Third Party Civil Penalties
Mohammed Yasin CPA, CGA
1-09-2018
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The objective of the third party civil penalties is to deter persons from making false statements or omissions in relation to the income tax matters of others.
These penalties apply to statements made after June 29th 2000. There are actually two separate penalty provisions included in the rules. They have been dubbed by the CRA as the ‘planner penalty’ and the ‘preparer penalty’. The planner penalty is aimed primarily at those who develop, sell or promote tax shelter like arrangements. The preparer penalty is aimed at those who provide tax related services to particular taxpayers.
Planner Penalty
The planner penalty applies to any person who makes or furnishers a statement (oral or written) that he or she knows, or would reasonably be expected to know, is a false statement that could be used by another person (i.e. a taxpayer) for a purpose of the Income Tax Act.
The circumstances in which a third party would reasonably be expected to know a statement is false and based on a much stricter standard than applies for ordinary negligence (i.e. reasonably care). The standard defined in the Act for these penalties is called “culpable conduct” and refers to the conduct that is:
- Tantamount to intentional conduct
- Shows an indifference as to whether the Act is compiled with; or shows a willful, reckless or wanton disregard of the law.
A key characteristic of the planner penalty is that the person who could use the false statement (i.e. the taxpayer does not need to be specifically identifiable). This penalty is therefore aimed at persons who develop and market tax schemes and arrangements for multiple taxpayers. Examples include:
- Tax shelter promoters holding seminars or presentations to provide information of a specific tax shelter, and
- Appraises and valuators preparing a report for a proposed scheme/shelter that could be used by unidentified investors.
The amount of the penalty is the greater of:
- $1000
- The total of the persons’ gross entitlements for the planning or valuators activity (defined to be all the compensation received or to be received by the person and others not dealing at arm’s length with the person, for the activity).
Preparer Penalty
The preparer penalty applies to any person who makes a statement to (or on behalf of) another person that he or she knows, or would reasonably be expected to know, is a false statement that could be used by the other person for a purpose of the Income Tax act.
The term ‘preparer penalty’ is misleading because the penalty applies to person who supply counsel or advice taxpayer with false misleading tax information, as well as those who make false representation to the tax authorities on behalf of the taxpayer.
The penalty applies to oral and written statements. The circumstances in which a person would reasonably be expected to know a statement is false are also based on the ‘culpable conduct’ standard discussed above in connections with the planner penalty.
A key characteristic of the preparer penalty is that the taxpayer to whom or for the false statement is made is specifically identifiable. Examples Include:
- A taxpayer preparing a tax return for a specific taxpayer
- A tax advisor providing tax advice to a specific taxpayer, and
- An appraiser or valuator preparing a report for a specific taxpayer or a number of persons who can be identified.
The amount of penalty is the greater of:
- $1000
- The penalty that would apply to the taxpayer for knowingly making the same false statement in his or her own tax return and
- The total of $100,000 and the persons gross compensation.
Principles of Application
Both penalties apply to third party who:
- Make statements that are misleading by reason of omission
- Make false statements regardless of an intention to deceive; and
- Cause a subordinate to make a false statement
Neither penalty applies to:
- Services that are clerical or administration in nature (other than bookkeeping services)
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