Guindon v. R - SCC: Tax preparer penalties survive a Charter-based challenge

Guindon v. R - SCC:  Tax preparer penalties survive a Charter-based challenge

Guindon v. The Queen (July 31, 2015 – 2015 SCC 41, (Abella (co-author, partial dissent), Rothstein (co-author, majority), Cromwell (co-author, majority), Moldaver, Karakatsanis, Wagner (co-author, partial dissent) and Gascon JJ.).

Précis:   Ms. Guindon was a lawyer who had issued an opinion which was used to market a charitable leveraged donation program;  she was also an officer of the charity involved and signed the tax receipts that were issued totalling $ 3,972,775.  She was assessed advisor penalties totalling $546,747 pursuant to subsection 163.2 (4) of the Income Tax Act (the “Act”), the so-called “preparer penalty”.  In the Tax Court she was successful in arguing that the penalty was criminal in nature and she had not been afforded the necessary Charter protections involved in a criminal prosecution.  The Crown argued that she had failed to raise this issue in a notice of constitutional question as required by section of 19.2  of the Tax Court of Canada Act.  The Tax Court overruled the Crown on this point.  On appeal the Federal Court of Appeal concluded that the appeal should be allowed on the basis of failure to give a notice of constitution question;  it also concluded that the penalties levied against Ms. Guidon were not criminal in nature.

On appeal to the Supreme Court of Canada Ms. Guidon for the first time served a notice of constitutional question.  The Court sat a panel of 7, presumably because Justice Côté had only been sworn in a few days prior to the hearing.

On the preliminary issue of whether the appeal should be dismissed for failure to give notice of a constitutional question in either the Tax Court or the Federal Court of Appeal the Supreme Court split 4-3.  The minority held that the Court should not exercise its discretion to waive the giving of a notice since this was a very important aspect of the process of examining the constitutionality of disputed provisions.  The majority held that the Supreme Court had commonly exercised its discretion to allow new issues to be raised on appeal.  Since the notice had been served in the appeal before the Supreme Court it was appropriate to exercise its discretion and allow the issue to be raised.  Before the Tax Court and the Federal Court of Appeal Ms. Guindon had argued that subsection 163.2(4) of the Act was not inoperative, rather that it should be pursued before a criminal court.  In the Supreme Court of Canada for the first time she served the notice of constitutional question at that point but still did not argue that the provision was inoperative.

On the substantive point the majority held that subsection 163.2(4) was not criminal in nature and did not impose true penal consequences.  Ms. Guindon’s conduct was indicative of a complete disregard for the law or willful blindness.

As a result the appeal was dismissed, with costs to the Crown.

Decision:   The majority held that the failure to serve a notice of constitutional question was not fatal to the appeal:

[36]                          We are struck by the enormous waste of judicial resources that would result from this Court declining to hear and decide the merits. As the Court pointed out in Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, at para. 24, “undue process . . . with unnecessary expense and delay, can prevent the fair and just resolution of disputes”. Insisting on the notice provision in the lower courts where, as here, it would serve no purpose to do so constitutes “undue process” and refusing to address the merits leaves the main issue unresolved after the expense and time devoted to it through three levels of court.

[37]                          We must respectfully indicate our disagreement with two specific contentions of Abella and Wagner JJ. They assert that since all constitutional issues are important, our approach would lead “essentially to entertaining all constitutional arguments raised in this Court for the first time”: para. 137. This is not the case: it ignores the other considerations relevant to the exercise of this Court’s discretion. History shows that this Court has only agreed to consider new constitutional issues in rare cases. While we agree that urgency may be a factor in deciding to hear a constitutional issue in this Court where no notice was served below, it is not the only consideration. The point is that all relevant considerations should be taken into account.

[38]                          Our colleagues also maintain, without any factual basis in the record and without any submission of this nature having been made, that Ms. Guindon failed to file notice “without explanation”, and sought to “evade” “the statutory obligation . . . by advancing the excuse” of her notice argument by employing “linguistic tactics at the expense of the public interest”: paras. 94, 96, 97 and 136.

[39]                          Ms. Guindon did not fail to explain why she did not give notice. She advanced the argument that notice was not required and the Tax Court judge decided that issue. Bédard J. did not require notice of constitutional question to be served because he did not issue a declaration of invalidity following his conclusion that s, 163,2 constituted a criminal offence. Instead, he allowed the appeal and vacated the assessment. The learned Tax Court judge did not dismiss Ms. Guindon’s argument on the basis of “semantics”. The Federal Court of Appeal did not accept Ms. Guindon’s position on this point. But it devoted several paragraphs of its judgment to the issue and did not characterize Ms. Guindon’s position as merely “linguistic” or as an attempt to “evade” the notice requirement. No party or intervener at any point has advanced the interpretation of Ms. Guindon’s conduct on which our colleagues rely and there is no support for it — none — in the record.

The majority then turned to the merits of the appeal.  First they concluded that the concept of “culpable conduct” was synonymous with the well known civil concept of gross negligence:

[60]                          The Minister states in her factum that “culpable conduct” in s. 163.2  of the ITA  “was not intended to be different from the gross negligence standard in s. 163(2) ”: para. 79. The Federal Court in Venne v. The Queen, [1984] C.T.C. 223 (T.D.), in the context of a s. 163(2)  penalty, explained that “an indifference as to whether the law is complied with” is more than simple carelessness or negligence; it involves “a high degree of negligence tantamount to intentional acting”: p. 234. It is akin to burying one’s head in the sand: Sirois (L.C.) v. Canada, 1995 CarswellNat 555 (WL Can.) (T.C.C.), at para. 13; Keller v. Canada, 1995 CarswellNat 569 (WL Can.) (T.C.C.). The Tax Court in Sidhu v. R., 2004 TCC 174, [2004] 2 C.T.C. 3167, explaining the decision in Venne, elaborated on expressions “tantamount to intentional conduct” and “shows an indifference as to whether this Act is complied with”:

Actions “tantamount” to intentional actions are actions from which an imputed intention can be found such as actions demonstrating “an indifference as to whether the law is complied with or not”. . . . The burden here is not to prove, beyond a reasonable doubt, mens rea to evade taxes. The burden is to prove on a balance of probability such an indifference to appropriate and reasonable diligence in a self-assessing system as belies or offends common sense. [para. 23]

 [61]                          Therefore, while there has been debate as to the scope of “culpable conduct” (as argued before the Tax Court in this matter), the standard must be at least as high as gross negligence under s. 163(2) of the ITA. The third party penalties are meant to capture serious conduct, not ordinary negligence or simple mistakes on the part of a tax preparer or planner.

[62]                          We can conclude that the purpose of this proceeding is to promote honesty and deter gross negligence, or worse, on the part of preparers, qualities that are essential to the self-reporting system of income taxation assessment.

The availability of a due diligence defence or the inclusion of a mental element in the penalty did not necessarily render it criminal in nature:

[72]                          While some regulatory penalties are imposed without consideration of the person’s state of mind, in other cases it is rational that the state would only wish to impose a penalty on those who engage in misconduct knowingly, recklessly, or with a particular intention. Providing a due diligence defence or including a mental element as a component of the penalty does not detract from the administrative nature of the penalty. (See the Federal Court of Appeal’s reasons, at para. 48.)

The majority concluded that the penalties imposed on Ms. Guindon were not truly “penal in nature”:

[85]                          Ms. Guindon was assessed a penalty of $546,747. This amount is very high for an individual. However, in the circumstances it does not constitute a true penal consequence: the Tax Court found that there were 135 violations (see paras. 1 and 112). In addition, that court found that Ms. Guindon was dishonest in her initial legal opinion when she stated that she had reviewed the supporting documents. She then compounded this dishonesty by signing charitable receipts that she should reasonably have known were tainted by her own failure to verify the legal basis of the program: paras. 107-9. Such dishonesty cannot be countenanced in a self-reporting system. As noted by the Federal Court of Appeal, “[s]ometimes administrative penalties must be large in order to deter conduct detrimental to the administrative scheme and the policies furthered by it”: para. 46.

[86]                          The Tax Court found that Ms. Guindon wrote and endorsed a legal opinion that she knew was “flawed and misleading”: in the opinion, she stated that she had reviewed supporting material which had in fact never been provided to her (para. 105). Later, when she signed charitable tax receipts as part of the program, she chose to “rely on her own legal opinion which she knew to be incomplete”: para. 107. The Tax Court found that Ms. Guindon’s conduct was “indicative either of complete disregard of the law and whether it was complied with or not or of wilful blindness”: para. 108.

[87]                          We agree with the Court of Appeal that a maximum penalty for a person making a false statement of $100,000 plus the person’s gross compensation in relation to that statement

does not demonstrate a purpose extending beyond deterrence to denunciation and punishment of the offender for the “wrong done to society”: Wigglesworth, supra, at page 561. Rather, in light of the possibility of false statements going undetected, penalties of such magnitude are necessary to prevent them from being regarded as just “another cost of doing business”: United States Steel Corp., supra, at paragraph 77. [para. 47]

 [88]                          In this case, the penalty of $546,747 assessed against Ms. Guindon does not impose a true penal consequence — the magnitude reflects the objective of deterring conduct of the type she engaged in. Although the penalty is paid ultimately into the Consolidated Revenue Fund, none of the other relevant considerations supports the view that this penalty is a true penal consequence.

Those assessed with planner penalties have legal recourses available to them:

[90]                          Finally, we note that even though s. 11 of the Charter  is not engaged by s. 163.2  of the ITA, those against whom penalties are assessed are not left without recourse or protection. They have a full right of appeal to the Tax Court of Canada and, as the respondent pointed out in her factum, have access to other administrative remedies: R.F., at para. 99; see, e.g., ITA, s. 220(3.1).

As a result Ms. Guindon’s appeal was dismissed with costs.