CRA substantially revises and expands its Bulletin on deductibility of fines and penalties

New (or differently expressed) points (as compared to IT-104R3) in CRA’s Folio on the deductibility of fines and penalties include:

• CRA generally will follow the characterization of amounts required to be paid under another statute, so that if they are not treated there as a fine or penalty, e.g., the purchase price of carbon offset credits, their deductibility will not be denied under s. 67.6.
• "[A] fine or penalty incurred in relation to a transaction that is outside the scope of a taxpayer’s normal business activities should not be included in the computation of profit from that business for purposes of subsection 9(1)."
• Following CIBC, the morality of a taxpayer’s conduct is not irrelevant to the deductibility of its expenses.
• In addition, it also is irrelevant if the fine or penalty was deliberately incurred, it was incurred as a result of egregious or repulsive conduct or its deduction would be contrary to public policy.
• CRA has carried forward the statements in IT-104R3 that fines or penalties incurred to acquire inventory, depreciable property or eligible capital property can be treated as expenditures on those items, without qualifying these statements by reference to the subsequently-enacted s. 67.6. The implication may be that fines or penalties whose deduction otherwise would be prohibited by s. 67.6 may be indirectly deducted by this route.
• Ss. 18(1)(t) and 67.6 do not prohibit the deduction of interest charges imposed under commodity tax statutes. However, provincial and foreign income taxes are non-deductible under general principles (unless allowed under ss. 20(11) to (12.1).)
• A deduction for a prepayment penalty under s. 18(9.1) for a taxation year ending after the prepayment is limited to the amount of the prepayment that reasonably relates to the value of the interest that otherwise would have been payable in that year as measured at the time of the prepayment. This amount may be determined using a straight line or present value method. (I don’t know whether the lack of a numerical example reflects embarrassment about the oddness of using a straight line method, diffidence about discussing what discount rate to use or sloth.)

Neal Armstrong. Summaries of S4-F2-C1: "Deductibility of Fines and Penalties" under s. 67.6, s. 18(1)(a) – income-producing purpose, s. 18(9.1), s. 13(21) – undepreciated capital cost – A, s. 10(1), s. 14(5) – eligible capital property, s. 18(1)(t).