Tax Act itself allows the Minister to choose between the penalties under s. 163, which are deemed to be civil, and those in s. 239, which are acknowledged to be criminal. In fact, both of these sections refer to knowingly making false statements, and there is nothing that obviously distinguishes the impugned conduct. Unlike s. 163, s. 239 specifically refers to the penalty of a term of imprisonment. Somebody charged with what is essentially criminal fraud in the form of tax evasion under s. 239 does not appear in the federal Tax Court, but in a provincial criminal court.

The second test, which is the one that was relevant for Ms. Guindon’s appeal, is unfortunately very vague, and the SCC has not taken any steps to clarify it. An offence may be effectively criminal, even if not charged as such, if the size of the penalty is large enough to be “punitive”:

A monetary penalty may or may not be a true penal consequence. It will be so when it is, in purpose or effect, punitive…The magnitude of the sanction on its own is not determinative. However, if the amount at issue is out of proportion to the amount required to achieve regulatory purposes, this consideration suggests that it will constitute a true penal consequence and that the provision will attract the protection of s. 11 of the Charter (Guindon, paras 76-77).

Somewhat More Detailed Guidance at the Federal Court of Appeal

It would have been helpful for future cases if the SCC had attempted to provide some more concrete guidance on when a monetary penalty is “out of proportion.” It did not attempt to analyze the reasonableness of the specific fine imposed on Ms. Guindon. This had in fact been done by the FCA in the decision below. Justice Stratas, writing for the FCA, parsed the legislation, and deemed the penalty to be reasonable because it was specifically related to the amounts of tax that might have been evaded if the false charitable receipts had gone undetected:

Each of the penalty provisions, including section 163.2, prescribes a non-discretionary fixed amount or a non-discretionary formula for the calculation of the penalty to be included in the assessment. In no way does the Minister evaluate the moral blameworthiness or turpitude of the conduct, including any mitigating circumstances…. Accordingly, these provisions, including section 163.2, seem directed to maintaining discipline or compliance within a discrete regulatory and administrative field of endeavour, rather than redressing and condemning morally blameworthy conduct or a public wrong (Guindon, FCA, para 44).

The FCA went on to note that the fact that a very large penalty might result from this formula does not render it a criminal penalty. It also noted that, in a situation where a mechanical approach leads to what is considered an excessively harsh penalty, the taxpayer has a right of appeal under s. 220(3.1) (para 56).

The FCA did not, however, consider whether there was any proportionality between the penalty and the personal monetary gain to Ms. Guindon. No evidence was presented on what gain, if any, she made from the scheme, and it is possible that she had very little benefit from it. That is in distinction to some other situations where promoters of bogus charitable schemes (such as art donated to charities at inflated values) have made large profits from the scheme.

One could argue that this issue would also be relevant to the question of whether the penalty was punitive. The Ontario Court of Appeal (“ONCA”) upheld a large monetary penalty under the Securities Act in Rowan v Ontario Securities Commission, 2012 ONCA 208 [Rowan]. There, too, the defendants argued that the fines were of a punitive, criminal nature. Unlike the courts dealing with Guindon, the ONCA in Rowan made a reasoned evaluation of the penalty in relation to the gains of the participants from the illegal activity. The Court noted “the need to impose sanctions that are more than the cost of doing business” (para 52). The judgment in Rowan made specific reference to the volume of improper trading and the commissions earned by those on whom the fines were imposed (para 55) to justify it as an administrative penalty.

Conclusion

The SCC, in affirming the FCA’s decision, may be considered to have implicitly accepted the reasoning of the FCA. However, it would have been helpful if it had paid explicit attention to the matter. Even the FCA’s reasoning can be criticized for being overly deferential to the mechanical rules in the legislation, without the type of critical thinking applied by the ONCA in Rowan. One can foresee situations where a defendant’s Charter rights could be violated because a penalty that is heavily punitive is not recognized as such.