June 14, 2013

New CRA Application for “Municipal or public bodies performing a function of government in Canada”

The CRA has just released its new process for recognizing “municipal or public bodies performing a function of government in Canada”.  This will be of particular interest to Aboriginal bands, school boards and others who may wish to obtain this recognition as it makes them a qualified donee and therefore able to issue official donation receipts and also more easily receive funds from other Canadian charities.  We hope that this new process will facilitate philanthropy in the Aboriginal space.  There are probably over a thousand organizations that could one day be listed on the CRA website, which will make donations to them far simpler and easier.  It is important to note that as of January 1, 2014 for a group to be recognized under the category “municipal or public bodies performing a function of government in Canada” it cannot self-assess but must be on the list.  Some organizations will want to proceed quickly with the process as CRA has not set out a service standard yet and therefore it is difficult to know how long the process will take.  It is also interesting to note that “...organizations that apply before January 1, 2014, and that can show that they met the requirements to be a municipal or public body performing a function of government in Canada as of January 1, 2012, will be given qualified donee status retroactive to that date.”  Although a lawyer is not required to send the letter to CRA some organizations may wish to retain legal counsel to assist with this and other matters such as appropriate issuance of receipts and required books and records.

Here is the note from the Charities Directorate of CRA:

“Application process

To apply for registration, an applicant should send a letter stating that it is applying for registration as a qualified donee and should include an explanation of how it meets the requirements for a municipal or public body performing a function of government in Canada. The letter and supporting documentation should be sent to the Canada Revenue Agency’s Charities Directorate at:

Charities Directorate
Canada Revenue Agency
Ottawa ON K1A 0L5

For detailed information about the criteria used by the CRA to determine whether an entity qualifies as a municipal or public body performing a function of government and the supporting documentation that must be submitted, go to Qualified Donee – Municipal or Public Body Performing a Function of Government in Canada.

In addition, the letter should be signed by at least one of the applicant’s officials and also be accompanied by:
•a complete list of the applicant’s current officials; and
•the address for the physical location of its books and records (a post office box or rural route number alone is not enough).

An applicant that meets the requirements will receive a letter confirming its registration and its name will be added to the publicly available list of qualified donees on the CRA Web site. If an applicant does not meet the requirements, it will receive a letter explaining why. An applicant that disagrees with the CRA’s decision can file an objection with the Minister of National Revenue through the CRA Appeals Branch. For more information, go to Objections below.

Note

As of January 1, 2014, the CRA will end the interim measures put in place while the application process was being developed, which allowed the CRA to continue to recognize all municipal and public bodies under 149(1)(c) as qualified donees. As of that date, only registered municipal and public bodies included on the CRA’s list will have qualified donee status. This means that as of January 1, 2014, only those municipal and public bodies appearing on the list will have the ability to issue official donation receipts and receive gifts from registered charities. However, organizations that apply before January 1, 2014, and that can show that they met the requirements to be a municipal or public body performing a function of government in Canada as of January 1, 2012, will be given qualified donee status retroactive to that date.”

For further information from CRA see:  http://www.cra-arc.gc.ca/chrts-gvng/qlfd-dns/mncplpblcbds-eng.html

Here is a note from CRA in terms of the criteria that was recently posted at http://www.cra-arc.gc.ca/chrts-gvng/qlfd-dns/mncplpblcbds-ltr-eng.html  although at http://www.globalphilanthropy.ca (TM) we published that letter on May 12, 2013 at http://www.canadiancharitylaw.ca/index.php/blog/comments/cra_letter_on_municipal_or_public_bodies_performing_a_function_of_governmen/

“Qualified Donee – Municipal or Public Body Performing a Function of Government in Canada

March 7, 2013

Attention: Policy, Planning and Legislation Division
Charities Directorate

Qualified donee: Municipal or Public Body Performing a Function of Government in Canada

We are writing in response to your request for our views with respect to a “municipal or public body performing a function of government in Canada” pursuant to paragraph 149(1)(c) of the Income Tax Act (the “Act”). Your request has arisen due to the requirement that, as of January 1, 2012, a municipal or public body performing a function of government in Canada must apply for registration with the Canada Revenue Agency (“CRA”) in order to become or remain a qualified donee in subsection 149.1(1) of the Act.

Specifically, a municipal or public body performing a function of government in Canada that has applied to and is registered by the Minister of Revenue, is a “qualified donee” pursuant to subparagraph (a)(iii) of the definition of “qualified donee” in subsection 149.1(1) of the Act. Sections 118.1 and 110.1 of the Act provide that within specified limits, and if supported by official receipts, individual taxpayers may claim a credit against taxes payable, and corporations may claim a deduction in computing taxable income, respectively, for an eligible amount of a gift made to a “qualified donee”. The qualified donee must be shown on a list maintained and made public by the CRA. The requirement to apply for, be registered, and be maintained on a publicly available list became effective January 1, 2012.

We understand that the Charities Directorate is currently developing a process for a municipal or public body performing a function of government in Canada to apply for registration as a qualified donee and is seeking our assistance in this regard.

Our comments

Municipal or public body performing a function of government in Canada within the meaning of paragraph 149(1)(c) of the Act

Municipal body

The term “municipal body” is not defined in the Act. However, we consider a municipal body to have similar characteristics to a municipality. In this regard, a municipal body is typically considered to be a body established or exercising a power under a municipal act or a similar statute of a province or territory with respect to governing the affairs or purposes of a geographic area and is accountable to those governed by it.

Public body

The term “public body” is also not defined in the Act. A public body is typically a body that acquires both its existence and its authority from a statute enacted by a legislature, and whose functions and transactions are for the benefit of, and affect the whole community of, persons to which its authority extends. Generally, a public body has a governance purpose and is accountable to those governed, regulated or represented by it.

Generally, a public body is:
1. An Indian band as defined in the Indian Act with procedures to elect Chief and council.

2. Other Aboriginal governments with election procedures.

3. A body (whether incorporated or not, the members of which may be elected or appointed) established under or as a result of implementing a statute with specific authorization and duties assigned by the statute to the body to develop, administer or regulate governance functions.

Further, in our view, if a public body is incorporated, the federal government or a provincial or territorial government, or the “public” that the corporation is serving or representing should have some specific control over the actions and operation of the corporation and the corporation should be accountable to either that government or that public.

Performing a function of government in Canada

In addition to being a municipal or public body, an entity must also be performing a “function of government” in Canada in order to qualify for the exemption from tax provided by paragraph 149(1)(c) of the Act. Again, the term “function of government” is not defined in the Act and reference must be made to the ordinary usage of this term.

A government typically taxes its residents and sets laws for the orderly management of the area over which it has jurisdiction. As part of managing the area, the government provides a wide variety of services. It is important to note that any particular service provided by a government is not necessarily equivalent to a “function of government”.

In our view, a function of government generally means an activity or group of activities undertaken to meet a governance role or purpose within a geographic area. Historically, the CRA has required that to be performing a function of government an entity must have the ability and powers to govern, tax, pass by-laws and/or provide municipal- or provincial-type services to its members/citizens.

The CRA has accepted that providing a range of municipal-type services, such as water, sewage removal, the pick-up of garbage and the maintenance of infrastructure such as roads, sewers and public buildings is a function of government. Further, providing a key service traditionally offered by the provinces or territories such as social services, overseeing of the environment, health services, and education is generally considered to constitute performing a function of government. The CRA also accepts that negotiating a treaty with the federal government, or a provincial or territorial government, is a function of government.

Accordingly, performing a function of government may be demonstrated by the following:
•Laws and Taxation
◦Enacting and enforcing laws, by-laws or rules which all citizens (or, in the case of an Indian band or other Aboriginal government, all of the band’s or other Aboriginal group’s citizens or members) must follow.
◦Imposing and collecting taxes.

•In the case of an Indian band or other Aboriginal government:
◦Negotiating and implementing a treaty or self-government agreement with the Crown (e.g., a federal, provincial or territorial government), and continued administration of the agreement.
◦An Indian band has passed by-laws under both sections 81 and 83 of the Indian Act.
◦An Indian band has passed by-laws under both section 81 of the Indian Act and subsection 5(1) of the First Nations Fiscal and Statistical Management Act.

•Being responsible for and providing provincial-type services or a range of municipal-type government services as follows: ◦
Provincial-type services
◾Education
◾Health care
◾Protection of the environment
◾Natural resources
◾Designation of park land and other special use property

◦
Municipal-type services
◾Sewage removal
◾Waste disposal
◾Water treatment and delivery
◾Building of infrastructure
◾Maintenance of infrastructure (such as sewers, public buildings and maintaining and clearing of roads)
◾Public transit
◾Fire protection services
◾Police services
◾Paramedic/ambulance services
◾Recreational services
◾Social services
◾Library services

Note that any one of these activities or services may not be sufficient for the entity to be considered a municipal or public body performing a function of government; it depends on the scope of the service or activity.

Geographical boundaries

As mentioned, we would expect a municipal or public body performing a function of government in Canada to have a governance role or purpose within a geographic area.

Proposed subsection 149(11) of the Act provides that the geographical boundaries of a municipal or public body performing a function of government to be either:

“…(a) the geographical boundaries that encompass the area in respect of which an Act of Parliament or an agreement given effect by an Act of Parliament recognizes or grants to the body a power to impose taxes; or

(b) if paragraph (a) does not apply, the geographical boundaries within which that body has been authorized by the law of Canada or a province to exercise that function…”

The explanatory notes explain that proposed subsection 149(11) of the Act is added to define, for the purposes of section 149, the geographical boundaries of a municipal or public body performing a function of government in Canada. The explanatory notes state:

“For example, if a particular self-governing First Nation meets the definition of “a public body performing a function of government in Canada,” it is intended that the relevant geographic boundary would delineate the area where the self-government agreement, or the statute enacting self-government powers, provides the First Nation authority to impose direct taxes. As a second example, if a particular Indian Band meets the definition of “a public body performing a function of government in Canada,” it is intended that the geographic boundary of the Indian Band be the band’s reserves as defined in the Indian Act. Similarly, if a particular school board meets the definition of “a municipal or public body performing a function of government in Canada” it is intended that the geographic boundary of the school board be the area of jurisdiction of the board as defined by provincial legislation or regulation.”

Application process

As mentioned, your Directorate is currently developing the process for a municipal or public body performing a function of government in Canada to apply for registration as a qualified donee (the “Applicant”). You have requested assistance with respect to the documentation required of an Applicant for registration as a qualified donee.

In our view, an Applicant must clearly provide support to indicate that it is a municipal or public body performing a function of government in Canada. Presently, as there is no prescribed form to apply for registration, an Applicant should submit a letter to the CRA (Charities Directorate) and include documentation such as the following:
•Identifying information of the Applicant, i.e., name, mailing address, business number, tax services office and tax centre servicing the entity.

•A statement as to whether, to the best of the Applicant’s knowledge, the issue of whether the Applicant is a municipal or public body performing a function of government in Canada, within the meaning of paragraph 149(1)(c) of the Act, is being considered or has previously been considered by the CRA.

•If the Applicant has previously been determined by the CRA to be a municipal or public body performing a function of government in Canada, a copy of the determination letter or of the advance income tax ruling letter, or any other relevant correspondence previously issued by the CRA.

•A complete description of the Applicant. The description should include:
◦an explanation of how the Applicant was created and how it is organized (how the officials are elected or appointed);
◦the Applicant’s purpose;
◦the geographical area over which the Applicant has responsibility and authority;
◦ an explanation of the persons that the Applicant is governing and accountable to; i.e., the residents and members for which the Applicant is responsible in its authorized area; and
◦ an explanation of the responsibilities and powers of the Applicant and of the programs and services offered by the Applicant. The description of programs and services should explain what the Applicant is actually performing, not simply what it is empowered to do.

•A statement as to how the Applicant meets the criteria as a municipal or public body performing a function of government in Canada.

•An explanation of the source of revenues of the Applicant, including any funding received from other governments.

•If relevant, a description of any other activities carried on by the Applicant, such as business activities. The Applicant should also advise if any activities are carried out by a subsidiary entity(s) of the Applicant.

•Copies of supporting documents and agreements supporting the Applicant’s request as necessary. Some of these supporting documents are shown in the examples below.

•A summary of the relevant facts contained in the supporting documents and agreements.

It should be noted that the above information should not be considered an exhaustive list. Additional information may be required as each application is reviewed. In addition, all of the documentation suggested may not be necessary in every situation.

We provide the following two examples for your assistance:

Example: An Indian band that is a public body performing a function of government in Canada

Generally, the CRA has accepted that an Indian band or Indian organization that clearly provides government services and is accountable to either the federal, or a provincial or territorial government, or directly to the band members it represents, is a public body. An Indian band is considered to be performing a function of government if it demonstrates that it performs functions and provides services in a manner generally exhibited by a government.

Along with the general information described above, information and documentation that support an Indian band’s application would be:
•The fact that the Indian band is a band as defined in subsection 2(1) of the Indian Act. This information can be verified on the Aboriginal Affairs and Northern Development Canada website.

•A statement with respect to the members of the band and the reserves over which the band has responsibility, or in the case of a self-governing First Nation, the lands transferred to it pursuant to a land settlement agreement or self-government agreement.

•A description of the election procedures of the Chief and council (generally the election procedures are in accordance with the provisions of the Indian Act).

•If the Indian band has section 81 and 83 bylaws passed pursuant to the Indian Act, or section 81 of the Indian Act and section 5 of the First Nation Fiscal and Statistical Management Act, copies of the bylaws should be submitted.

•If applicable, information explaining that the Indian band is involved in the negotiation of a settlement agreement with Canada or a province or territory and will continue to be involved in the administration and implementation of the settlement agreement. This can be evidenced by documentation such as letters of intent to negotiate a treaty, information relating to the stage of the treaty negotiation, or agreements entered into relating to the implementation of taxes.

•A description of the programs and services for which the First Nation is responsible and is providing. These programs and services may be supported with a copy of agreements between Health Canada and/or Aboriginal Affairs and Northern Development Canada.

Example: Other organization that is a municipal or public body performing a function of government in Canada

Along with the general information described above, information and documentation that support an organization’s application may include:
•Creating documents, such as the Act of Parliament or an agreement given effect by Parliament, or the authority that recognizes or grants to the body the power to impose taxes, or gives power and authority to the entity to govern in a geographical area.

•Financial statements, including a statement of revenue and expenses and a statement of assets and liabilities. The statement should be descriptive of the sources of the entity’s income and the main expenditures of the entity.

Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch”

June 12, 2013

FCA overturns TCC in Guindon case - reinstates third party civil penalties for charity tax scheme

The Federal Court of Appeal (FCA) has overturned a Tax Court of Canada (TCC) decision in Guindon.  The FCA found that, in this case in which no notice of constitutional questions was served by Guindon, “the Tax Court did not have the jurisdiction to find that section 163.2 of the Income Tax Act creates an offence, triggering the rights under section 11 of the Charter.” 

The Court notes “[9] Ms. Guindon is a lawyer, practising mainly in the area of family law and wills and estates. She became involved in a charitable donation scheme called “The Global Trust Charitable Donation Program.” [10] Ms. Guindon provided a legal opinion vouching for the scheme. She signed tax receipts on behalf of the charity. In her legal opinion, she represented that she had reviewed certain documentation. She had not. The scheme was a sham. A full account of the facts appears in the reasons of the Tax Court.” The CRA assessment of penalties of $564,747 was upheld by the FCA. 

The FCA explains the background of the Third-Party Civil Penalties and discusses in detail the penalties and even responds to some academic articles on the provision. The FCA noted “[37] In my view, the assessment of a penalty under section 163.2 is not the equivalent of being “charged with a [criminal] offence.” Accordingly, none of the section 11 rights apply in section 163.2 proceedings. In this regard, I disagree with the Tax Court’s conclusion on this question of law.  [38] The Income Tax Act contains a complex web of provisions constituting a discrete regulatory and administrative field of endeavour with unique characteristics. Justice Wilson of the Supreme Court of Canada described it in this way: A chief source of revenue for the federal government is the collection of income tax. The legislative scheme which has been put in place to regulate the collection of tax is the Income Tax Act. The Act requires taxpayers to file annual returns and estimate their tax payable as a result of calculations made in these returns. In essence, the system is a self-reporting and self-assessing one which depends upon the honesty and integrity of the taxpayers for its success. (R. v. McKinlay Transport Ltd., [1990] 1 S.C.R. 627.)  [39] The provision of accurate information that permits the proper calculation of tax is another aspect of self-compliance. This is achieved through tax returns, reports, certificates, forms and other information supplied. Timely elections, designations, reports and payments also allow for the efficient administration of the tax system. [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.”

Here is a PDF of the decision: A-459-12_20130612_Guindon_2013_FCA_153.pdf

Here are large portions of the text of the case:

Date: 20130612
Docket: A-459-12
Citation: 2013 FCA 153

CORAM: NOËL J.A.
GAUTHIER J.A.
STRATAS J.A.

BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
JULIE GUINDON
Respondent

Heard at Ottawa, Ontario, on June 5, 2013.
Judgment delivered at Ottawa, Ontario, on June 12, 2013.

REASONS FOR JUDGMENT BY: STRATAS J.A.

CONCURRED IN BY: NOËL J.A.
GAUTHIER J.A.

Date: 20130612
Docket: A-459-12
Citation: 2013 FCA 153

CORAM: NOËL J.A.
GAUTHIER J.A.
STRATAS J.A.

BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
JULIE GUINDON
Respondent

REASONS FOR JUDGMENT

STRATAS J.A.

A. Introduction

[1] The Crown appeals from the judgment dated October 2, 2012 of the Tax Court of Canada (per Justice Bédard): 2012 TCC 287.

[2] The Tax Court set aside a penalty assessed against the respondent, Ms. Guindon, under section 163.2 of the Income Tax Act, R.S.C. 1985 c. 1 (5th Supp.). The Tax Court found that section 163.2 of the Act creates an “offence” within the meaning of section 11 of the Charter. Therefore, in the section 163.2 proceedings against Ms. Guindon, she was entitled to the rights guaranteed by section 11. In this case, Ms. Guindon was not given these rights. Therefore, the Tax Court set aside the assessment.

[3] For the reasons set out below, the Tax Court did not have the jurisdiction to find that section 163.2 of the Income Tax Act creates an offence, triggering the rights under section 11 of the Charter. That finding would require a ruling that, as a constitutional matter, some or all of section 163.2 was invalid, inoperable or inapplicable. The jurisdiction to make that ruling is present only when a notice of constitutional question has been served. None was served.

[4] In this Court, as an alternative submission, Ms. Guindon pointed to some of the section 11 rights, such as the requirement that liability be demonstrated only upon proof beyond a reasonable doubt. In her view, despite the failure to serve a notice of constitutional question, she could assert some of them because they supplemented section 163.2 and did not conflict with its wording.

[5] For the reasons set out below, Ms. Guindon could not assert only some of the section 11 rights – either all of the section 11 rights apply, or none of them. But even if she could assert only some of them, the Wigglesworth/Martineau test for criminality has not been met – proceedings under section 163.2 are not criminal by their nature, nor do they impose true penal consequences.

[6] Notwithstanding its finding that the assessment against Ms. Guindon should be set aside because of non-compliance with section 11 of the Charter, the Tax Court went on to consider the correctness of the assessment. It interpreted section 163.2 in a manner favourable to Ms. Guindon. However, on the facts, even on that favourable interpretation of section 163.2, the Tax Court confirmed the correctness of the assessment. Put another way, the Tax Court would have upheld the penalty against Ms. Guindon had it not found that proceedings under section 163.2 attract the protection of section 11 of the Charter.

[7] In this Court, the Crown submits that the Tax Court’s interpretation of section 163.2 was incorrect. In the circumstances, we need not determine this issue: even under the interpretation of section 163.2 most favourable to Ms. Guindon, the Tax Court upheld the assessment.

[8] Therefore, I would allow the appeal, set aside the judgment of the Tax Court and restore the assessment against Ms. Guindon, with costs here and below.

B. The basic facts

[9] Ms. Guindon is a lawyer, practising mainly in the area of family law and wills and estates. She became involved in a charitable donation scheme called “The Global Trust Charitable Donation Program.”

[10] Ms. Guindon provided a legal opinion vouching for the scheme. She signed tax receipts on behalf of the charity. In her legal opinion, she represented that she had reviewed certain documentation. She had not. The scheme was a sham. A full account of the facts appears in the reasons of the Tax Court.

[11] The Minister assessed a penalty against Ms. Guindon under section 163.2 of the Act for 134 tax receipts issued to participants in the charitable donation scheme. For these receipts, she received penalties ranging from $1,000 to $25,114, on the basis that she knew, or would have known but for wilful disregard of the Income Tax Act, that the tax receipts issued and signed by her constituted false statements. These penalties totalled $564,747.

[12] Subsection 163.2(4) is the key provision:

(4) Every person who makes or furnishes, participates in the making of or causes another person to make or furnish a statement that the person knows, or would reasonably be expected to know but for circumstances amounting to culpable conduct, is a false statement that could be used by another person (in subsections (6) and (15) referred to as the “other person”) for a purpose of this Act is liable to a penalty in respect of the false statement. (4) La personne qui fait un énoncé à une autre personne ou qui participe, consent ou acquiesce à un énoncé fait par une autre personne, ou pour son compte, (ces autres personnes étant appelées « autre personne » au présent paragraphe, aux paragraphes (5) et (6), à l’alinéa (12)c) et au paragraphe (15)) dont elle sait ou aurait vraisemblablement su, n’eût été de circonstances équivalant à une conduite coupable, qu’il constitue un faux énoncé qui pourrait être utilisé par l’autre personne, ou pour son compte, à une fin quelconque de la présente loi est passible d’une pénalité relativement au faux énoncé.

[13] Subsection 163.2(5) quantifies the penalty under subsection 163.2(4) as the lesser of (a) $100,000 plus the person’s gross compensation in relation to the statement, and (b) the penalty hypothetically payable by the taxpayer to which the statement relates, usually 50% of the amount of tax sought to be avoided. Ms. Guindon’s fine was based on the latter calculation, done separately for each of the 134 tax receipts.

[14] This penalty provision was introduced in the 1999 Federal Budget. Ever since its enactment, the Canada Revenue Agency has viewed it as imposing a civil penalty: Canada Revenue Agency, Information Circular IC 01-1, “Third-Party Civil Penalties” (September 18, 2001). However, noting the penalty’s potential scope, many outside of the Canada Revenue Agency have maintained that the penalty, in substance, is a criminal penalty as opposed to a civil penalty.

[15] In the Tax Court and in this Court, Ms. Guindon so maintains. She submits that if it imposes a criminal penalty, she is entitled to the rights under section 11 of the Charter. Section 11, and the rights it guarantees, are as follows:

11. Any person charged with an offence has the right

(a) to be informed without unreasonable delay of the specific offence;

(b) to be tried within a reasonable time;

(c) not to be compelled to be a witness in proceedings against that person in respect of the offence;

(d) to be presumed innocent until proven guilty according to law in a fair and public hearing by an independent and impartial tribunal;

(e) not to be denied reasonable bail without just cause;

(f) except in the case of an offence under military law tried before a military tribunal, to the benefit of trial by jury where the maximum punishment for the offence is imprisonment for five years or a more severe punishment;

(g) not to be found guilty on account of any act or omission unless, at the time of the act or omission, it constituted an offence under Canadian or international law or was criminal according to the general principles of law recognized by the community of nations;

(h) if finally acquitted of the offence, not to be tried for it again and, if finally found guilty and punished for the offence, not to be tried or punished for it again; and

(i) if found guilty of the offence and if the punishment for the offence has been varied between the time of commission and the time of sentencing, to the benefit of the lesser punishment. ...

