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Docket: 2007-114(IT)G
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BETWEEN:
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FERGUSON-NEUDORF GLASS INC.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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____________________________________________________________________
Appeal heard on December 18, 2008 at Toronto, Ontario
By: The Honourable
Justice Judith Woods
Appearances:
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Counsel for the
Appellant:
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Jeffrey L.
Goldman
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Counsel for the
Respondent:
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Brandon Siegal
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____________________________________________________________________
JUDGMENT
The appeal
with respect to an assessment made under the Income Tax Act for the taxation
year ended July 31, 2002 is allowed, and the assessment is referred back to the Minister of National Revenue
for reconsideration
and reassessment on the following basis:
1. the
appellant is entitled to the relief in the Partial Consent to Judgment filed;
and
2. the
appellant is entitled to a deduction in computing income for a fine incurred in
the amount of $212,500.
The appellant is entitled to its costs.
Signed at Toronto, Ontario this 19th
day of December 2008.
Woods J.
Citation: 2008TCC684
Date: 20081219
Docket: 2007-114(IT)G
BETWEEN:
FERGUSON-NEUDORF GLASS INC.
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1] Ferguson-Neudorf
Glass Inc. appeals an assessment for the taxation year ended July 31, 2002.
[2] Some
of the items in dispute were resolved by the parties prior to the hearing and the
resolution of these is reflected in a partial consent to judgment filed with
the Court.
[3] The only
remaining issue is the deductibility of a fine that was imposed as a result of a workplace accident.
[4] The
appellant is in the business of manufacturing and installing glass for
commercial projects. Because of nature of the business, the work is inherently
dangerous, and this is reflected in the workers’ compensation premiums payable
by companies in this industry.
[5] In
the fall of 2000, an employee of the appellant was tragically killed by a
forklift truck while he was working at a construction site in downtown Toronto.
[6] The
Ontario Department of Labour investigated the accident and charged the
appellant with an offence under the Occupational Health and Safety Act (Ontario).
[7] At a
hearing on October 18, 2002 before a judge of the Ontario Court of Justice, the
appellant pled guilty to an offence of failing to “provide information,
instruction and supervision to a worker.” A fine of $170,000 was imposed.
[8] Subsequent
to the hearing, a victim surcharge of 25 percent was added to the fine which
resulted in the total fine being $212,500. It is this amount for which a
deduction is being sought.
[9] The
respondent takes the position that the fine in these circumstances does not
satisfy the income-earning purpose requirement of paragraph 18(1)(a) of
the Act.
[10] Paragraph
18(1)(a) provides:
18(1) General limitations. In
computing the income of a taxpayer from a business or property no deduction
shall be made in respect of
(a) General
limitation - an outlay or expense except to the
extent that it was made or incurred by the taxpayer for the purpose of gaining
or producing income from the business or property;
[11] In
support of its position, the respondent relies on comment from a Supreme Court
of Canada decision which suggests that paragraph 18(1)(a) may be applied
where the circumstances are “egregious.” In that case, 65302 British
Columbia Ltd. v. The Queen, 99 DTC 5799, [1999] 3 S.C.R. 804, the deduction
claimed related to a levy under an egg marketing scheme.
[12] It is
useful to reproduce the relevant parts of the decision in the egg marketing
case. At para. 69, Iacobucci J. writing for the majority states:
Finally, at para.
17, my colleague states that penal fines are not, in the legal sense, incurred
for the purpose of gaining income. It is true that s. 18(1)(a)
expressly authorizes the deduction of expenses incurred for the purpose of
gaining or producing income from that business. But it is equally true
that 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 and the analysis stops here. It is conceivable that a breach
could be so egregious or repulsive that the fine subsequently imposed could not
be justified as being incurred for the purpose of producing income.
However, such a situation would likely be rare and requires no
further consideration in the context of this case, especially given that
Parliament itself may choose to delineate such fines and penalties, as it has
with fines imposed by the Income Tax Act. To repeat, Parliament
may well be motivated to respond promptly and comprehensively to prohibit
clearly and directly the deduction of all such fines and penalties, if
Parliament so chooses.
[Emphasis
added.]
[13] The
above comment is in response to a comment in paragraph 17 by Bastarache J.,
writing for the minority. The relevant passage reads:
I agree with my colleague,
Iacobucci J., that public policy determinations are best left to
Parliament. However, I am not suggesting that the deduction of penal
fines be disallowed for public policy reasons, but instead because their
deduction, not specifically authorized by the Act, would frustrate the
expressed intentions of Parliament in other statutes if they were held to come
under s. 18(1)(a) of the Act. In my view, penal fines are not
expenditures incurred for the purpose of gaining or producing income in
the legal sense. This concern is not so much one of public policy,
morality or legitimacy, but one consistent with a realistic understanding of
the accretion of wealth concept and the court’s duty to uphold the integrity of
the legal system in interpreting the Income Tax Act. As explained
by McLachlin J. in Hall v. Hebert, 1993
CanLII 141 (S.C.C.), [1993] 2 S.C.R. 159, at p. 169, in finding that a
court could bar recovery in tort on the ground of the plaintiff’s immoral or
illegal conduct:
The basis of this
power, as I see it, lies in duty of the courts to preserve the integrity of the
legal system, and is exercisable only where this concern is in issue.
This concern is in issue where a damage award in a civil suit would, in effect,
allow a person to profit from illegal or wrongful conduct, or would permit
an evasion or rebate of a penalty prescribed by the criminal law. The
idea common to these instances is that the law refuses to give by its right
hand what it takes away by its left hand.
[Emphasis added.]
[14] The
question to be decided in this appeal is whether the fine imposed as a result
of the workplace accident was incurred for the purpose of earning income from
the appellant’s business.
[15] Previous
judicial decisions have held that fines arising from activities in the normal
course of business generally satisfy the income-earning purpose test. The
activity which led to the tragedy here satisfies this test. The only issue is
whether the appellant’s conduct was so reprehensible that the activity cannot
be said to have an income-earning purpose.
[16] Neither
counsel was aware of any circumstance in which a court has disallowed a
deduction for a fine or penalty on the basis of the Supreme Court’s comment at
paragraph 69. If it were to be applied here, it would be a first.
[17] The
respondent suggests that, if the actions, or inaction, of an employer are such
as to endanger workers’ lives by reason of inadequate training at a dangerous
work site, this is the type of circumstance that is envisaged by the egregious
conduct comment of Iacobucci J.
[18] Unfortunately,
the Supreme Court did not elaborate on the type of conduct that could give rise
to such a finding, but they did say that it likely would be rare.
[19] It is
not necessary that I attempt to define the type of conduct which would engage
the Supreme Court’s obiter. It is sufficient to conclude that it most
certainly does not include the circumstances that led to the imposition of the
fine that is at issue here.
[20] I
would note the following comment from the justice of the peace who imposed the
fine (Ex. R-2, at p. 24):
There is no evidence that
there’s been some blatant inaction or problems with this particular defendant
before or even at the time of -- in conjunction with this tragic incident. It
appears to be an isolated incident. The workers got involved in moving something.
It’s been acknowledged that training and supervision could have been better and
has, it’s been acknowledged it has been addressed and will be addressed.
[21] This
appeal will be allowed, with costs.
Signed at Toronto, Ontario this 19th day of December 2008.
“J. Woods”
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