2 November 2006 External T.I. 2006-0212051E5 - Softwood lumber - surge mechanism

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 the surge mechanism found in section 13 of the proposed Softwood Lumber Products Export Charge Act, 2006 ("Bill C-24") is a fine or penalty for the purposes of section 67.6

Position: No

Reasons: Not characterized as a fine or penalty under the relevant legislation

				2006-021205
XXXXXXXXXX 			T. Harris
(613) 957-2114
November 2, 2006

Dear XXXXXXXXXX:

Re: Softwood Lumber Agreement

This is in response to your letter of October 18, 2006 wherein you requested our interpretation of whether the surge mechanism found in section 13 of the proposed Softwood Lumber Products Export Charge Act, 2006 ("Bill C-24") would be considered to be a fine or penalty for the purposes of section 67.6 of the Income Tax Act (the "ITA").

Proposed subsection 13(1) of Bill C-24 (the surge mechanism) provides:

The amount of the charge applicable to an export of a softwood lumber product from a region during a month is increased by 50% if

(a) the export is one that does not require an export allocation under paragraph 6.3(3)(b) of the Export and Import Permits Act; and

(b) the exports of softwood lumber from the region during that month exceed the monthly trigger volume applicable to that region.

A backgrounder relating to the Canada-U.S. Softwood Lumber Agreement, which is available on the website of Foreign Affairs and International Trade Canada, describes the surge mechanism as follows:

Each province will be allocated a share of exports based on its historic share of the U.S. market. If shipments from a province in a month exceed 110 percent of its base allocation, then the export charge on shipments from that province during that month will be increased by 50 percent. For example, if there is a 10 percent export charge during that month, then the export charge would be increased to 15 percent.

Our Comments

Written confirmation of the income tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request as described in Information Circular 70-6R5 dated May 17, 2002 issued by the Canada Revenue Agency. A fee is charged for this service. Although, we are unable to provide any comments with respect to your particular fact situation otherwise than in the form of an advance income tax ruling, the following general comments may be of assistance.

Section 67.6 of the ITA provides that any fine or penalty (other than a prescribed fine or penalty) that is imposed under a law of a country or of 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 will not be deductible in computing a taxpayer's income. The specific fines or penalties that have been prescribed for the purposes of section 67.6 of the ITA are described in proposed section 7309 of the Income Tax Regulations.

Section 67.6 of the ITA was originally proposed by the March 22, 2004 federal budget. Annex 9 to the Budget Plan 2004 Tax Measures: Supplementary Information and Notice of Ways and Means Motion included the following statement:

The federal, provincial, municipal or foreign law under which an amount is required to be paid will determine whether the amount may be deductible: if it is not characterized as a fine or penalty, the amount may be deductible if it is otherwise incurred for the purpose of earning income; if it is characterized as a fine or penalty, the amount will not be deductible.

In view of these comments, it is our view that if an amount is not characterized as a "fine or penalty" under the relevant legislation which provides for the levy, it would not generally be subject to the provisions of section 67.6 of the ITA. In this regard, the surge mechanism is not referred to as a fine or penalty in Bill C-24 and is found under the heading Softwood Lumber Products Export Charge. Also, as noted in your letter, the various penalties and fines imposed under the proposed legislation are found under the heading Administration and Enforcement. In particular, penalties are imposed under sections 64 to 67, while fines are imposed under sections 68 to 76 of Bill C-24. Consequently, provided that the provisions of Bill C-24 referred to herein are enacted in substantially the same form as described above, it is our opinion that an export charge levied under the surge mechanism found in section 13 of Bill C-24 would not constitute a fine or penalty for the purposes of section 67.6 of the ITA.

We trust that our comments, which are provided in accordance with the practice outlined in paragraph 22 of IC-70-6R5, are of assistance.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch