Guindon v. The Queen, TCC decision that third party penalties require higher burden of proof
Posted under News | What's New from the Charities Directorate of CRA | Ethics and Canadian Charities
In the case of Guindon v. The Queen, 2012 TCC 287 the Tax Court of Canada decided that third party penalties under section 163.2 of the Income Tax Act are tantamount to a criminal proceeding and therefore the burden of proof required as in all criminal matters is proof beyond a reasonable doubt and not on a balance of probabilities as in civil matters. Some of those who have advised abusive charity gifting tax schemes are seeing this case as positive in that it makes it more difficult for CRA to punish promoters of what CRA terms “abusive charity gifting tax schemes”. The schemes may not work and those who organize abusive charity gifting tax schemes could suffer class action litigation from frustrated investors but it will be more difficult for CRA to also impose third party penalties. We will see if CRA appeals the decision. The TCC judge was extremely critical of the successful appellant, who is a lawyer in Ontario.
A few additional points worth noting:
-we will know in November if CRA decides to appeal the TCC decision;
-no one ever wants a judge to describe them the way the judge described the Appellant and for some lawyers, and their law firms, they would prefer to pay a $500,000 fine than have a ‘victory’ with a judge commenting in this way;
-Finance may decide to amend the provision to be more narrow;
-the timing of this decision is terrible for proponents of additional tax incentives which are being reviewed by the Finance Committee of the House of Commons as it calls into question whether CRA has the necessary tools to prevent the types of massive abusive charity gifting tax schemes and the Finance Committee does not want to be seen as providing even more lucrative tax incentives that may further encourage abuse of the system by a small number of promoters and their captured charities;
-this decision shows that greater attention should paid to prosecuting certain types of charity abuse in criminal court rather than as part of the Income Tax Act and hopefully Finance will allocate resources for that to protect the integrity and reputation of the charity sector;
-there was another very important case called Kossow only a couple of weeks in which the Tax Court of Canada decided that there was no gift in an abusive charity gifting tax scheme; and
-while some tax litigators may be pleased with the decision it is not good for people who actually pay taxes in Canada, and who are paying more taxes than they should, and others who are receiving less services because $6 billion in improper donation receipts have been issued as part of these abusive charity gifting tax schemes.
Here is a quote from the judgment:
“Does the Appellant’s Conduct Qualify as “Culpable Conduct”?
 The evidence submitted and the facts established by the Minister conclusively demonstrate the Appellant’s culpable conduct.
 The Appellant submitted that she could not be required to know every element of the law. It was beyond her ability to conduct an investigation of the underlying title to the property located in Turks and Caicos Islands when she issued the tax receipts. She relied on professional advice that the property existed and submits that she was entitled to do so.
 Subsection 163.2(4) of the Act does not create an obligation for administrators of a charity to do checks on property that is donated to them, and professionals are indeed fully entitled to rely on another professional’s advice. However, the Appellant’s situation is different. The Appellant was both the legal professional responsible for the legal opinion concerning the Program and the administrator of the Charity who got the Charity involved in the Program and signed the charitable donation tax receipts.
 The Appellant wrote and endorsed a legal opinion regarding the Program, an opinion which she knew would be part of a promotional package intended for potential participants in the Program. Her legal opinion clearly states that she reviewed the principal documents relating to the Program when these documents had in fact never been provided to her. She knew, therefore, that her legal opinion was flawed and misleading.
 The Appellant chose to rely on the Program’s Principals. They pressured her into providing them with an executed version of the legal opinion without providing her with the supporting documents on which to found her opinion. Yet her legal opinion does not reflect this reality. Rather, it indicates that the documents were reviewed.
 When the Appellant chose to involve the Charity in the Program and, later, to sign the tax receipts, she knew she could not rely on her legal opinion. She again decided to rely on the Principals. However, the Principals had relied on the Appellant to attest the legality of the Program. The Appellant knew her legal opinion could not be relied on and, for that reason, she could not be entitled to blindly rely on the Principals. In other words, the Appellant would have been entitled to rely on the Principals if a different professional had signed the legal opinion. She could not, however, rely on her own legal opinion which she knew to be incomplete.
 Her conduct is indicative either of complete disregard of the law and whether it was complied with or not or of wilful blindness. The Appellant should have refrained from involving the Charity and signing the tax receipts until she had either reviewed the documents herself or had another professional approve the Program’s activities. When the Appellant issued the tax receipts, she could have reasonably been expected to know that those receipts were tainted by an omission, namely, that no professional had ever verified the legal basis of the Program.
 The Appellant cannot agree to endorse a legal opinion and then justify her wrongful conduct by saying she did not have the necessary knowledge — either of tax law or of foreign law — to write that opinion.
 Moreover, the Appellant’s conduct after the tax receipts were signed negatively affects her credibility and reflects badly on her character. When the Appellant was informed, after the tax receipts had been issued, that the legal titles were not in order, she co‑signed a letter informing the participants of the situation. At that point, the Appellant knew she could not rely on the Principals — the same individuals who had never provided her with the documents she was supposed to review and the same individuals she had trusted in signing the tax receipts. Yet when Ploughman sent out a letter, days before the end of the fiscal year, stating that all was in order and that the participants could submit their receipts, the Appellant blindly relied on him again, without asking any further questions.
 And finally, the facts established show that by July 9, 2002, at the latest, the Appellant knew that the charitable donations associated with the Program would not be accepted by the CRA. Yet, on June 12, 2003, the Appellant made representations to the CRA regarding her claim in respect of a donation of VOWs to the Charity in her 2001 taxation year. The Appellant lied to the authorities. This conduct reflects negatively on the Appellant’s character.
 For these reasons, the Appellant’s culpable conduct leads me to conclude that she would reasonably be expected to have known that the tax receipts were false statements. The penalty would therefore be applicable if that penalty were a civil one.”