[16] The full text of the portions of section 163.2 most relevant to this case is as follows:

163.2 (1) The definitions in this subsection apply in this section.

“culpable conduct” means conduct, whether an act or a failure to act, that

(a) is tantamount to intentional conduct;
(b) shows an indifference as to whether this Act is complied with; or

(c) shows a wilful, reckless or wanton disregard of the law.

“entity” includes an association, a corporation, a fund, a joint venture, an organization, a partnership, a syndicate and a trust.
…

“false statement” includes a statement that is misleading because of an omission from the statement.

“gross compensation” of a particular person at any time, in respect of a false statement that could be used by or on behalf of another person, means all amounts to which the particular person, or any person not dealing at arm’s length with the particular person, is entitled, either before or after that time and either absolutely or contingently, to receive or obtain in respect of the statement.

“gross entitlements” of a person at any time, in respect of a planning activity or a valuation activity of the person, means all amounts to which the person, or another person not dealing at arm’s length with the person, is entitled, either before or after that time and either absolutely or contingently, to receive or obtain in respect of the activity.

“participate” includes

(a) to cause a subordinate to act or to omit information; and

(b) to know of, and to not make a reasonable attempt to prevent, the participation by a subordinate in an act or an omission of information.

“person” includes a partnership.

“planning activity” includes
(a) organizing or creating, or assisting in the organization or creation of, an arrangement, an entity, a plan or a scheme; and

(b) participating, directly or indirectly, in the selling of an interest in, or the promotion of, an arrangement, an entity, a plan, a property or a scheme.

“subordinate”, in respect of a particular person, includes any other person over whose activities the particular person has direction, supervision or control whether or not the other person is an employee of the particular person or of another person, except that, if the particular person is a member of a partnership, the other person is not a subordinate of the particular person solely because the particular person is a member of the partnership.

“tax benefit” means a reduction, avoidance or deferral of tax or other amount payable under this Act or an increase in a refund of tax or other amount under this Act.

“valuation activity” of a person means anything done by the person in determining the value of a property or a service.
(2) Every person who makes or furnishes, participates in the making of or causes another person to make or furnish a statement that the person knows, or would reasonably be expected to know but for circumstances amounting to culpable conduct, is a false statement that could be used by another person (in subsections (6) and (15) referred to as the “other person”) for a purpose of this Act is liable to a penalty in respect of the false statement.

(3) The penalty to which a person is liable under subsection (2) in respect of a false statement is

(a) where the statement is made in the course of a planning activity or a valuation activity, the greater of $1,000 and the total of the person’s gross entitlements, at the time at which the notice of assessment of the penalty is sent to the person, in respect of the planning activity and the valuation activity; and

(b) in any other case, $1,000.

(4) Every person who makes, or participates in, assents to or acquiesces in the making of, a statement to, or by or on behalf of, another person (in this subsection, subsections (5) and (6), paragraph (12)(c) and subsection (15) referred to as the “other person”) that the person knows, or would reasonably be expected to know but for circumstances amounting to culpable conduct, is a false statement that could be used by or on behalf of the other person for a purpose of this Act is liable to a penalty in respect of the false statement.

(5) The penalty to which a person is liable under subsection (4) in respect of a false statement is the greater of

(a) $1,000, and

(b) the lesser of

(i) the penalty to which the other person would be liable under subsection 163(2) if the other person made the statement in a return filed for the purposes of this Act and knew that the statement was false, and

(ii) the total of $100,000 and the person’s gross compensation, at the time at which the notice of assessment of the penalty is sent to the person, in respect of the false statement that could be used by or on behalf of the other person.

...

C. Does section 11 of the Charter apply?

(1) The existing jurisprudence, summarized

[17] The Tax Court found that section 163.2 of the Act creates an “offence” such that Ms. Guindon had the rights set out in section 11 of the Charter. In so finding, it applied the jurisprudence set out in R. v. Wigglesworth, [1987] 2 S.C.R. 541 and later cases such as Martineau v. M.N.R., 2004 SCC 81, [2004] 3 S.C.R. 737.

[18] The Tax Court’s summary of that jurisprudence is essentially accurate. A person is entitled to the procedural protections under section 11 of the Charter in two circumstances:

● the matter is, by its very nature, intended to promote public order and welfare within a public sphere of activity. This is to be contrasted with proceedings of an administrative nature instituted for the protection of the public in accordance with the policy of a statute: Martineau, supra at paragraphs 21-22; Wigglesworth, supra at page 560.

● the person is exposed to the possibility of a “true penal consequence,” for example imprisonment or a fine imposed for the purpose of redressing the wrong done to society at large rather than to the maintenance of discipline or compliance within a limited sphere of activity or an administrative field of endeavour: Martineau, supra at paragraph 57; Wigglesworth, supra at page 561.

[19] In light of these cases, the parties agreed that there is a line, albeit sometimes a fuzzy one, between cases to which section 11 protections apply, and those to which they do not.

[20] Drawing the line in matters arising under the Income Tax Act can be a challenge, particularly because the Act touches almost all Canadians, yet much of it is largely administrative in character. Nevertheless, indeed one can discern a line and, as this illustration shows, some cases are clearly on one side or the other:

● It is contrary to the Act to file a late tax return. Under the Act, a penalty may be imposed against a late-filing taxpayer. This is best regarded as a penalty imposed against a taxpayer for a transgression within the self-assessment and reporting system under the Act, and is not a wrong committed against society as a whole. It is aimed at ensuring the maintenance of discipline or compliance within a limited sphere of activity or an administrative field of endeavour. A person subject to such a penalty is not entitled to the protections under section 11 of the Charter.

● It is contrary to the Act to evade or commit tax fraud and, if found guilty, fines or imprisonment can follow. This is best regarded as a sanction imposed for a wrong committed against society as a whole, every bit as much as the offence of fraud in the Criminal Code, R.S.C. 1985, c. C-46. A person charged with tax evasion or tax fraud is entitled to the protections under section 11 of the Charter.

(2) The Tax Court’s conclusion

[21] The Tax Court applied this distinction between criminal and non-criminal matters. It found that section 163.2 of the Act “should be considered as creating a criminal offence” such that Ms. Guindon had the rights set out in section 11 of the Charter (at paragraph 70):

...[Section 163.2 of the Act] 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.

(3) Did the Tax Court have jurisdiction to conclude as it did? Did its jurisdiction depend on the service of a notice of constitutional question?

[22] On appeal to this Court, the Crown submits that the Tax Court had no jurisdiction to find that section 11 of the Charter applied to section 163.2 of the Act because Ms. Guindon did not serve a notice of constitutional question. Ms. Guindon was obligated to serve such a notice on the federal and provincial Attorneys General if she sought a finding that a section of the Act was invalid, inoperative or inapplicable: Tax Court of Canada Act, R.S.C. 1985 c. T-2, section 19.2 and, on appeal, the Federal Courts Act, R.S.C. 1985 c. F-7, section 57.

[23] In substance, Ms. Guindon sought that very thing in the Tax Court and seeks that very thing here.

[24] She contends that section 11 of the Charter applies to penalty proceedings under section 163.2 of the Act. If her contention is accepted, section 11 of the Charter renders the scheme of section 163.2 and related procedural sections invalid, inoperative or inapplicable. Section 11 of the Charter requires that a penalty can only be imposed until after charges are laid and a fair trial is conducted before an independent and impartial tribunal. Section 163.2 and related procedural sections do something quite different: under them, a person can be assessed a penalty and the assessment is binding unless it is varied or overturned by way of reconsideration or in an appeal to the Tax Court. Only in the Tax Court, after liability has been found, is there something akin to an independent and impartial trial of the matter.

