The recent decision of the Tax Court of Canada in Guindon v. The Queen ((2012) TCC 287) poses a major setback for the government in the battle against abusive donation scams.  The case dealt with whether the third party penalties provided for under section 163.2 were properly assessed against the appellant.  The purpose of this provision is to penalize persons who knowingly, or in circumstances amounting to gross negligence, participate in, promote, or assist conduct that results in another taxpayer making a false statement or omission in a tax return.  

Given the egregious facts of the case, one might have anticipated a favourable outcome for the government.  Nonetheless, the court's somewhat surprising holding, if not overturned on appeal, will significantly limit the ability of the government to assess penalties against promoters of abusive donation scams. 

Background 

The case dealt with a buy-low, donate-high arrangement involving time share units.  Like other donation arrangements of this nature, the arrangement was fairly complex, involving a number of foreign and domestic entities.  The bottom line was that donors could in effect purchase time share units for a low price and then donate them to a particular charity for a donation receipt reflecting a much a higher value.    

Although the appellant lacked expertise in tax law, she agreed to provide the promoters with a legal opinion representing that participants in the donation arrangement would be considered for income tax purposes to have made charitable gifts (presumably at the higher value, though the facts are not explicit on this point).  She ultimately provided the favourable opinion without ever having reviewed all of the relevant documentation for the arrangement.    

Further, the appellant was the president of the charity participating in the arrangement.  She signed 135 donation receipts acknowledging that the time share units had been donated to the charity under the arrangement.  In signing the gift receipts, the appellant relied upon the verbal representations of the promoters that title to the time share units had indeed been transferred to the charity but took no other steps to independently confirm that the transfers occurred.  As it turns out, the transfers never occurred. 

Adding to the unusual circumstances of the case was the fact that the appellant not only backed the arrangement through a legal opinion and issued receipts as an officer of the charity recipient, but also participated as a donor. 

  

The Minister of National Revenue assessed penalties against the appellant under s. 163.2 totalling $546,747 for making false statements that she either knew, or, in effect, should have known, would result in other taxpayers - namely, the donors participating in the arrangement - making false statements or omissions in their tax returns.  The alleged false statements included her legal opinion and the improperly issued 135 donation receipts.  

The judge's conclusion 

Justice Bédard concluded that if the penalties under s. 163.2 were civil in nature, i.e., something less than a truly criminal sanction, then they were properly assessed.  Two issues were highlighted as being of particular concern to the court.  

The first issue was that the appellant prepared her legal opinion in support of the donation arrangement without reading all of the relevant documentation.  The appellant could not deny knowing that the opinion was misleading because it contained the express statement that she had reviewed all of the principal documents even though she had not.  

The second issue was that appellant (in her capacity as an officer of the participating charity) issued donation receipts solely in reliance upon the representations of the promoters of the donation arrangement that the property transfers to the charity had indeed occurred.  Justice Bédard held that, although s. 163.2 does not create an across-the-board requirement for charities issuing gift receipts to confirm advisors' representations that title transfers have occurred, it was inappropriate in these circumstances for the appellant to take no steps to confirm the information received.  

While the court's reasoning on this point was not entirely clear, the concern appeared to be that the appellant had reason to be suspicious of the promoters because they pressured her into providing a supportive legal opinion without providing her all of the background materials.  

Ultimately, however, the court concluded that none of these were controlling considerations because s. 163.2 creates what is in substance a criminal rather than a civil sanction.  The penalties brought against the appellant would therefore have to be prosecuted, not in a tax court, but instead in a provincial court in accordance with criminal procedure and applicable protections under the Charter of Rights and Freedoms. 

In coming to the conclusion that the penalties under s. 163.2 are criminal in nature, the court relied upon the breadth of this provision.  Specific mention was made of the fact that the penalties are not subject to an express time limit and that the amount of the penalties could be significant, as evidenced by the $546,747 penalty assessed against the appellant.  The court also emphasized that s. 163.2 applies where a third party makes a false statement that "could" be relied upon regardless of whether it was ever actually relied upon by anyone.  

Reflections 

The holding in Guindon has been appealed by the government.  If the decision is left to stand, it will become significantly more difficult to impose penalties on advisors backing abusive donation schemes.  Such penalties would have to be prosecuted in accordance with the strictures of criminal procedure and constitutional protections.  Also, the standard of proof will be raised from that of proof on a balance of probabilities to proof beyond a reasonable doubt.  This would be significantly damaging to the future viability of s. 163.2. 

If the appeal is ultimately unsuccessful, it is likely that s. 163.2 will be amended.  The provision was very broadly drafted, presumably so that it could be applied to abusive circumstances not specifically within the contemplation of Parliament at the time it was adopted.  That strategy has now come back to haunt the architects of the provision.  

The timing of the judgment is somewhat unfortunate in that it was released while the Standing Committee on Finance is completing its study of donation incentives.  The decision not only brings attention to abuses of donation incentives at a crucial moment of policymaking in this area of law, but it also calls into question the current capacity of the Canada Revenue Agency to police such abuses.  

The Guindon decision was no doubt received with some element of frustration by tax authorities.  One might have thought that the facts, involving as they did a lawyer lacking expertise in tax law providing a supportive tax opinion for a donation scheme without ever reading all of the background documentation, represented exactly the kind of circumstance within the contemplation of s. 163.2.  But as is so often the case, there is more than one side to this story.  Assessing well over a half million dollars of fines against the appellant personally was more or less an invitation for the court to very carefully consider whether proper protections are in place.  The case tells a story of overreach as much as anything else. 

Adam Parachin is associate professor at the Faculty of Law at the University of Western Ontario. He teaches, researches and writes in the areas of trusts, estates and charities law. His work in the area of charities law has recently been recognized through the Douglas J. Sherbaniuk Distinguished Writing Award from the Canadian Tax Foundation and a substantial research grant from the Social Sciences and Humanities Research Council to study donation incentives.

Contact him at 519-661-2111, ext 81445, aparachi@uwo.ca.