16 January 2003 Internal T.I. 2002-0177807 - GST PENALTIES&INTEREST DEDUCTIBILITY

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 assessed and/or reassessed under the Excise Tax Act are deductible in computing income for income tax purposes.

Position: Question of fact but generally, yes.

Reasons:

--- For penalties, must meet the criteria set out in 65302 BC Ltd. v. HMQ to be deductible in computing income.

--- Interest paid on late or deficient payments of GST that relate to a business or property will be deductible.

		January 16, 2003

	Southern Interior Tax Services Office	HEADQUARTERS
	Verification and Enforcement Division	A. Seidel, CMA
(613) 957-2058
	Attention: Penny Seeley
	              Technical Advisor
								2002-017780

GST Penalties and Interest

We are writing in response to your memorandum dated November 27, 2002, concerning the deductibility, for income tax purposes, of interest and penalties assessed under the Excise Tax Act (the "ETA").

The ETA imposes a liability for collecting and remitting the goods and services tax ("GST") on the provider of a taxable supply, the importer of goods or a person bringing goods into a participating province. A taxpayer may be audited for compliance with the GST legislation and may be assessed or re-assessed for late or deficient amounts owing under the ETA. The amounts owing could include interest and penalties. You query whether any of these amounts are deductible in computing income for income tax purposes.

Whether a particular expenditure is deductible in computing income for the year of a taxpayer is a question of fact that can only be determined by reviewing all of the circumstances applicable to a particular situation. Generally, an expense is deductible in computing income if it has been made for the purpose of gaining or producing income from a business or from property and the deduction thereof is not specifically prohibited pursuant to a provision in the Income Tax Act (the "Act"). Since there is a reasonable argument that interest paid under the ETA is a payment made for the purpose of gaining or producing income from a business or from property, it is our view that it would likely be deductible in computing income for income tax purposes in most situations. A provision similar to paragraph 18(1)(t) of the Act would be necessary to deny the deductibility of interest paid under the ETA.

The deductibility of penalties was addressed in 65302 British Columbia Ltd. v. Her Majesty the Queen (99 DTC 5799, SCC). The Supreme Court concluded that a penalty is deductible in computing income from a business where a taxpayer can establish that the penalty was incurred for the purpose of gaining or producing income from that business and where the penalty is not in respect of a breach that is "so egregious or repulsive that the fine or penalty subsequently imposed could not be justified as being incurred for the purpose of producing income". Whether or not a penalty for "gross negligence imposed under section 285 of the ETA" is a breach that is "egregious" or "repulsive" would have to be determined on the facts of each particular case.

Paragraph 8 of draft Interpretation Bulletin IT-104R3 discusses the deductibility of fines and penalties imposed under provincial income tax law as a result of the Exchequer Court of Canada decision in Clinton W. Roenisch v. Minister of National Revenue (1 DTC 199). However, amounts assessed pursuant to the ETA are not an income tax but a tax on the supply of goods and services. It is therefore our view that the comments in paragraph 8 of the draft interpretation bulletin would not be applicable to amounts assessed under the ETA.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. 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 electronic library 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 Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

John Oulton, CA
Manager
Business and Individual Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch