Third-Party Civil Penalty

Volume No. 12-31

“this is not the last word on the matter.”

Section 163.2 of the Income Tax Act imposes a penalty that is commonly known as the “third-party civil penalty”. It was first introduced in the 1999 federal Budget.  If applicable, it levies a penalty against third parties such as tax preparers, advisors, tax-shelter promoters and valuators who cause others to misrepresent their tax owing.  While the Canada Revenue Agency has levied section 163.2 penalties against about 80 third parties to date, there were no reported Court decisions on section 163.2 until this month. 

The introduction of section 163.2 caused a large stir in the tax community, with much ink spilled on the appropriateness of the penalty. Some commentators wrote that section 163.2 could be considered as imposing a criminal fine, based on to the Supreme Court of Canada’s 1987 decision in Wigglesworth.  This concern has proven to be valid. 

The Tax Court of Canada issued its first decision on section 163.2 on October 2, 2012, in Julie Guindon v. The Queen.  The taxpayer, who was a lawyer and the president of a charity that was involved in a tax shelter, had been assessed a penalty of almost $550,000 for her involvement in promoting the shelter, including giving a wrong legal opinion. 

The Tax Court ruled that if the section 163.2 penalty is an administrative penalty, then Ms. Guindon was liable. However, the Court ruled that the penalty is actually a criminal penalty, because the level of penalty that can be imposed is essentially infinite (since it is based on how many people wrongly claimed tax benefits based on the third party’s advice). 

Because the penalty was a criminal penalty, it required criminal standards for conviction: proof beyond a reasonable doubt, Charter of Rights protections, and a conviction after a criminal trial in provincial court, as with any charges of tax evasion. Since the Tax Court is not such a criminal court, the judge allowed Ms. Guindon’s appeal and cancelled the penalty. 

It is certain that Guindon will be appealed to the Federal Court of Appeal (and possibly beyond there to the Supreme Court of Canada), so this is not the last word on the matter. We shall continue to watch this case with interest. In the meantime, third-parties such as accountants and lawyers who advise on tax matters should be aware of this decision and follow its implications through the Court process.


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