A
J
Frost:—This
is
an
appeal
from
an
income
tax
assessment
in
respect
of
the
appellant’s
1968
taxation
year
wherein
the
penalty
of
$82,168.80
imposed
under
subsection
(4)
of
section
48
of
the
Excise
Tax
Act
was
not
allowed
as
a
deduction
from
income
on
the
ground
that
it
was
not
incurred
for
the
purpose
of
producing
income.
The
Minister
of
National
Revenue
confirmed
the
assessment
on
January
14,
1971.
The
appeal
was
heard
at
Hamilton,
Ontario,
on
November
22,
1971,
by
the
Tax
Appeal
Board
as
it
was
then
constituted.
The
appellant
fabricates
steel
plate
and
is
a
subsidiary
of
Chicago
Bridge
and
Iron
Company
of
Chicago,
Illinois,
United
States.
As
the
result
of
a
sales
audit,
an
additional
federal
sales
tax
of
$666,680.25
was
levied
and
a
penalty
of
$82,168.80
imposed
under
subsection
(4)
of
section
48
of
the
Excise
Tax
Act.
The
said
subsection
(4)
reads
as
follows:
(4)
Subject
to
subsection
(5),
upon
default
in
payment
of
the
tax
or
any
portion
thereof
payable
under
Part
IV,
V
or
VI
within
the
time
prescribed
by
subsection
(3),
there
shall
be
paid
in
addition
to
the
amount
of
the
default
a
penalty
of
two-thirds
of
one
per
cent
of
the
amount
in
default
in
respect
of
each
month
or
fraction
of
a
month
during
which
the
default
continues.
Counsel
for
the
appellant
in
his
argument
submitted
that:
(1)
The
amount
represents
an
ordinary
business
expense
of
the
taxpayer
and
was
incurred
by
the
taxpayer
in
the
ordinary
conduct
of
its
business;
(2)
The
Excise
Tax
Act
levies
penalties
only
(rather
than
interest)
for
sales
tax
deficiencies;
accordingly,
such
additional
charges
are
a
form
of
additional
sales
tax
because
of
the
manner
by
which
the
charge
is
imposed
under
the
Excise
Tax
Act,
similar
to
the
penalty
for
dumping
duties
(ie,
additional
special
duties)
under
the
Customs
Tariff,
which
penalties
have
traditionally
been
accepted
by
the
Department
as
normal
business
expenses
and
deductions
for
corporation
income
tax
purposes.
(3)
In
all
of
the
tax
cases
dealing
with
the
question
of
deductibility
for
tax
purposes
of
fines
and
penalties
(CCH
Canadian
Tax
Reporter,
11-436.739),
penalties
were
not
allowed
as
tax
deductions
only
in
cases
where
such
penalties
were
not
business
expenses
or
were
unrelated
to
the
taxpayer’s
ordinary
conduct
of
its
business,
which
cannot
be
said
with
respect
to
the
penalties
incurred
by
Horton
Steel
Works,
Limited
which
were
related
to
the
collection
of
sales
tax
on
the
sale
of
its
products
during
the
conduct
of
its
ordinary
business.
Moreover,
CCH
refers
only
to
the
disallowance
by
the
Department
of
penalties
or
interest
incurred
by
taxpayers
under
the
Income
Tax
Act,
and
fails
to
include
in
this
reference
penalties
under
the
Excise
Tax
Act.
(4)
The
amount
of
$82,168.80
was
disallowed
by
the
Department
under
Section
12(1)(a)
of
the
Income
Tax
Act
as
“not
an
outlay
or
expense
incurred
by
the
taxpayer
for
the
purpose
of
gaining
or
producing
income
of
a
business”.
The
taxpayer
submits
that
the
penalty
imposed
can
be
identified
with
the
federal
sales
tax
itself
which
is
imposed
under
the
Excise
Tax
Act
and
is
considered
by
the
Department
as
a
deduction
for
corporation
tax
purposes
notwithstanding
the
“purpose
of
gaining
or
producing
income”
test
of
Section
12(1
)(a).
(5)
Such
additional
charges
under
the
Excise
Tax
Act
cannot
be
equated
with
interest
and
penalties
on
a
corporation’s
deficient
income
tax
liability
payments
which
liabilities
(and
any
accompanying
charges)
are
determinable
and
payable
only
after
the
taxable
income
has
been
earned,
completely
unlike
federal
sales
taxes
(and
related
charges)
which
are
an
integral
part
of
the
corporation’s
business
income
earning
process.
In
the
Board’s
opinion,
the
fine
was
imposed
as
a
consequence
of
a
breach
of
the
law
and
cannot
be
considered
an
expenditure
incurred
in
the
normal
course
of
business.
The
distinction
between
the
imposition
of
sales
tax
and
a
penalty
under
the
Excise
Tax
Act
is
that
the
penalty
would
not
have
been
incurred
had
there
been
no
default
under
the
said
Act.
This
fact
severs
the
penalty
from
the
tax
itself.
Sales
tax
has
always
been
recognized
as
a
business
expense,
but
penalties
fall
into
a
different
category
being
imposed
only
as
a
result
of
default.
The
respondent
cannot
be
expected
to
bear
any
part
of
the
burden
of
a
sales
tax
penalty
arising
as
a
result
of
carelessness
or
ignorance,
either
directly
or
indirectly.
As
the
business
of
the
appellant
could
have
been
carried
on
without
any
infraction
of
the
law,
the
penalty
is
not
an
outlay
made
for
the
purpose
of
producing
income
under
paragraph
12(1)(a)
of
the
Income
Tax
Act.
Reference
may
be
had
to
Atomic
Transfer
Lid
v
MNR,
34
Tax
ABC
451;
CIR
v
Alexander
Von
Glehn
&
Co,
Ltd
(1919-20),
12
TC
232.
Appeal
dismissed.