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 CCRA.

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

Principal Issues: Whether penalties and interest on un-remitted source deductions are deductible in computing income for tax purposes.

Position: Generally, yes.

Reasons: IT-104R3 and 65302 British Columbia Ltd.

		January 28, 2004

	Bernice Gibson	HEADQUARTERS
	Senior Business Agent	A. Seidel
	Client Services Division	(613) 957-2058
	Hamilton Tax Services Office
		2004-005488

Fines, Penalties and Interest

We are writing in response to your January 6, 2004 e-mail concerning the deductibility of fines, penalties and interest imposed under the Income Tax Act (the "Act"), the Canada Pension Plan Act (the "CPP Act") and the Employment Insurance Act ("EI Act"). The fines, penalties and interest are assessed in respect of un-remitted source deductions.

Background

An employer has failed to remit source deductions and has been assessed penalties and interest under the Act, the CPP Act and the EI Act. You have denied the deductibility of the penalties and interest relating to the assessments under the Act pursuant to paragraph 18(1)(t) of the Act.

Issue

You query whether the penalties and interest levied pursuant to section 21 of the CPP Act, the penalties and interest levied pursuant to sections 82 and 85 of the EI Act and the interest charged under the Act, all in respect of overdue remittances of source deductions, are deductible by the employer in computing income for tax purposes.

Your Views

It is your view that none of the penalties or interest imposed under the Act, the CPP Act and the EI Act should be deductible in computing the employer's income for tax purposes by virtue of paragraph 18(1)(a) of the Act.

Our Comments

Fine and Penalties

Prior to the Supreme Court's decision in the case of 65302 British Columbia Ltd. v. Her Majesty the Queen, 99 DTC 5799 (SCC) ("65302 BC Ltd"), the position of the Canada Revenue Agency was that fines or penalties were not deductible where the event that resulted in the fine or penalty being imposed was avoidable or contrary to public policy pursuant to paragraph 18(1)(a) of the Act. The Supreme Court rejected these criteria.

The Canada Revenue Agency's current views concerning the deductibility of fines and penalties are discussed in Interpretation Bulletin IT-104R3 ("IT-104R3"). As stated in paragraph 2 of IT-104R3, the Supreme Court provided the following general principles that are to be used to determine whether a fine or penalty is deductible:

• The characterization of a levy as a "fine" or "penalty" is of no consequence (i.e., does not make it any less deductible), because the income tax system does not distinguish between levies (which are essentially compensatory in nature) and fines and penalties (which are punitive in nature).
• The deduction of a fine or penalty cannot be disallowed solely on the basis that to allow it would be considered contrary to public policy.
• Prohibiting the deductibility of fines and penalties is inconsistent with the practice of allowing the deduction of expenses incurred to earn illegal income.
• In order for a fine or penalty to be deductible in computing income from a business or property, paragraph 18(1)(a) of the Act requires that it be incurred for the purpose of gaining or producing income from that business or property.
• Paragraph 18(1)(a) of the Act contains no requirement that a fine or penalty be avoidable in order for it to not be deductible.
• Notwithstanding that a fine or penalty may have been incurred for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(1)(a), its deductibility can nevertheless be disallowed by another provision in the Act.

Based on these general principles, the Supreme Court came to the conclusion that "the fundamental principles and provisions of the Act ... dictate that the rule be deductibility. First and foremost, on its face, fines and penalties are capable of falling within the broad and clear language of paragraph 18(1)(a)".

However, the Supreme Court concluded that, in general, "...if the taxpayer cannot establish that the fine was in fact incurred for the purpose of gaining or producing income, then the fine or penalty cannot be deducted ...." by virtue of paragraph 18(1)(a) of the Act. Finally, the Supreme Court stated that there may be situations where the offence giving rise to the fine or penalty is so "egregious or repulsive" that it could not be considered to be incurred for the purpose of gaining or producing income.

Whether or not a fine or penalty is incurred for the purpose of "gaining or producing income" under paragraph 18(1)(a) of the Act is a question of fact. Such a determination can only be made after a review of all the circumstances surrounding a particular situation. In making such a determination, the principles in 65302 BC Ltd. must be taken into consideration.

As stated in paragraph 6 of IT-104R3, there are specific provisions in the Act that will deny deductibility of certain fines and penalties. Specifically, penalties assessed under the Act are not deductible by virtue of paragraph 18(1)(t) of the Act. However, paragraph 18(1)(t) of the Act is not applicable to penalties imposed under the CPP Act or the EI Act. There is also no other specific provision in the Act that would deny the deductibility of penalties imposed under the CPP Act or the EI Act. The general principles from 65302 BC Ltd. must therefore be used to determine the deductibility of such penalties. As indicated earlier, it is our view that penalties incurred for the purposes of gaining or producing income will generally be deductible in computing income for tax purposes, including penalties imposed under the CPP Act or the EI Act.

Interest

Subparagraph 20(1)(c)(i) of the Act requires that the interest expense sought to be deducted be on "borrowed money used for the purpose of earning income from a business or property." Finding the purpose for the use of borrowed money is generally a question of fact. In general, it is our view that interest paid pursuant to the CPP Act or the EI Act, in respect of un-remitted source deductions, would be interest paid on borrowed money. This is so because subsection 23(1) of the CPP Act provides that all contributions, and subsection 86(1) of the EI Act provide that all premiums, "interest, penalties and other amounts payable by a ("person" in CPP Act/"employer" in EI Act) under this Act are debts due to Her Majesty and recoverable as such in the Federal Court or any other court of competent jurisdiction or in any other manner provided for by this Act". Any interest paid in respect of un-remitted source deductions and any interest paid in respect of penalties would therefore be amounts paid in respect of a debt. Since the requirements of paragraph 20(1)(c) of the Act would be satisfied, the interest assessed under the CCP Act or the EI Act, in respect of un-remitted source deductions, would be deductible in computing income for income tax purposes, by any employer that has failed to remit such source deductions to the Receiver General.

If we can be of any further assistance, please do not hesitate to contact us. XXXXXXXXXX.

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch