An Update on Misrepresentation
of a Tax Matter by a Third Party,
and on Base Erosion, Profit
Shifting ("BEPS")
David W. Chodikoff, Tax Partner
(With the assistance of Simon Robertson, Student-at-law)
Phone: (416) 595-8626
E-mail: dchodikoff@millerthomson.com
September 2013
OVERVIEW
1. Introduction
2. Topic 1 – Misrepresentation of a Tax Matter by
a Third Party
3. Topic 2 – “BEPS”
2
Topic 1 – Misrepresentation of a Tax Matter by
a Third Party
• Where are we today and what it means to you –
section 163.2 of the Income Tax Act
• What is a 3rd party penalty?
– Penalty imposed on a planner, preparer, or valuator
– While the taxpayer likely benefited from the planner or
preparer’s work, they do not pay the penalty
– Accountants need to be concerned because they
often act for clients in these capacities
3
Misrepresentation of a Tax Matter by a Third
Party (con’t)
• “Preparer” Penalty section
• Section 163.2(4) Penalty for participating in a
misrepresentation: 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.
4
Misrepresentation of a Tax Matter by a Third
Party (con’t)
• “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.
5
Misrepresentation of a Tax Matter by a Third
Party (con’t)
• Section 163.2(5) Amount of penalty: 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.
6
Misrepresentation of a Tax Matter by a Third
Party (con’t)
• Section 163.2(6) Reliance on good faith provision:
For the purposes of subsections (2) and (4), a person (in
this subsection and in subsection (7) referred to as the
“advisor”) who acts on behalf of the other person is not
considered to have acted in circumstances amounting to
culpable conduct in respect of the false statement
referred to in subsection (2) or (4) solely because the
advisor relied, in good faith, on information provided to
the advisor by or on behalf of the other person or,
because of such reliance, failed to verify, investigate or
correct the information.
7
Misrepresentation of a Tax Matter by a Third
Party (con’t)
• Guindon v. The Queen, 2012 TCC 287 [Guindon – TCC]
– Facts:
• Appellant was a lawyer who practiced mainly in the areas of family
law and wills/estates
• The Appellant was not a tax practitioner, nor did she have any
experience with tax law
• In addition to being a lawyer, the Appellant was the president of a
registered Canadian charity involved in a program by which
taxpayers could acquire timeshare units for a fraction of their value
and donate them to charities
• In exchange for donating the timeshare units to charity, the
taxpayers would receive tax receipts in the amount of the units’
actual values
8
Misrepresentation of a Tax Matter by a Third
Party (con’t)
• Guindon – TCC (con’t)
– Facts (con’t):
• The Appellant signed and issued the tax receipts herself
• The legal deeds to the timeshare units were never finalized to be
conveyed to taxpayers
• The charitable donation tax credits issued for ostensible donations
of timeshares were entirely disallowed by the CRA and the program
was found to be a scam
• In addition to disallowing individual taxpayers’ claims for charitable
tax credits, the CRA assessed the appellant for penalties under s.
163.2 of Income Tax Act for making false statements
• The CRA took the position that the appellant knew or ought to have
reasonably known that the tax receipts contained and constituted
false statements
9
Misrepresentation of a Tax Matter by a Third
Party (con’t)
• Guindon – TCC (con’t)
– Issues:
• Is s. 163.2 of the ITA a criminal provision that attracts Charter
protections and that should be prosecuted in a provincial criminal
court?
• If not, was the appellant guilty of “culpable conduct,” such that the
imposition of penalties under s. 163.2 was warranted, in the
circumstances?
– Decision:
• A finding under section 163.2 could lead to true penal
consequences
• The provision is therefore criminal or penal in nature, to which
Charter protections do apply
10
Misrepresentation of a Tax Matter by a Third
Party (con’t)
• Guindon – TCC (con’t)
– Decision (con’t):
• The section 163.2 penalty is different from gross negligence
penalties under subs. 163(2) since its purpose is to go
beyond sanctions in an administrative proceeding
• The penalty could be assessed against a false statement that
was never acted upon or never intended to have been acted
upon by use of the broad verb “could” in the legislation
• Since the purpose behind section 163.2 is to suppress injury
to the public interest, it is a quintessentially criminal provision
– The penalty under section 163.2 is unlimited, which supports
this conclusion
11
Misrepresentation of a Tax Matter by a Third
Party (con’t)
• Guindon – TCC (con’t)
– Decision (con’t):
• Justice Bedard went on to consider whether the appellant
was guilty of culpable conduct
• Although the appellant had no experience in tax law, she
nonetheless signed the charitable tax receipts without
knowing the status of the timeshare projects or determining
the legal validity of the receipts
• She was therefore guilty of culpable conduct that otherwise
justified the imposition of a penalty against her
– The CRA appealed this decision to the FCA
12
Misrepresentation of a Tax Matter by a Third
Party (con’t)
•
Guindon v. The Queen, 2013 FCA 153 [Guindon –
FCA]
–
Issues:
•
–
Did the TCC make a mistake in finding that s. 163.2 of the ITA is a
criminal provision, and therefore the individual should be
prosecuted in a provincial criminal court and have access to
Charter protections?
Decision:
•
•
TCC did not have the jurisdiction to find that this section of the Act
was a criminal offence.
Guindon did not serve the provincial or federal government with a
notice of constitutional question.
13
Misrepresentation of a Tax Matter by a Third
Party (con’t)
•
Guindon – FCA (con’t)
–
Decision (con’t):
•
•
•
•
•
While this appeal was decided on a technicality, the court made
several observations.
Section 163.2 does not create a criminal offence.
Conduct that goes against the proper working of the tax system
must be deterred. The penalty imposed by this section is a simple
way to deter that activity and maintain order.
A large financial penalty does not mean that the Charter will
automatically apply.
A large penalty can be necessary to avoid a “cost of doing
business” calculation.
14
Misrepresentation of a Tax Matter by a Third
Party (con’t)
•
Guindon – FCA (con’t)
– Decision (con’t):
•
•
•
•
The assessment of a penalty can be appealed to the TCC.
At the appeal, the Minister must demonstrate the facts
justifying the penalty.
The individual can also seek relief against a harsh penalty
from the Minister, under section 220(3.1), who can exercise
her discretion to cancel the penalty or reduce it.
The Minister’s discretion on such an application must be
based on the purposes of the Act, the fairness purposes of
section 220(3.1), and a rational assessment of the
circumstances.
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Misrepresentation of a Tax Matter by a Third
Party (con’t)
•
Guindon – FCA (con’t)
– The assessment against Guindon was restored.
– The regime of massive fines imposed by the CRA,
along with no Charter protections, remains.
– Guindon filed for appeal at the Supreme Court of
Canada.
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Topic 2 – BEPS
• BEPS: Base Erosion and Profit Shifting
• Why all the attention?
– Political problem: tax fairness.
– Governments concerned about lost tax revenue.
– Very profitable companies paying little tax on profits.
17
BEPS (con’t)
• A “new” issue
– The concern
• Two different jurisdictions, two definitions of income.
• The possibility of double non-taxation
• Profits shifted between jurisdictions to achieve favourable tax
rates.
• The digital economy and profits from intangibles (like
intellectual property)
18
BEPS (con’t)
• International Organizations Lead the Charge
– G20 finance ministers ask the OECD for a report on
the topic.
– OECD produces report that analyzes data and
statistics.
– OECD presents an Action Plan on Base Erosion and
Profit Shifting.
19
BEPS (con’t)
• OECD Action Plan on BEPS
– 15 action items
•
•
•
•
Neutralize hybrid mismatch.
Establish CFC rules.
Prevent base erosion through interest deduction.
Reform tax treaties, permanent establishment, and transfer
pricing.
• Common template for tax and profit reporting.
• Disclosure of tax aggressive tax planning arrangements.
• Development of a multilateral instrument.
20
BEPS (con’t)
• G20 Agrees with the OECD’s Action Plan
– Both the G20 Finance Ministers and the country
leaders agree with the Action Plan’s approach.
– The leaders also agree to swift implementation of the
Action Plan.
21
BEPS (con’t)
•
Where are things going?
– World leaders are engaged
– Certain multinational enterprises have reacted to
criticism
– The Government of Canada has previously
addressed some of these concerns
22
BEPS (con’t)
•
What do accountants need to know
– Jurisdictions under “watch”
– Structures that will be attacked
– Potential positives from a uniform global tax system
– DIGITAL
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Conclusion – Key Points
•
Misrepresentation of a Tax Matter by a Third Party
–
If you have represented individuals who developed tax
shelters, or have marketed any shelters:
•
•
•
A) Be ready for an assessment
B) Be prepared to get legal advice to assist you
BEPS
–
–
–
This issue is on government agendas, and there will be more
international investigations.
As a result, crossborder and offshore tax planning must
consider the domestic and multilateral push for changes.
Great care must be taken for any activity that involves GAAR or
aggressive tax planning.
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