[25] In her memorandum of fact and law filed in this Court, Ms. Guindon submitted that, once section 163.2 of the Income Tax Act is regarded as an offence provision, subsection 34(2) of the Interpretation Act, R.S.C. 1985 c. I-21 kicks in. That subsection requires that Criminal Code procedures be followed instead of Income Tax Act procedures. In her view, then, finding section 163.2 is an offence under section 11 of the Charter does not make any procedures in the Income Tax Act invalid, inoperative, or inapplicable.

[26] I disagree. This submission overlooks the language of subsection 34(2), which imposes the procedures of the Criminal Code to any offence, “except to the extent that [another] enactment otherwise provides.” The Income Tax Act otherwise provides. It provides for the assessment of a penalty under section 163.2, a reconsideration procedure and an appeal to the Tax Court.

[27] Therefore, I conclude that in these circumstances, Ms. Guindon was seeking the invalidity, inoperability or inapplicability of sections of the Income Tax Act. A notice of constitutional question had to be served.

[28] The failure to serve a notice of constitutional question took away the Tax Court’s jurisdiction to consider whether section 163.2 of the Act creates a criminal offence, triggering Ms. Guindon’s section 11 rights.

[29] Canadian courts regard the requirement that a notice of constitutional question be served on the Attorneys General as a matter going to the jurisdiction of the Court to consider the constitutional issues: see, e.g., Paluska v. Cava (2002), 59 O.R. (3d) 469 (C.A.). The requirement serves a “useful and essential purpose”: Bekker v. Canada, 2004 FCA 186 at paragraph 9. Attorneys General need notice of a constitutional challenge to the validity, applicability or operability of laws because if the challenge succeeds, their own laws may be affected.

[30] Once notice is provided to them, Attorneys General may intervene and participate in the constitutional challenge. They may wish to adduce important evidence, test other evidence, rebut that evidence, make submissions on the constitutional issues, or any and all of these things. Their participation can affect the outcome of the constitutional challenge.

[31] Before the Tax Court, the Minister objected to Ms. Guindon raising section 11 of the Charter because she had not served a notice of constitutional question. If asked, the Tax Court could have exercised its discretion to adjourn its proceedings to allow a notice of constitutional question to be served. However, in the face of the Minister’s objection, Ms. Guindon did not ask for an adjournment in order to serve the notice. Similarly, in this Court, Ms. Guindon has neither served a notice of constitutional question nor asked for an adjournment.

[32] Therefore, I conclude that it was not open to the Tax Court to find that section 163.2 of the Act prescribes a criminal offence such that all of the rights under section 11 of the Charter apply.

(4) Is it open to Ms. Guindon to assert that only some section 11 rights apply in proceedings conducted under section 163.2 of the Act?

[33] In the event that her failure to serve a notice of constitutional question prevented the Tax Court from finding that all of the section 11 rights apply in section 163.2 proceedings, Ms. Guindon submitted that, nevertheless, some section 11 rights could still apply. She pointed out that some of the section 11 rights do not conflict with the words of section 163.2 and related procedural sections in the Act.

[34] For example, section 11 requires that guilt be found only upon proof of the commission of the offence beyond a reasonable doubt. This does not conflict with the wording of section 163.2 or any other provision of the Act.

[35] In my view, this submission cannot be entertained. It is not open to Ms. Guindon to assert that some of the section 11 rights apply but not others. Under the text of section 11, set out above, either a person is “charged with an offence” and all of the section 11 rights apply, or a person is not “charged with an offence” and none of the section 11 rights apply. Section 11 is not a buffet table where one can pick and choose the rights on offer. The Supreme Court of Canada confirmed this in the context of extradition proceedings, using words of broad application:

To say that some provisions of s.11 apply to extradition hearings, while others do not, involves giving varying meanings to “any person charged with an offence.” The expression must have a constant meaning throughout, one that harmonizes with the various paragraphs of the section.

(R. v. Schmidt, [1987] 1 S.C.R. 500 at page 519.)

(5) Section 163.2 of the Act does not create an “offence” within the meaning of section 11 of the Charter

[36] Even if it were open to Ms. Guindon to submit that only some of the section 11 rights apply, the submission still fails.

[37] In my view, the assessment of a penalty under section 163.2 is not the equivalent of being “charged with a [criminal] offence.” Accordingly, none of the section 11 rights apply in section 163.2 proceedings. In this regard, I disagree with the Tax Court’s conclusion on this question of law.

[38] The Income Tax Act contains a complex web of provisions constituting a discrete regulatory and administrative field of endeavour with unique characteristics. Justice Wilson of the Supreme Court of Canada described it in this way:

A chief source of revenue for the federal government is the collection of income tax. The legislative scheme which has been put in place to regulate the collection of tax is the Income Tax Act. The Act requires taxpayers to file annual returns and estimate their tax payable as a result of calculations made in these returns. In essence, the system is a self-reporting and self-assessing one which depends upon the honesty and integrity of the taxpayers for its success.

(R. v. McKinlay Transport Ltd., [1990] 1 S.C.R. 627.)

[39] The provision of accurate information that permits the proper calculation of tax is another aspect of self-compliance. This is achieved through tax returns, reports, certificates, forms and other information supplied. Timely elections, designations, reports and payments also allow for the efficient administration of the tax system.

[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.

[43] This conclusion is confirmed by a particular feature of the Income Tax Act. The Act contains approximately sixty penalty provisions, including section 163.2. This is in contradistinction from the provisions in the Act that create “offences.” A comparison of the penalty provisions and the offence provisions in the Act reveals something most salient to the question before us.

[44] Each of the penalty provisions, including section 163.2, prescribes a non-discretionary fixed amount or a non-discretionary formula for the calculation of the penalty to be included in the assessment. In no way does the Minister evaluate the moral blameworthiness or turpitude of the conduct, including any mitigating circumstances. Indeed, based on the rather mechanical nature of the task of preparing an assessment and the type of information available to the Minister, the Minister is not equipped to do such a thing. Accordingly, these provisions, including section 163.2, seem directed to maintaining discipline or compliance within a discrete regulatory and administrative field of endeavour, rather than redressing and condemning morally blameworthy conduct or a public wrong.

[45] On the other hand, each of the offence provisions is punishable by a fine, imprisonment, or both, none of which is fixed or calculated by a rigid formula. Instead, each is punishable by a range of sanctions – for example, in the case of tax evasion under section 239, a term of imprisonment up to a maximum or a fine between a certain minimum or maximum. The judge’s task is not mechanical, but discretionary. In sentencing, the judge is entitled to take into account, among other things, the moral blameworthiness or turpitude of the conduct, including any mitigating circumstances. Accordingly, the offence provisions do more than merely maintain discipline or compliance within a discrete regulatory and administrative field of endeavour. They also redress and condemn morally blameworthy conduct or a public wrong.

[46] Ms. Guindon points out that the penalties under section 163.2 can be large. This is true, but the size of a penalty does not alone dictate whether section 11 of the Charter applies: Martineau, supra. Sometimes administrative penalties must be large in order to deter conduct detrimental to the administrative scheme and the policies furthered by it: Re Cartaway Resources Corp., 2004 SCC 26, [2004] 1 S.C.R. 672. Many cases confirm that large penalties, indeed very large penalties, can qualify as administrative monetary penalties governed by administrative law principles, free from the requirements of section 11 of the Charter: United States Steel Corporation v. Canada (Attorney General), 2011 FCA 176; Rowan v. Ontario Securities Commission, 2012 ONCA 208; Lavallee v. Alberta (Securities Commission), 2010 ABCA 48; Martineau, supra.

[47] Under subsection 163.2(4), the provision engaged in the present case, the maximum possible penalty for a person making a false statement is $100,000 plus the person’s gross compensation in relation to that statement. Such a magnitude 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 Corporation, supra, at paragraph 77.

[48] Ms. Guindon also draws our attention to the reference to “culpable conduct” in section 163.2 and urges that it imports a notion of criminality into the matter. Taken in isolation, assessed in the abstract, and understood in its colloquial meaning, “culpable conduct” does suggest “guilty” conduct. But in the Act “culpable conduct” has a defined meaning that sets out the elements that must be present before the Minister can assess a penalty under section 163.2 of the Act. This definition does not bring within it the notion of “guilt” or conduct violating some criminal standard.

[49] Incidentally, in this appeal, the parties debated the meaning of “culpable conduct.” Accepting the more exacting definition of “culpable conduct” proposed by Ms. Guindon, the Tax Court nevertheless found on the facts that Ms. Guindon had engaged in such conduct. Therefore, it is unnecessary for us in this appeal to decide this issue.

[50] In another submission before us, Ms. Guindon emphasizes the need for section 11 Charter rights to apply given the serious sanctions that may be imposed under section 163.2 of the Act. She warns that unless section 11 protections are afforded, great unfairness will result. The short answer is that section 11 Charter rights apply only when the Wigglesworth/Martineau test is met. The discussion above shows that it has not been met.

[51] Some commentators have also expressed concerns about the unfairness of section 163.2 of the Act and the potential for misuse of the section: see, e.g., William I. Innes and Brian J. Burke, “Adviser Penalties: How Will the Courts Construe Section 163.2?”, 2001 Conference Report, Report of Proceedings of the Fifty-Third Tax Conference (Toronto: Canadian Tax Foundation, 2002); Warren J.A. Mitchell, “Civil Penalties: A Wolf in Sheep’s Clothing?”, 2000 Conference Report, Report of Proceedings of the Fifty-Second Tax Conference (Toronto: Canadian Tax Foundation, 2001); Brian Nichols, “Civil Penalties for Third Parties”, 1999 Ontario Tax Conference (Toronto: Canadian Tax Foundation, 2000). In light of these well-considered expressions of concern, some additional words may be appropriate.

[52] In my view, many of the concerns expressed are overstated.

[53] The jurisprudence concerning section 163.2 is in an embryonic state. What now appears to some to be uncertain and worrying may later be addressed satisfactorily in the jurisprudence.

[54] In addition, there are many available tools to address procedural or substantive unfairness and any misuse of the section.

[55] As is well-known, an appeal ultimately lies to the Tax Court from the assessment of penalties. In that appeal, pursuant to subsection 163(3) of the Act, the burden lies on the Minister to demonstrate the facts justifying the imposition of the penalty. A number of procedural rules – including the right to adduce evidence, to test the Minister’s evidence, and to obtain disclosure of relevant documents – give the appellant a meaningful opportunity to challenge the assessment. The Tax Court must construe these rules to ensure, among other things, the just determination of every proceeding, and can modify them “as necessary in the interests of justice” – in other words, if it is appropriate and necessary in order to achieve procedural fairness: See Tax Court Rules, SOR/1990-688a, Rules 4 and 9. That Court also has a plenary jurisdiction to take necessary steps to ensure the fairness of proceedings before it and, further, to restrain any abuses of its process: Canada (National Revenue) v. RBC Life Insurance Company, 2013 FCA 50 at paragraph 35 (by analogy to the Federal Courts, also courts of statutory jurisdiction).

[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.

[61] In the case at bar, resort to these recourses was not made. Accordingly, I offer no further comment on them.

D. Proposed disposition

[62] For the foregoing reasons, I would allow the appeal with costs, set aside the judgment of the Tax Court, and giving the judgment the Tax Court should have given, I would dismiss Ms. Guindon’s appeal with costs.

“David Stratas”
J.A.

“I agree
    Marc Noël J.A.”

“I agree
    Johanne Gauthier J.A.”
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET: A-459-12

APPEAL FROM A JUDGMENT OF THE HONOURABLE MR. JUSTICE BÉDARD DATED OCTOBER 2, 2012, NO. 2009-3368(IT)G

STYLE OF CAUSE: Her Majesty the Queen v. Julie Guindon

PLACE OF HEARING: Ottawa, Ontario

DATE OF HEARING: June 5, 2013

REASONS FOR JUDGMENT BY: Stratas J.A.

CONCURRED IN BY: Noël J.A.
Gauthier J.A.

DATED: June 12, 2013

APPEARANCES:

André LeBlanc
Paul Klippenstein
FOR THE APPELLANT

Adam Aptowitzer
Joel Secter FOR THE RESPONDENT

SOLICITORS OF RECORD:

William F. Pentney
Deputy Attorney General of Canada
FOR THE APPELLANT

Drache Aptowitzer
Ottawa, Ontario FOR THE RESPONDENT

May 31, 2013

Blumbergs’ Canadian Charity Law Institute 2013 - corporate law, CRA compliance and more

On October 15, 2013, Blumbergs will be having the 2nd Annual Blumbergs’ Canadian Charity Law Institute in Toronto. It will be a full day of practical legal and ethical compliance information geared toward charities, professional advisors and those interested in regulatory issues affecting charities.
 

Some of the topics (tentatively) will include:

CNCA Progress and Challenges
Growing up and becoming Canadian - Ontario (OCA) to Federal (CNCA) continuance
The ONCA Update
Abusive Schemes, Class Action Lawsuits and Legal Opinions
Update on CRA changes
Ontario charitable environment
Governance
Top Employment Mistakes for Charities to Avoid
Trends in Philanthropy and Fundraising
Here is the tentative information on registration http://charitylawinstitute.eventbrite.ca

March 30, 2013

Kathryn Blaze Carlson in Globe & Mail “Canada Revenue Agency struggling to put a lid on tax fraud”

In an article today in the Globe & Mail entitled “Canada Revenue Agency struggling to put a lid on tax fraud”  Kathryn Blaze Carlson discusses false receipting schemes. 

Here is a link to the article:

http://www.theglobeandmail.com/news/national/canada-revenue-agency-struggling-to-put-a-lid-on-tax-fraud/article10585609/

Here is a link to the presentation by Danie Huppe-Cranford, who is head of compliance at the Charities Directorate of the CRA.  The presentation was to the Ontario Bar Association (OBA) Institute charity program that I co-chaired:
http://www.canadiancharitylaw.ca/index.php/blog/comments/presentation_by_danie_huppe-cranford_on_cra_major_charity_non-compliance_is/

March 19, 2013

Globe and Mail article “Tax-scheme case revived against Bay Street law firm”

Jeff Gray of the Globe and Mail is reporting today in an article “Tax-scheme case revived against Bay Street law firm” that the class action lawsuit against Cassels Brock & Blackwell LLP has been certified by a decision of the Ontario Court of Appeal. 

Here is the decision on the Ontario Court of Appeal in Lipson v. Cassels Brock & Blackwell LLP
http://www.ontariocourts.ca/decisions/2013/2013ONCA0165.htm  (HTML)
http://www.ontariocourts.ca/decisions/2013/2013ONCA0165.pdf  (PDF)

I had covered this case earlier at http://www.globalphilanthropy.ca/index.php/blog/comments/lipson_v._cassels_brock_blackwell_llp_dismissed_as_statute_barred/

All allegations in the lawsuit have yet not yet been proven. 

————
Below is the text of the Ontario Court of Appeal decision:

“COURT OF APPEAL FOR ONTARIO

CITATION: Lipson v. Cassels Brock & Blackwell LLP, 2013 ONCA 165

DATE: 20130319

DOCKET: C54702

Goudge, Simmons and Gillese JJ.A.

