8 January 2013 External T.I. 2012-0472261E5 - Penalties and interest

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: Are the interest and penalties resulting from failure to collect tax levied pursuant to subsections 18.1(1) and 19(2), respectively, of the Tobacco Tax Act of Ontario deductible expenses?

Position: No. Penalties will be deductible only if meet Regulation 7309 exception. However, the interest on such penalties may be deductible.

Reasons: Law and facts

XXXXXXXXXX
2012-047226
Lata Agarwal, CMA, MBA

January 8, 2013

Dear XXXXXXXXXX

Re: Deductibility of interest and penalties

This is in response to your letter dated May 17, 2012, wherein you have requested our views on section 67.6 of the Income Tax Act ("Act") and section 7309 of the Income Tax Regulations ("Regulations") as they relate to the deductibility of interest and penalties levied under subsections 18.1(1) and 19(2), respectively, of the Tobacco Tax Act of Ontario ("TTA") from failure to collect tax levied under the TTA.

Our Comments

As the situation described in your correspondence involves a completed transaction, a determination of the related tax implications would require a careful review of all relevant facts of the specific transaction. Such review would normally be conducted by the applicable Tax Services Office during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year. Notwithstanding the foregoing, we are prepared to provide the following general comments that may be of assistance.

Section 67.6 of 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. Pursuant to section 7309 of the Regulations, the only prescribed penalties, for the purposes of section 67.6 of the Act, are the penalties imposed under paragraph 110.1(1)(a) of the Excise Act.

Accordingly, penalties imposed under the TTA would not deductible in computing income for purposes of the Act.

Subject to paragraph 18(1)(t) of the Act, interest incurred on certain penalties could be deductible under the Act, provided such interest was otherwise incurred by the taxpayer for the purposes of gaining or earning income from the business or property. While paragraph 18(1)(t) of the Act would deny a deduction, inter alia, for interest paid or payable under Part IX of the Excise Tax Act or Air Travellers Security Charge Act, it would not preclude a deduction for interest levied under subsection 18.1(1) of the TTA.

We trust that these comments will be of assistance.

Yours truly,

Michael Cooke, C.P.A., C.A.
Manager
Business and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch