Decision Date: October 16, 2012
Link: Case Summary Document
Citation: [2012] TCC 287 (Tax Court of Canada, Bédard J)
Acknowledgement:The Pemsel Case Foundation thanks The Australian Centre for Philanthropy and Nonprofit Studies for its contribution in the drafting of this Case Note.


This Canadian case concerned another of the many fraudulent charity donation schemes which have operated in Canada in recent years. In this case, the participants in a donation program were to acquire timeshare units as beneficiaries of a trust for a fraction of their value and then donate them to a charity in exchange for tax receipts for the actual value of the units. No donations ever took place as the timeshare units never existed, and no trust was ever settled.

The appellant (Guindon) made, participated in, assented to or acquiesced in the making of 135 tax receipts that she knew, or would reasonably be expected to have known, constituted false statements that could be used by the participants to claim an unwarranted tax credit under the Income Tax Act (the Act). Penalties of $546,747 in respect of false statements made in the context of the donation program were assessed under section 163.2 of the Act. The appellant appealed the assessment.

Section 163.2 of the Act provides that monetary penalties can be assessed against third parties who knowingly, or in circumstances in which they should have known, make or participate in making a false statement on an income tax return. The appellant, who was a lawyer, was involved in the donation program as both the signatory of the charitable recipient of the timeshare donations (Les Guides Franco-Canadiennes District d’Ottawa (the Charity)), and as legal advisor for the developers of the timeshare (and trust) program. The third party assessment against the appellant resulted from the fact that while tax receipts were issued by the Charity involved, neither the establishment of the trust nor the transfers of the timeshares to the Charity were found actually to have occurred.

There were two main issues considered by His Honour (at [5]–[7]):

1.       Whether the third party penalty imposed under section 163.2 of the Act involved by its very nature a criminal proceeding;

2.       Whether the appellant should be found liable to a third party penalty pursuant to subsection 163.2(4) of the Act in respect of false statements (the tax receipts) made in the context of the program.

In respect of issue 1, His Honour said that (at [5]–[6]):

Such a finding would entail far-reaching consequences. If it was found that section 163.2 of the Act leads to a true penal consequence, then the protection of section 11 of the Canadian Charter of Rights and Freedoms (the Charter) would apply to guarantee fundamental substantive and procedural legal rights to any individual charged with an offence under section 163.2. Notably, the right to be presumed innocent would raise the burden of proof from that of proof on a balance of probabilities to proof beyond a reasonable doubt. Furthermore, if this Court finds that section 163.2 of the Act creates an offence, that offence would, pursuant to subsection 34(2) of the Interpretation Act, need to be prosecuted in provincial court under the criminal procedure provided for in the Criminal Code.

The respondent, the Minister of National Revenue (the Minister), argued that section 163.2 gave rise to a civil penalty only. It was not designed to be penal in nature, but rather to uphold the internal integrity of the taxation system. The appellant was liable for a third party penalty under section 13.2(4) of the Act because her conduct was ‘wilfully blind’, reckless and showed a wanton disregard of the law. The appellant was not only the president of the Charity but also the lawyer who signed a misleading opinion on the matters in contention. She knew that no supporting documents were ever provided by the principals of the program and, thus, that she could not rely on the legal opinion. Her responsibilities as an officer of a charity did not cease to exist at the time the legal opinion was signed or the tax receipts issued. On the contrary, the appellant had ongoing responsibilities which required that proper actions be taken to disclose to the participants and to the Canada Revenue Agency (CRA) any false statement those documents may have contained.

The appellant argued that section 163.2 of the Act is a provision with true penal consequences, and so comes within section 11 of the Charter. In support of this contention, she quoted R v Wigglesworth, 1987 CanLII 41 (SCC) where the Supreme Court of Canada held that proceedings will be subject to section 11 protection where the consequences include ‘imprisonment or a fine which by its magnitude would appear to be imposed for the purpose of redressing the wrong done to society at large rather than to the maintenance of internal discipline within the limited sphere of activity’. Following this rationale, the appellant argued that section 163.2 of the Act attracted the protection of section 11 by its unlimited terms as regards both the magnitude of the punishment and the time limit in which it can be imposed. The appellant further argued that the wrong done to society contemplated by the Wigglesworth test ‘does not require harm to the fisc’. In the context of section 163.2 of the Act, the harm contemplated is aid given by one person to a taxpayer which damages the integrity of the Canadian system of ‘honest self-reporting’.

His Honour held that section 163.2 of the Act does create a penal consequence and thus attracted the protection of section 11 of the Charter. He relied on the Supreme Court decision in R v Wigglesworth. In that case, the Supreme Court determined that a matter could fall within the ambit of section 11 in two situations, namely, where the matter is by its very nature a criminal proceeding, or where the offence involves a sanction that has a true penal consequence. His Honour said that both these reasons applied in this case. He said (at [70]):

[A]pplying the rationale enunciated in Wigglesworth, section 163.2 of the Act should be considered as creating a criminal offence because it is so far-reaching and broad in scope that its intent is to promote public order and protect the public at large rather than to deter specific behaviour and ensure compliance with the regulatory scheme of the Act. Furthermore, the substantial penalty imposed on the third party — a penalty which can potentially be even greater than the fine imposed under the criminal provisions of section 239 of the Act, without the third party even benefiting from the protection of the Charter — qualifies as a true penal consequence.

Since this was a donation program case, there were many participants who would be found to have avoided significant tax by virtue of donation receipts improperly claimed in their returns, so that the third party penalties could be very substantial. He said (at [62]):

[T]he Appellant was assessed a penalty in the amount of $546,747. This amount was calculated by adding up the amounts of the penalties under subsection 163(2) of the Act to which each of the 134 other donors would have been liable. The penalty under subsection 163.2(5) thus has the potential of increasing ad infinitum depending on the number of ‘other persons’ involved. As the Appellant submitted, where the penalty is unlimited and is imposed on a third party, it seems evident that its purpose is to redress a wrong done to society and consequently ceases to be a purely administrative matter or one of internal discipline.

Thus, the section 163.2 penalty was held to be criminal in nature leading to the conclusion that all the criminal protections of section 11 of the Charter applied: the presumption of innocence, protection from self-incrimination, a trial to be held in provincial court in accordance with criminal (rather than tax) procedure, and a burden of proof beyond a reasonable doubt. This meant that in future there would be a higher burden imposed on the CRA in applying penalties in these sorts of cases.

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Implications of this case

This case will continue as it is subject to appeal by the Crown. The decision thus far is very important in Canadian tax law as it demonstrates that third party penalties which were previously thought to be civil in nature are in fact criminal. This means that they will be afforded the constitutional protections of the Canadian Charter of Rights and Freedoms. The CRA will therefore have a higher threshold to meet in future, when assessing and imposing third party penalties.

The case also points to the danger for lawyers, accountants and tax advisors in providing tax advice to charities and others without the necessary expertise. His Honour said that the appellant would have been liable for the penalty even if he found it was a civil one. He commented that the gravity of the penalty would impose a stigma on the person found liable and cause damage to her reputation both professionally and personally.