BETWEEN

Jeffrey Lipson

Plaintiff (Appellant/

Respondent by way of Cross-Appeal)

and

Cassels Brock & Blackwell LLP

Defendant (Respondent/

Appellant by way of Cross-Appeal)

David F. O’Connor and J. Adam Dewar, for the appellant

Peter H. Griffin, Ian MacLeod and Shara N. Roy, for Cassels Brock & Blackwell LLP

Tim Gleason and Sean Dewart, for Gardner Roberts LLP and the Estate of Ronald Farano

Alexandra Urbanski, for Deloitte & Touche LLP

Heard: September 17 and 18, 2012

On appeal from the order of Justice Paul Perell of the Superior Court of Justice, dated November 14, 2011.

Goudge and Simmons JJ.A.:

A.        overview
[1]    The main issue before us is whether, on a motion for certification, the motion judge erred in holding that a proposed class action for solicitor negligence and negligent misrepresentation is statute-barred, but that the action otherwise qualifies for certification.

[2]    The appellant, Jeffrey Lipson, is one of about 900 Canadian taxpayers who donated cash and resort timeshare weeks to registered Canadian athletic associations during the four-year period between 2000 and 2003. He and the other donors made their donations through a program (the “Timeshare Tax Reduction Program” or “the Program”) operated by the Canadian Athletic Trust (the “Athletic Trust”).

[3]    Under the terms of the Timeshare Tax Reduction Program, donors anticipated receiving tax credits worth more than the donor’s actual financial outlay. In support of the viability of the Program, the promotional material included an opinion prepared by Cassels Brock & Blackwell LLP indicating that it was unlikely that the Canada Customs and Revenue Agency could successfully deny the anticipated tax credits.

[4]    In 2004, the CCRA notified Mr. Lipson that it intended to disallow his claims for tax credits under the Timeshare Tax Reduction Program in their entirety. On receiving this information, he and other donors who had received similar notices sought legal and accounting advice.

[5]    In 2006, two of the other donors launched proceedings with the assistance of counsel as a test case to challenge the CCRA’s denial of the tax credits.

[6]    In 2008, the CCRA settled the test case on the basis that the donors would receive tax credits for their actual cash donations, but not for their donations of timeshare weeks (which had been paid for by a third party). Mr. Lipson and other members of the proposed class entered into similar arrangements with the CCRA.

[7]    In April 2009, almost five years after he had received the initial notice of disallowance from the CCRA, Mr. Lipson commenced a proposed class action in which he sued Cassels Brock for negligence and negligent misrepresentation relating to their opinion about the Timeshare Tax Reduction Program. Mr. Lipson claimed damages in the form of interest arrears, lost opportunities to make other donations, and special damages consisting of professional fees for challenging the CCRA’s position.

[8]    On a motion for certification of the action as a class proceeding, Perell J. found that, apart from the limitations issue (and with the exception of certain proposed common issues including causation), the proposed class action satisfied the criteria for certification. Nonetheless, in an order dated November 14, 2011 (the “Order”), he dismissed the action, holding that it is statute-barred by the two-year limitation period set out in the Limitations Act, 2002, S.O. 2002, c. 24, Sched. B.

[9]    Mr. Lipson raises two issues on appeal:

1.    Did the motion judge err in dismissing his action as statute-barred?

2.    Did the motion judge err in not certifying the action, including his proposed common issue relating to causation, as a class proceeding?

[10]  In the event Mr. Lipson succeeds on the first issue, Cassels Brock cross-appeals from aspects of the motion judge’s finding that the proposed class action otherwise satisfies the criteria for certification.

[11]  For the reasons that follow, we allow the appeal, set aside those portions of the Order holding that the action is statute-barred and dismissing it, and substitute an order certifying the action as a class proceeding. The cross-appeal is dismissed.

B.        Background
(1)        The Timeshare Tax Reduction Program
[12]  The motion judge provided a full summary of the origin and structure of the Timeshare Tax Reduction Program at paras. 14 to 18 of his reasons.

[13]  In brief, after establishing the Athletic Trust in Ontario, a Bahamian resident purchased timeshare weeks in a Caribbean resort and transferred them to the Trust.

[14]  Under the terms of the Timeshare Tax Reduction Program, potential donors could apply to become beneficiaries of the Athletic Trust and, once accepted, the trustee of the Athletic Trust had discretion to distribute timeshare weeks to them. Beneficiaries could, but were not required to, donate their timeshare weeks to a registered Canadian amateur athletic association, along with sufficient cash to discharge encumbrances on the timeshare weeks.

[15]  In return for each donation, the registered Canadian amateur athletic association that received the donation would issue two charitable tax receipts: one for the donor’s cash contribution to discharge the encumbrances on the timeshare weeks (ranging from $4,600 to $9,700 per donated timeshare week); and one for the then fair market value of the donated timeshare week, less the amount of the encumbrance (ranging from $8,765-$18,900).

[16]  The Program also included arrangements for pooling the donated timeshare units and facilitating their resale to the original developer at a significantly discounted price, subject to a 5% commission on net revenue to one of the promoters of the Program.

[17]  Without getting into all the details, in general, the net result of these arrangements was:

·          assuming receipt of the anticipated tax credits, participants in the Program would realize a net return on their cash donations of about 35% (this is because it was the Bahamian resident who settled the Athletic Trust and actually paid for the timeshare weeks); and

·          although they issued charitable receipts to each participant totalling between $13,275 and $28,600, the registered Canadian amateur athletic associations that received donations ultimately benefited by about $1,300 per donated timeshare week.

(2)        The Cassels Brock Legal Opinions
[18]  Commencing in 2000, on each occasion that timeshare weeks were made available for distribution to beneficiaries, Cassels Brock was retained to provide the promoters of the Timeshare Tax Reduction Program with a legal opinion about the tax consequences of participating in the Program as a beneficiary and donor.

[19]  In all, Cassels Brock provided six opinions between October 2000 and April 2003. The six opinions are substantially the same. The motion judge excerpted the relevant passages of the opinions at para. 23 of his reasons.

[20]  For the purposes of this appeal, two aspects of the opinions are key. First, the opinions are directed not just to the promoters of the Athletic Trust, but also to potential donors. In fact, all but the final opinion specifically state that the opinion “may be relied upon … by … potential donors”. 

[21]  Second, although the opinions acknowledge the prospect of a challenge by the CCRA to the tax benefits available under the Program, the opinions state that “it is unlikely that the CCRA could successfully deny … the [anticipated] tax credit[s].”

[22]  As we have said, a copy of the pertinent Cassels Brock opinion was included in the promotional material marketing the Timeshare Tax Reduction Program on each occasion that timeshare weeks were offered for distribution.

[23]  Because the opinions are central to the issues on appeal, we set out here the text of the key passages. The remainder of the excerpts quoted by the motion judge together with certain other passages we consider important are set out in Appendix ‘A’:

Re: Donation of One-Bedroom and Two-Bedroom, Biennial Timeshare Vacation Weeks

You have requested our opinion regarding the Canadian Federal Income Tax consequences relating to a donation of … Timeshare Resort Weeks … by individual Canadian resident taxpayers. It is contemplated that any such donation would entitle the donor to claim a tax credit under the Income Tax Act (Canada) (the “Tax Act”).

…This opinion is specifically directed to potential donors who are individuals and who acquire and hold the Timeshare Weeks as capital property.

...

3. Meaning of “Gift”

In order to claim a tax credit for a donation there must be a complete gift of the property.

…

If all or substantially all of the Class A Beneficiaries who receive Timeshare Weeks donate them, the CCRA may be more inclined to challenge the arrangement (but see our opinion below at page 23 as to the unlikely success of such a challenge.)

....

7. General Anti-Avoidance Rule (“GAAR”)

…

In our opinion, and based on the foregoing, a donation of Timeshare Weeks in these circumstances would not likely be successfully attacked under GAAR.

....

9. General Comments

…

This opinion may be relied upon only by CAA and potential donors, their agents and professional advisors, for the purpose of the transactions contemplated by this opinion. …

Based on and subject to the foregoing review, in our opinion it is unlikely that the CCRA could successfully deny the deemed adjusted cost base of the Timeshare Weeks to, nor the tax credit claimed by, the Class A Beneficiaries who receive a distribution of the Timeshare Weeks from the Trust, and subsequently choose to make a voluntary and complete donation of some or all of their Timeshare Weeks to a [registered Canadian amateur athletic association].

(3)        Other Legal Opinions Obtained by Promoters and Marketers
[24]  In addition to the Cassels Brock opinion, in December 2002, the promoters of the Timeshare Tax Reduction Program obtained an opinion from a Manitoba law firm confirming the applicability of the Cassels Brock opinion to the Manitoba Tax Act.

[25]  Further, one of the entities marketing the Timeshare Tax Reduction Program obtained a second opinion confirming the Cassels Brock opinion from Ronald J. Farano, Q.C., a tax partner at Gardner Roberts LLP.

(4)        Mr. Lipson’s Participation in the Timeshare Tax Reduction Program
[26]  In an affidavit filed on the certification motion, Mr. Lipson deposed that his accountant spoke to him about the Timeshare Tax Reduction Program in the fall of 2000. Although he understood “the gist” of the Program, he says he did not understand the intricacies of how it worked. He asked his accountant whether there was a legal opinion to support the tax benefits of the program. On being told that Cassels Brock had issued a supporting legal opinion, Mr. Lipson was satisfied that the Program offered legitimate tax benefits and decided to participate. He states: “I would not have participated in the Program absent a favourable tax opinion from a reputable law firm.”

[27]  On his cross-examination, Mr. Lipson indicated he has no recollection of reading the Cassels Brock opinion. He understood from his accountant that the Cassels Brock opinion provided an assurance that the Program was “legal” and thus that there would be “nothing for the [CCRA] to complain about.” According to Mr Lipson, had there been an 80% chance he would not receive the tax credits, he would not have participated.

[28]  Mr. Lipson confirmed that, for the years 2000 to 2003, he claimed the following tax credits for donations under the Timeshare Tax Reduction Program:

2000 – $634,352

2001 – $1,261,988

2002 – $2,085,835

2003 – $1,148,879.60.

(5)        Mr. Lipson’s Dealings with the CCRA
[29]  In a series of letters to Mr. Lipson dated October 19 through to November 9, 2004, the CCRA indicated it would be denying the full amount of the tax credits Mr. Lipson had claimed arising from the Program. Among other things, in their correspondence, the CCRA challenged (i) the validity of the Athletic Trust; (ii) the validity of the gifts of timeshare weeks; and (iii) the valuation of timeshare weeks

[30]  Both in the statement of claim and in his affidavit, Mr. Lipson indicates that in response to the reassessments, he “sought legal and accounting advice at significant personal expense”. In his affidavit, Mr. Lipson also states that he retained Thorsteinssons LLP in April 2004 to act for him in his dealings with the CCRA and that it is his understanding that Thorsteinssons acted for most of the class members in this regard.

[31]  On his cross-examination, Mr. Lipson confirmed that the promoters of the Program had created a fund to look after any challenge to the tax structure that might occur and that he understood that Thorsteinssons’ legal fees were paid from that fund. This evidence was confirmed by evidence from one of the creators of the Program.

[32]  According to Mr. Lipson, the dispute with the CCRA proceeded by way of test cases launched in 2006 by two of the participants in the Timeshare Tax Reduction Program on behalf of all of the donors who participated in the Program and who were reassessed.

[33]  On March 24, 2008, Mr. Lipson accepted an offer to settle made by the CCRA restricting his tax credits for participation in the Timeshare Tax Reduction Program to the amount of his cash donations to Canadian athletic associations.

[34]  Although Thorsteinssons conducted the test case litigation, on his cross-examination, Mr. Lipson testified that he retained Davies Ward Phillips & Vineberg LLP “to interface” with Thorsteinssons. Further, he says he settled with the CCRA as a result of advice received from Davies Ward, and not Thorsteinssons.

[35]  During his cross-examination, Mr. Lipson agreed with suggestions that he realized there was a problem as soon as he received the first disallowance letter and that he knew then that the result Cassels Brock had said would occur was not going to happen.

(6)        The Proposed Class-Action
[36]  On April 15, 2009, Mr. Lipson commenced the proposed class action in which he sued Cassels Brock for negligence and negligent misrepresentation.

[37]  At para. 35 of his Fresh As Amended Statement of Claim, Mr. Lipson characterizes the Cassels Brock opinions as follows:

35. In each of the Legal Opinions, Cassels Brock stated that Lipson and the other Class Members would obtain the tax benefits described in the promotional materials. Cassels Brock’s ultimate conclusion, as set out in each of the Legal Opinions, was that:

[I]t is unlikely that the [CCRA] could successfully deny the deemed adjusted cost base of the Timeshare Weeks to, nor the tax credit claimed by, the Class A beneficiaries who receive a distribution of the Timeshare Weeks from the [Athletic] Trust, and subsequently choose to make a voluntary and complete donation of some or all of their Timeshare Weeks to an RCAAA.

[38]  In essence, Mr. Lipson alleges that Cassels Brock (i) fell below the standard of care of a reasonably competent tax solicitor in preparing its opinion, resulting in an opinion that contains material misrepresentations; (ii) knew that a favourable tax opinion was a necessary precondition to the creation and successful promotion of the Timeshare Tax Reduction Program; and (iii) knew that potential donors would rely on the existence of a favourable tax opinion in deciding whether to participate in the Program.

[39]  Mr. Lipson claims that, but for the Cassels Brock opinion, the Timeshare Tax Reduction Program could not have been made publicly available or successfully promoted. In addition, he claims that he and the other class members decided to participate in the Program in reliance on the Cassels Brock opinion and the representations, both express and implied, which it contained.

[40]  Finally, Mr. Lipson claims that, as a result of the negligence and negligent misrepresentations of Cassels Brock, he and the other class members suffered damages in the form of substantial interest arrears under federal and provincial income tax legislation, loss of the opportunity to make other donations or participate in other tax shelters, and special damages in the form of accounting and other professional fees to respond to the CCRA’s reassessments.

[41]  In his Fresh As Amended Statement of Claim, Mr. Lipson defines the proposed class as:

[A]ll individuals who applied and were accepted to be beneficiaries of the Athletic Trust 2000, 2001, 2002 and/or 2003 and received Timeshare Weeks from the Athletic Trust and donated them, together with a cash donation, to one or more of [certain registered Canadian amateur athletic associations].

[42]  According to the Fresh As Amended Statement of Claim, Mr. Lipson and the other class members settled with the CCRA when it became “at least likely, if not certain” that the CCRA would be successful in challenging the tax credits claimed by Mr. Lipson and the other class members.[1]

(7)        Cassels Brock’s Third-Party Claim and Statement of Defence
[43]  On April 15, 2011, Cassels Brock issued a third party claim against a number of individuals and entities, alleging that they provided tax, financial or legal advice to putative class members with respect to the Timeshare Tax Reduction Program. Gardiner Roberts LLP and the Estate of former Gardiner Roberts senior tax partner Ronald J. Farano, deceased, are among the named third parties.

[44]  In accordance with a direction from the motion judge, prior to the certification motion, Cassels Brock delivered its statement of defence and the third parties delivered statements of defence to the main action and to the third party action.

[45]  The statements of defence to the main action included an assertion that, by pleading that the CCRA denied his claims for tax credits in 2004, Mr. Lipson had acknowledged that the proposed class action is statute-barred.

(8)        Mr. Lipson’s Reply
[46]  In his reply, Mr Lipson pleaded that “ntil January 2008 during the test case litigation … it was not known or reasonably discoverable that it was at least likely … that [the CCRA] would be successful in challenging the tax credits claimed by Lipson and the other Class Members.” He also pleaded that it was not until at least January 2008, when the test case appeal litigation had significantly progressed, that a proceeding against Cassels Brock became an appropriate avenue for the donors to seek redress.