14 June 2007 Internal T.I. 2006-0185611I7 - Deductibility of fine or penalty

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 fines or penalties imposed by a self-regulatory organization that is recognized by a provincial securities commission are deductible for income tax purposes.

Position: No.

Reasons: Section 67.6 of the Income Tax Act.

								June 14, 2007

	Hamilton Tax Services Office			HEADQUARTERS
Sr. Tax Avoidance Auditor			Income Tax Rulings
		   						Directorate
	Attention : Fred McFaul				Tim Fitzgerald, CGA

								2006-018561

Deductibility of Fines Levied by a Self-Regulatory Organization ("SRO")

We are responding to your electronic correspondence of May 10, 2006 wherein you asked whether fines or penalties imposed on members by a SRO recognized by the Ontario Securities Commission would be non-deductible by virtue of section 67.6 of the Income Tax Act ("the Act"). Subsequently, you also asked whether section 67.6 of the Act applies to other associated charges such as interest on penalties and charges levied for costs incurred to distribute compensatory payments to parties adversely affected by the member's actions. We apologize for the delay in responding.

Our Comments:

Subject to certain proposed prescribed exceptions, section 67.6 of the Act provides that no deduction shall be made in respect of any amount that is a fine or penalty imposed under a law of a country or a political subdivision of a country (including a state, province or territory) by any person or public body that has authority to impose the fine or penalty. It is our view that if provincial securities legislation provides authority to a recognized SRO to govern and regulate its members, through the SRO's bylaws for example, in order to ensure compliance with that provincial securities legislation, then fines and penalties applied under those bylaws are, in effect, imposed as a consequence of the law of a province as specified in section 67.6 of the Act. A deduction for the payment of such fines or penalties would therefore be denied. We have confirmed with officials of the Department of Finance that this result is consistent with tax policy.

With regard to other associated non-penalty charges that you mentioned, such as interest on fines and separate levies for distribution costs, these charges fall outside the application of section 67.6 of the Act. The tax treatment of each such amount would be determined in accordance with the Act on the basis of the facts in the particular circumstances.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada 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. You should direct your request for this latter version to Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

We trust our comments are of assistance.

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch