10 May 2005 External T.I. 2005-0119721E5 - Fines and penalties

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.

Principal Issues: Whether various penalties and fines are deductible and whether the interest on such fines and penalties is deductible: Federal Income Tax, Provincial Income Tax, GST, Ontario Retail Sales Tax, Source Deductions, Ontario Work Place Safety Insurance Board, and Ontario Ministry of Transportation

Position: Fines and Penalties: Proposed section 67.6 of the Act provides that no deduction is allowed for any fines and penalties other than as prescribed by draft section 7309 of the Regulations. Interest on Unpaid Taxes, Fines, Penalties, Levies and Premiums: a) Federal Income Tax: No b) Provincial Income Tax: No c) GST and Ontario Retail Sales Tax: in certain circumstances d) Unremitted CPP and EI source deductions: Yes e) Ontario Work Place Safety Insurance Board, and Ontario Ministry of Transportation: Deductible if incurred for the purpose of earning income from business.

Reasons: Previous comments given in various interpretations

2005-011972
XXXXXXXXXX G. Moore
(613) 957-8982
May 10, 2005

Dear XXXXXXXXXX:

Re: Deductibility of Fines, Penalties and Interest

This is in response to your letter of January 5, 2005, wherein you are asking for our views on whether fines, penalties and interest on penalties as well as interest on unpaid taxes, levies and premiums are deductible.

Our Comments

Fines and Penalties:

Proposed section 67.6 of the Income Tax Act (the "Act") provides that, in computing income, no deduction shall be made in respect of an amount that is a fine or penalty (other than a prescribed fine or penalty), imposed after March 22, 2004, under a law of a country (including a state, province or territory) by any person or public body that has authority to impose the fine or penalty. Proposed section 67.6 applies to penalties and fines, but not interest.

Paragraph (a) of draft section 7309 of the Income Tax Regulations (the "Regulations") states that, for the purposes of section 67.6 of the Act, it is proposed that penalties and fines imposed under paragraphs 110.1(a), 280(1)(a), 280(1.1)(a) and 280(2)(a) of the Excise Act and subsection 53(1) of the Air Travellers Security Charge Act are prescribed penalties.

Accordingly, with the exception of those fines and penalties expressly described above, as prescribed by draft section 7309 of the Regulations, all other fines and penalties are not deductible in computing income for purposes of the Act.

Interest on Unpaid Federal Income Tax:

With respect to interest on federal income tax owing, subsection 18(1) and paragraph 18(1)(t) of the Act provide:

"In computing the income of a taxpayer from a business or property no deduction shall be made in respect of: ...

(t) any amount paid or payable under this Act (other than tax paid or payable under Part XII.2 or Part XII.6);"

Accordingly, interest that is paid or payable pursuant to the Act is not deductible. This may be contrasted with the Excise Tax Act, which does not contain a provision that is similar to paragraph 18(1)(t) of the Act.

With respect to interest on provincial tax owing, it is our view that such interest would not be deductible in computing income.

Interest on GST and ORST:

In most cases, GST is paid by taxpayers as an agent which collects the taxes payable in respect of a taxable supply and remits them to Her Majesty as a discharge of the purchaser's liability. In these situations, the GST is not deductible by the taxpayer, and accordingly, any interest incurred by a taxpayer on a loan incurred to make such GST remittance would not be deductible. However, where a purchaser is entitled to deduct the cost of GST in computing its income from business or property, the interest paid on a loan used to pay this GST would be deductible.

Paragraph 6 of Information Circular IC- 77-11, Sales Tax Reassessments: Deductibility in Computing Income, states that the interest element of a sales tax reassessment will be deductible provided the sales tax amount is itself deductible in computing income. In other words, the interest element of a sales tax assessment or reassessment of the GST or QST will be deductible provided the related sales tax amount arises in the course of earning income from business or property.

It is our understanding that the ORST is paid by taxpayers as an agent which collects the taxes payable and remits them to the Ontario government as a discharge of the purchaser's liability. In this respect, this tax is similar in nature to the GST and therefore, it is our view that interest on a loan used to pay ORST would be accorded the same tax treatment as described above for interest on loans used to pay GST.

Interest in Respect of Unremitted Source Deductions:

It is our view that an unremitted source deduction is an amount payable by a taxpayer and not borrowed money. Therefore, interest assessed under the CPP Act or EI Act, in respect of an unremitted source deduction, is deductible in computing income from a business under section 9 of the Act.

Interest on Fines and Penalties Levied by the Ontario Work Place Safety Insurance Board and the Ontario Ministry of Transportation:

Interest on fines and penalties levied by the Ontario Work Place Safety Insurance Board and the Ontario Ministry of Transportation would be deductible in computing income from a business under section 9 of the Act only if it can be shown that it was incurred for the purpose of earning business income.

We trust that these comments will be of assistance.

Yours truly,

Steve Tevlin
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch