Federal Court of Appeal: Advisor Penalties Under Section 163.2 of the Income Tax Act Are Not Criminal Offences and Do Not Attract the Protection of Section 11 of the Charter

Bill Innes on Current Tax Cases

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The decision of the Federal Court of Appeal on June 12, 2013 in The Queen v. Guindon[1] is the first appellate decision to examine the nature of advisor penalties although they have formed part of the Income Tax Act[2] for more than a decade.  Put simply, advisor penalties are imposed by the Act on promoters and marketers of tax plans who engage in what the Act defines as “culpable conduct”. The tax community has long expressed concern that these penalties are by their very nature so severe that they may amount to criminal offences.  The Court of Appeal reversed the decision of the Tax Court in Guidon[3] which held that advisor penalties were criminal offences and, accordingly, attracted the various Charter protections available to those charged criminally.

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This decision, if it is not reversed by the Supreme Court of Canada, will certainly set the bar much lower for CRA in seeking to impose such penalties and will undoubtedly send a chill over the community of those engaged in tax planning that might possibly cross the “culpable conduct” line.

The decision of the Court of Appeal touched on a number of issues including the giving of notice of a constitutional question.  In the interests of brevity this commentary will only deal with their rationale on the issue of “criminal offence”.

The gist of the court’s decision was that section 163.2 is administrative in character, designed to maintain the proper functioning of the Act, and does not create a criminal offence:

[40]           Conduct that is antithetical to the proper functioning of this system must be deterred. Compliance and order within this self-assessment system must be maintained. This is done – in this administrative field of endeavour as in many others – through the imposition of administratively simple sanction or, as the Act calls them, penalties. Given the complexity and breadth of the discrete regulatory and administrative field of endeavour set up by the Act, the sanctions must be administratively simple.

[41]           Seen in this way, penalties under the Act are not about condemning morally blameworthy conduct or inviting societal condemnation of the conduct. They are not among the “most serious offences known to our law”: Wigglesworth, supra, at page 558. Rather, the penalties are about ensuring that this discrete regulatory and administrative field of endeavour works properly.

[42]           In my view, section 163.2 is mainly directed to ensuring the accuracy of information, honesty and integrity within the administrative system of self-assessment and reporting under the Act. The imposition of a section 163.2 penalty by way of assessment and the subsequent procedures for challenging the assessment are proceedings of an administrative nature aimed at redressing conduct antithetical to the proper functioning of the administrative system of self-assessment and reporting under the Act. Put another way, proceedings under section 163.2 aim at maintaining discipline, compliance or order within a discrete regulatory and administrative field of endeavour. They do not aim at redressing a public wrong done to society at large.

The court went on to conclude that abuse on the part of CRA could be addressed by other remedies without the need for the types of protections available under criminal law:

[56]           Undoubtedly, in certain individual circumstances, penalties set by formulae or in fixed amounts – while administrative in nature and not triggering section 11 of the Charter – can be harsh. However, relief against harsh penalties can potentially be had under a different provision of the Act, subsection 220(3.1). Under that subsection, those subject to a section 163.2 penalty can ask the Minister to exercise her discretion to cancel all or part of the penalty. Before us, the Crown conceded the availability of this remedy.

[57]           Some might question the meaningfulness or effectiveness of this remedy. After all, it is the Minister imposing the penalty who considers whether it should be cancelled. But that is too facile a view of the matter. Subsection 220(3.1) of the Act imposes on the Minister an entirely different task. The Minister does not have a free hand to do whatever she wants, act on whim, or unthinkingly rubber-stamp her earlier penalty assessment. A few more words on this are apposite.

[58]           The Minister’s discretion on an application for relief must be based on the purposes of the Act, the fairness purposes that lie behind subsection 220(3.1) of the Act, and a rational assessment of all the relevant circumstances of the case. Her discretion must be genuinely exercised and must not be fettered or dictated by policy statements such as Information Circular 07-1: Stemijon Investments Ltd. v. Canada (Attorney General), 2011 FCA 299 at paragraph 27.

[59]           On an application for judicial review from a subsection 220(3.1) decision, the Federal Court may quash unreasonable exercises of discretion by the Minister – i.e., exercises of discretion that fall outside the range of the acceptable and defensible on the facts and the law: Dunsmuir v. New Brunswick, 2008 SCC 9, [2008] 1 S.C.R. 190. Depending on the circumstances, the range available to the Minister can be quite narrow: Canada (Attorney General) v. Abraham, 2012 FCA 266 at paragraphs 37-50; and in a different context, see Canada (Attorney General) v. Canadian Human Rights Commission, 2013 FCA 75 at paragraphs 13 and 14.

[60]           Finally, I note that section 12 of the Charter prohibits cruel and unusual punishment or treatment, i.e. a disproportionate sanction that “outrage[s] standards of decency”: Canada (Minister of Employment and Immigration) v. Chiarelli, [1992] 1 S.C.R. 711 at page 736. In the administrative context, section 12 remains largely untested and its applicability remains a matter of debate. Further, since penalties under section 163.2 are calculated by formulae that attempt to gauge the extent to which the impugned conduct may have affected the tax system, I am sceptical whether a section 12 claim against a section 163.2 penalty could ever succeed. Nevertheless, at this early point in the development of the jurisprudence under section 163.2, it cannot yet be ruled out as a possible avenue of exceptional recourse.

This decision displays a great degree of deference to the administrative apparatus of CRA, e.g., “[c]onduct that is antithetical to the proper functioning of this system”.  While the result of the decision may be correct, it possibly indicates a shift in the jurisprudence of the Federal Court of Appeal in the direction of greater administrative discretion for CRA.

It would be extremely helpful if the Supreme Court agreed to grant leave in order to examine this very important area.

[1] 2013 FCA 153.

[2] R.S.C. 1985, c. 1 (5th Supp.), as amended (the “ITA”).

[3] 2012 TCC 287.