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Posted on Thursday, Aug 06, 2015

On July 31, 2015, the Supreme Court of Canada released its decision in Guindon v Canada, 2015 SCC 41, affirming that tax proceedings under the Income Tax Act (ITA) are administrative and not criminal in nature.

The Facts

In 2001, Julie Guindon, a lawyer, was approached by promoters of a donation program in which participants would purchase and then donate timeshare units to a charity in exchange for an official donation receipt. Guindon, although not a tax lawyer, provided a legal opinion on the tax consequences of the program. Guindon also served as president of the recipient charity. The donation scheme eventually proved to be a sham and 135 official donation receipts were improperly issued. In 2008, Canada Revenue Agency (CRA) assessed $546,747 in penalties against Guindon under subsection 163.2(4) of the ITA related to making false statements in the donation receipts.

On appeal, Guindon argued that the penalties assessed against her were criminal in nature and that the assessment could not be upheld because she was not provided the procedural protections of section 11 of the Charter. Section 11 of the Charter provides procedural protection for persons charged in criminal matters.

The Law

A majority of the Supreme Court of Canada dismissed Guindon’s appeal, finding that the penalties assessed against her were administrative and not criminal. In coming to their decision, the Court found that: (1) the proceeding was not criminal in nature; and (2) the half-million-dollar penalty was not a “true penal consequence.”

The Court found that the proceeding was not criminal in nature. Criminal proceedings are “aimed at promoting public order and welfare within a public sphere of activity.” The proceeding here, in contrast, was “to promote honesty and deter gross negligence, or worse, on the part of preparers [of statements for income tax purposes], qualities that are essential to the self-reporting system of income taxation assessment.” The Court found that the ITA penalties are integral to encouraging compliance with the regulatory system. In addition, the Court found that the proceedings had very few similarities to criminal proceedings.

The Court also found that the penalty was not a “true penal consequence.” A true penal consequence is imprisonment or a fine that, instead of securing compliance, is intended to redress a societal wrong. Although the penalty was very high, the Court found that it was not punitive. The penalty was consistent with the objective of deterring dishonesty and was calculated in part on the violator’s compensation in respect of the false statement. Here, there were 135 violations and Guindon was dishonest in preparing the legal opinion and the donation receipts. The Court noted that such large penalties are necessary to make it clear that this type of dishonesty is not just “another cost of doing business.”

Implications for Charities

Donation schemes are not permitted under the ITA. Charities that are found to be involved in a donation scheme may have their charitable registration revoked by CRA. As seen in Guindon, CRA may also assess penalties against individuals who deliberately or with gross negligence prepare fraudulent donation receipts. These penalties can be significant and violators will not be afforded the same procedural protections that criminal offences attract. Charities should ensure that anybody involved in donation receipting, including their financial officers, treasurers and professional advisors,  are aware of and compliant with ITA requirements.

For more information on donation receipting or on charitable compliance, contact De Jager Volkenant & Company.


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