Tax Court decision protects charity directors – unless it’s appealed

publication date: Dec 5, 2012
 | 
author/source: Adam Aptowitzer
For years, tax professionals have faced potentially massive fines for leading their clients into tax arrangements to which the Canada Revenue Agency afterwards took issue. The threat of the "Third Party Civil Penalties" of the Income Tax Act has hung over the heads of tax advisors, planners, and preparers like the sword of Damocles. What Canadians didn't consider was that the same provision could be applied to the directors of charities as well.Adam Aptowitzer photo

In a recent decision successfully argued by the author, the Tax Court of Canada has come to their rescue. 

In Guindon, the third party was a lawyer who signed charitable donation tax receipts in her capacity as the director of a charity. When the receipts turned out to be false, she was assessed a penalty of $546,747. 

Infinite penalties 

The law states that anyone who makes, participates in, assents to or acquiesces in the making of a false statement in a tax return by someone else can be liable to a penalty. The penalty is based on the amount the individual who filed the return could be fined by the CRA.  What is not obvious is that the penalties are cumulative. If there are a large number of people who filed returns with the false statement, then the penalty is potentially very large.  As there is no cap on the penalty, it will be added to time and again by each person who uses the plan. 

Even worse, there is no limitation period. In effect, the CRA can assess charities and directors of a charity with enormous penalties decades after the infraction. 

To make matters still worse, the CRA proceeded on the basis that these were civil penalties.  In effect, this denies the benefit of Charter protections to anyone assessed a penalty under that provision. 

New protections 

In Guindon, the Tax Court agreed with the director of the charity that these ruinous penalties are not civil, but rather penal in nature. This has major implications for everyone involved with preparing tax statements or signing charitable donation tax receipts. Anyone assessed such a penalty will now receive protections under the Charter, such as presumed innocence and the right to be proven guilty by the criminal standard of "beyond a reasonable doubt." 

Principles that apply in other criminal investigations will presumably kick in as well, such as the requirement to seek a warrant to seize additional information. 

Given the potentially infinite nature of these penalties and the limitless time the CRA has to assess them, it seems only reasonable that there be some protections for Canadian citizens facing financial and professional ruin. Nevertheless, it's likely the CRA will appeal Guindon. Hopefully Ms. Guindon will be able to continue the fight on behalf of all of us who may one day face a similar situation. In the meantime, it appears the "Third Party ‘Civil' Penalties" are due to be renamed.

Adam Aptowitzer of Drache Aptowitzer LLP is a charity law lawyer with a national practice based in Ottawa. He has been published in Canadian Taxpayer, Canadian Fundraising & Philanthropy and the Not-for-Profit News. He has also published a widely distributed study on the regulation of Canadian charities with the C.D. Howe Institute. 

As a speaker, he has presented to the National Symposium of Charity Law, the C.D. Howe Institute, the Association of Fundraising Professionals, the Canadian Association of Gift Planners, the Ottawa Estate Planning Council and various large and small Canadian charities. He has also given expert advice on Parliament Hill. Adam is an executive member of the Canadian Bar Association's Charity and Not-for-Profit Law section. 

For speaking engagements and consultations, contact him at 613-237-3300 or visit http://www.drache.ca.


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