Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether subsection 67.5(1) of the Act applies to deny the deduction of certain payments made in 1998 and 1999.

Position: Yes.

Reasons: Subsection 67.5(1) of the Act denies the deduction of an outlay or expense incurred for the purposes of doing anything that is an offence under, amongst others, section 426 of the Criminal Code.

		December 8, 2000

	XXXXXXXXXX  Tax Services Office	HEADQUARTERS
A. Seidel
	Attention: XXXXXXXXXX 	(613) 957-2058

		2000-005451

Deductibility of Illegal Payments

This is in reply to your memorandum dated November 2, 2000 concerning the application of subsection 67.5(1) of the Income Tax Act (the "Act").

Background

1. A corporation carries on business as a broker in the XXXXXXXXXX.

2. The corporation paid XXXXXXXXXX as "bribes" to an individual in a foreign country. The corporation has indicated that the individual was in charge of a XXXXXXXXXX contract for a XXXXXXXXXX company located in the foreign country and that the payment was required to secure the XXXXXXXXXX contract.

3. The corporation's accountant is of the view that, since the corporation has reported all of the income from the contract, they are entitled to claim the payments made in XXXXXXXXXX as a business expense.

4. The corporation issued cheques payable to "cash", the shareholder endorsed and cashed the cheques and then made a trip to the foreign country to pay the individual.

5. The corporation has indicated that they will obtain signed statements from the individual in the foreign country to substantiate that the payments are made to earn income from the business of the corporation. To date this documentation has not been received.

Issue

Subsection 67.5(1) of the Act provides that "no deduction shall be made in respect of an outlay made or an expense incurred for the purpose of doing anything that is an offence under section 3 of the Corruption of Foreign Public Officials Act or under any of sections 119 to 121, 123 to 125, 393 and 426 of the Criminal Code, or an offence under section 465 of the Criminal Code as it relates to an offence described in any of those sections.

Does subsection 67.5(1) of the Act apply to deny the corporation a deduction for the amounts paid to the individual in the foreign country in XXXXXXXXXX?

Our Comments

Subsection 246(1) of the Criminal Code provides, amongst other things, that:

"every one commits an offence who corruptly gives ... to an agent ... any reward, advantage or benefit of any kind as consideration for doing or forbearing to do ... any act relating to the affairs or business of his principal or for showing or forbearing to show favour or disfavour to any person with relation to the affairs or business of his principal;"

Subsection 246(4) of the Criminal Code states that "[I]n this section, "agent" includes an employee, and "principal" includes an employer."

The technical notes released at the time that subsection 67.5(1) of the Act was introduced stated that the subsection prohibited any deduction in respect of illegal payments made to persons under a duty as agents or employees. The deduction is prohibited where a payment is made to induce, or attempt to induce, the recipient to breach his/her duty and the payment is made for the purpose of doing anything that is an offence under the provisions of the Criminal Code enumerated in subsection 67.5(1) of the Act. The reference to section 3 of the Corruption of Foreign Public Officials Act was added effective February 14, 1999.

Subsection 67.5(1) of the Act applies in any situation where the payment is for "the purpose of doing anything that is an offence" under either of the Acts enumerated in the provision. This is a purpose test which does not include a requirement that the person making the outlay or incurring the expense must be convicted in a court of law under one of the sections enumerated therein before the subsection is applicable.

It is therefore our view that subsection 67.5(1) of the Act would apply to deny the corporation a deduction for the amounts paid to the individual in the foreign country in XXXXXXXXXX.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.

John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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