Tax advisors across Canada are anxiously awaiting the next version of the Canada Customs and Revenue Agency’s guidelines for its new third-party civil penalties regime.

The new regime continues to provoke angry comment from tax preparers and planners since it was first proposed in the 1999 federal budget and enacted in June 2000. The first CCRA information circular was released earlier this year to a chorus of complaints. (A circular is one of the ways the tax department communicates its administrative position on certain subjects to the Canadian tax community.)

The next one is due out in September, says Collette Gentes-Hawn, Ottawa-based media relations officer for the CCRA. That will be good news for members of the Canadian Tax Foundation. The CTF is holding its annual conference in Vancouver in late September, and the civil penalty regime promises to be a hot topic again this year. “We’re hoping this time they’ll actually listen to our submission,” says Rob MacKnight, the CTF’s executive director. “People were not too impressed with the results of the first round of consultations.”

Prior to releasing the first information circular, the CCRA met with officials from the CTF, the Canadian Institute of Chartered Accountants and the Canadian Life and Health Insurance Association, among others.

The civil penalty regime will allow CCRA officials to nail tax planners and preparers with civil penalties — as opposed to the criminal charges, already set out in the Income Tax Act.

The law established two kinds of penalties: one for preparers and one for planners. The planner penalty will apply when a planner makes, enables or participates in making a false statement on a tax return that he or she would reasonably be expected to know is false, or causes another person to do so in the context of tax-planning activities. The preparer penalty will apply when an advisor participates in, assents to or acquiesces in making a statement to, or on behalf of another person (i.e., a client) that the preparer knows or would reasonably be expected to know is false.

MacKnight says tax officials already have enough remedies within the act with which to penalize errant tax practitioners. In the CTF’s response to the first circular, MacKnight wrote, “Tax legislation is no longer comprehensible to the average Canadian taxpayer. Increasing numbers of individual and business taxpayers rely on professional tax advisors to apply tax laws and administrative procedures to their particular situations. To maintain the integrity of our voluntary compliance system, it is imperative that tax advisors continue to play this critical role. The integrity of the tax system will not be maintained if reputable tax advisors decide to avoid any potential application of civil penalties by refusing difficult assignments or clients, forcing clients to seek advice from less reputable sources.”

MacKnight points out that the burden placed on advisors by the new regime is potentially quite onerous. “Because the CCRA may instigate a civil penalty review at any time, even beyond the normal reassessment period or record retention period, tax advisors will have to decide whether to incur the additional cost of restoring old records or risk not having the necessary documents in case an investigation commences.”

The ability to comply will vary depending on the advisor and client’s resources, says MacKnight. “The expectations and economic capabilities of clients affect how tax advisors operate. For example, large corporate clients typically have sophisticated staff dedicated to managing corporate tax affairs. Owner-managed clients rarely do. Large corporate clients have more resources to dedicate to tax management. Owner-managed clients are very cost-conscious.” These differences must be addressed in the circular, says MacKnight.

Further, MacKnight, along with other critics of the new law, is worried about the potential damage of an investigation that is vacated when government officials can’t prove their case. “There must be protection for tax advisors. We appreciate this is a flaw in the legislation, but to some degree it can be addressed in the administration of the law.”

Ron Sanderson is the tax policy advisor for the Canadian Life and Health Insurance Association. Prior to the release of the first information circular, he took the lead presenting the position of the CLHIA, the Canadian Association of Insurance and Financial Advisors and the Canadian Association of Financial Planners to government officials.

@page_break@”Initially, financial services saw this as a penalty for lawyers and accountants. It didn’t see this as a problem for insurance advisors.” Sanderson, like MacKnight, still holds concerns about what could come down the CCRA compliance pipe. The wording of the law is broader than originally set out in the 1999 budget, he says. The shared concern of all tax advisors is that it throws a potentially larger net.

But Sanderson is pragmatic. A 20-year veteran of tax law and policy, he notes that “The CCRA can’t write law. [That’s the job of the federal Department of Finance.] It can narrow the scope of the law through its administrative practices.”

The concern among insurance advisors has been a provision in the law which could have an impact on advisors paid by commission. Specifically, the new regime says advisors can rely on the “good faith defence” (that an advisor can rely on conducting a file based on good faith in information given by the client). It’s available to advisors — except when an advisor is involved in excluded activities, including working on commission. “That’s why insurance advisors, in particular, were concerned.” That means among a lawyer, accountant and life insurance agent sitting down with a client to develop a tax plan, only the agent would be refused the good faith defence, says Sanderson. ‘That’s seems inequitable.”

There’s no reference to insurance in the information circular. “That may be good. That may be bad,” says Sanderson. The CCRA has given verbal assurances that normal, everyday planning activities are not intended to be scrutinized. It’s the more egregious tax-planning, i.e., illegal tax shelter promotion, that’s under the microscope.

Sanderson is fairly comfortable with the CCRA’s assurances. “Still there’s that nagging doubt with what might happened down the pipe.” Insurance advisors are required to carry errors and omission insurance, says Sanderson, but that won’t be much comfort if an E&O insurer decides not to cover an error caught under this legislation. (One company has devised a policy against the civil penalty regime, but it’s available only to chartered accountants.)

Terry Taylor, executive director of the CAFP, is also taking a pragmatic view. He recognizes that the CCRA is engaged in a balancing act. “It’s fine to sit here and say we’re not doing anything illegal, but how does [Finance and the CCRA] sort that out?”

The hope among advisors, says Sanderson, is that eventually the Department of Finance will re-work the legislation. That will take legislative amendments passed by Parliament. It will also take a few years, Sanderson speculates. “Finance will want to see how the law works before fiddling with it.” Meanwhile, CLHIA, along with other interested organizations, is awaiting the CCRA’s response to its submissions.