Misrepresentation of a tax matter by a third party.

On January 14, 2000, Tax Executives Institute submitted the following comments to the Canadian Ministry of Finance concerning income and goods and services tax measures. TEI's comments were prepared under the aegis of the Institute's Canadian Income and Commodity Tax Committees, whose chairs are, respectively, John M. Allinotte of Dofasco Inc. and Glen S. Pye of Nortel Networks Corporation. David V. Daubaras of GE Capital Canada contributed substantially to the development of TEI's comments. Also contributing were David M. Penney of General Motors Corporation, Gary G. Penrose of TransCanada Pipelines Limited, and Alan Wheable of Toronto Dominion Bank.

On September 10, 1999, the Department of Finance released draft legislation of income and goods and services tax measures that were first announced in the February 1999 federal budget. A Notice of Ways and Means Motion to implement the draft legislation was introduced in the House of Commons on December 7, 1999. On behalf of Tax Executives Institute, Inc., I am writing to express TEI's serious concerns about, and objections to, several provisions relating to the proposal captioned Misrepresentation of a Tax Matter by a Third Party. The provisions, which respond to the call of the Auditor General of Canada for new legislation imposing civil penalties against individuals who promote abusive tax shelters,(1)(*) reach far beyond any legitimate purpose by imposing onerous penalties on company employees for "false statements" or omissions relating to tax matters on their employers' corporate income and excise tax returns.(2) TEI believes the draft legislation is misguided and seriously flawed and, hence, should be withdrawn or substantially revised.

Background

Tax Executives Institute is the preeminent association of business tax executives. The Institute's 5,000 professionals manage the tax affairs of the leading 2,800 companies in Canada, the United States, and Europe and must contend daily with the planning and compliance aspects of Canada's business tax laws. Canadians make up 10 percent of TEI's membership, with our Canadian members belonging to chapters in Calgary, Montreal, Toronto, and Vancouver, which together make up one of our eight geographic regions. Our non-Canadian members (including those in Europe) work for companies with substantial activities in Canada. In sum, TEI's membership includes representatives from most major industries including manufacturing, distributing, wholesaling, and retailing; real estate; transportation; financial services; telecommunications; and natural resources (including timber and integrated oil companies). The comments set forth in this letter reflect the views of the Institute as a whole, but more particularly those of our Canadian constituency.

TEI is concerned with issues of tax policy and administration and is dedicated to working with government agencies in Ottawa (and Washington), as well as in the provinces (and the states), to reduce the costs and burdens of tax compliance and administration to our common benefit. We are convinced that the administration of the tax laws in accordance with the highest standards of professional competence and integrity, as well as an atmosphere of mutual trust and confidence between business and government, will promote the efficient and equitable operation of the tax system. In furtherance of this principle, TEI supports efforts to improve the tax laws and their administration at all levels of government. That we have undertaken to prepare these comments is a measure of our serious concern over draft legislation imposing personal civil penalties on company employees for statements or omissions on corporate tax returns that are determined to be false and that lead to the reduction of the corporation's tax liability.

Summary of Draft Legislation

Draft section 163.2 of the Income Tax Act (ITA) and draft section 285.1 of the Excise Tax Act (ETA) would impose penalties on any person who contributes to the making of a "false statement" on income and excise tax returns, respectively. Specifically, draft subsection 163.2(2) provides that "[e]very person who makes or furnishes, participates in the making of or causes another person to make or furnish a statement 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 another person ... for a purpose of this Act is liable to a penalty in respect of the false statement."(3) Moreover, under draft subsection 163.2(4) of the ITA"[e]very person who makes, or participates in, assents to or acquiesces in the making of, a statement to, or by or on behalf of, another per son ... 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." (Emphasis added.) The differences between subsections 2 and 4 are very subtle -- indeed, the confusingly similar provisions can apply simultaneously to the same conduct or false statement(4) -- but the latter subsection applies to officers, directors, and employees of corporate taxpayers in respect of the corporation's income (and excise) tax returns, whereas the former is aimed primarily at promoters, appraisers, and third-party tax practitioners.(5)

Under draft subsection 162.2(3), the penalty for a false statement under subsection 162.2(2) is the greater of $1,000 or 100 percent of the "gross entitlements" (essentially the fees payable to the third party). Under draft subsection 162.2(5), the penalty for a false statement under subsection 162.2(4) is the greater of $1,000 and 50 percent of the tax reduction attributable to the "false statement." Regrettably, the proposed legislation fails to define the term "statement," but, in addition to the tax returns and statements therein, the term likely includes invoices, purchase orders, books of account, and any other record that forms the basis for the information reported in a company tax return or tax election. The very broad nature of what constitutes a statement, in turn, means that any "false" statement, which includes an omission or failure to act, of an employee that "could be used by or on behalf of the other person [the corporation] for a purpose of the Act" will potentially give rise to a penalty where the false statement is made either knowingly or under circumstances amounting to "culpable conduct."

"Culpable conduct" includes "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." (Emphasis added.) The first and third prongs of the definition of culpable conduct embody legal standards with well-established meanings. Indeed, the two provisions impose a burden on the government to prove the elements of substantial malfeasance that is similar to the elements for establishing criminal conduct (i.e., knowledge that an act or statement is wrongful or false, coupled with intentional or reckless commission of an act or the making of a statement).(6) Nevertheless, the broad scope of the potential application of the first and third prongs to every employee in a corporate setting will prove troublesome. More important and surprising is that, because of interpretations of the standard adopted by the courts, the second prong of the definition -- the "indifference" standard -- could arguably be invoked by the Canada Customs and Revenue Agency (CCRA) to...