Canada Takes Powers To Fine Tax Professionals

by Mike Godfrey, Tax-News.com, New York

24 October 2001

New guidelines issued by the Canada Customs and Revenue Agency (CCRA) will impose savage penalties on third-party tax advisors who participate in creating tax shelters that are later found to be abusive.

Apart from retirement savings plans, there are hardly any legal tax saving schemes available in Canada, so, as in the US, there is - or was - a thriving tax shelter industry. The professionals who advise taxpayers on minimising tax (accountants, tax preparers, financial planners and others) are sometimes rewarded simply through fees, but sometimes take a percentage of the savings achieved.

Until now, a taxpayer who was found to have illegally sheltered income is liable to repay tax with interest and penalties, but the authorities seldom pursue a criminal prosecution except in really egregious cases due to the cost and difficulty of obtaining convictions - and advisers therefore escape any penalty other than the wrath of their clients.

In future, the tax authorities will be able to use the new 'guidelines' to apply civil penalties that make third-party advisors liable for half the amount of tax avoided by too-aggressive planning. Needless to say, the CCRA has a rosy view of the function of civil penalties. "Our intention is not to stand in the way of advice from accountants," says spokeswoman Colette Gentes-Hawn. "The point is that up until now - short of (criminal) prosecution - there was nothing that could be done to a tax preparer who created 20 false returns. We'd reassess the 20 people but there was nothing we could do about the advisor who engineered the scam."

The accounting profession of course sees it differently, and worries that the measures, apart from requiring extra record-keeping and driving up fees, could cause friction between client and adviser. In order to escape liability, advisers will have to be able to show that they established a client's veracity and circumstances beyond reasonable doubt - and even then, nothing will protect them if what appears to be a reasonable shelter is later banned by the CCRA or the courts.

The government, which has an unassailable majority in Parliament, has over-ridden the objections of the accounting industry, and the CCRA says it will only resort to its new powers in really serious cases. But that's of little comfort to taxpayers, who will find advisers notably more reluctant to help them in mitigating Canada's sky-high tax bills in future.

See the text of the guidelines in Tax-News Resources

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