Third Party Penalties
Prior to the third-party civil penalties coming into force on June 29, 2000, there was no civil penalty provision that applied to those who counsel others to file their returns based on false or misleading information, or who turn a blind eye to false information provided by their clients for tax purposes. The objective of the third party civil penalties is to deter third parties from making false statements or omissions in relation to income tax or goods and services tax/harmonized sales tax (“GST/HST”) matters.
Talks on third-party penalties started in 1992 with in-house discussions of a penalty to address overvaluation abuses. By 1995 discussions with Finance on a penalty to address abuses in tax shelter promotions had begun. In 1997, the Mintz Committee recommended a new civil penalty that would hold advisors and promoters accountable for faulty advice. The 1999 Budget proposed a new civil penalty that would apply to persons promoting tax shelter and other tax planning arrangements and to persons who counsel or assist others in filing false returns. Draft legislation was released September 10, 1999, it was revised and released December 7, 1999 and it came into force on June 29, 2000.
Question
Can the CRA provide an update on the administration of this penalty? (How many cases, how did they arise etc.)
Response
First of all, the Canadian tax system has benefited from a cooperative relationship between professional advisors and the CRA. Since that relationship is critically important to all Canadians, and to the continued health of our taxation system, the CRA is committed to applying the penalties fairly, consistently and only when clearly justified.
As outlined in Information Circular IC 01-1, Third Party Civil Penalties, the third-party penalty is to be applied to “egregious” situations. To that end for purposes of consistency, the CRA has established the Third-Party Penalty Review Committee (“TPPRC”). The TPPRC is tasked with reviewing all third-party penalty recommendation reports, as a result of a third-party penalty audit, prior to the issuance of a penalty proposal letter. The TPPRC will conduct a further review of all third-party penalty cases prior to assessment. The Committee includes senior representatives from the CRA’s Compliance Programs Branch and Legislative Policy and Regulatory Affairs Branch, as well as a representative from the Department of Finance.
As of August 31, 2005, thirteen cases have been considered for the application of the third-party penalties. After reviewing the merits of the individual cases, five of these cases were rejected for third-party penalty audit as they did not meet the criteria as outlined in the circular. Six cases are currently under audit. The issues encountered in these six cases include failure to adhere to straightforward provisions of the Act, the promotion of an aggressive tax arrangement and the inclusion of fictitious amounts in a return. Two cases have been approved for the application of section 163.2 of the ITA and/or section 285.1 of the Excise Tax Act. In these two cases, tax returns were prepared with information that the preparer knew to be fictitious.