6 February 1992 Internal T.I. 9202247 F - Excise 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.

February 6, 1992

OTTAWA DISTRICT OFFICE     Rulings Directorate

Basic Files     Claude Tremblay

(613) 952-1361

Attention: Rocco Frangione

          920224

     24(1)

We are writing in response to your memorandum of January 23, 1992, requesting our comments on the submission received from 19(1),24(1) concerning the deductibility of the penalties under subsection 50(4) of the Excise Tax Act.

FACTS

     24(1)

24(1) seeks a deduction for this penalty payment.

19(1) concludes that the penalty imposed on 24(1) pursuant to subsection 50(4) of the Excise Tax Act is deductible as an expense because it was incurred as a result of an event that was incidental to 24(1) business. She goes on to state that the deduction is not prohibited on the grounds of public interest; the violation of the Excise Tax Act resulted from the combination of a change in business arrangements and the negligence of an employee.  The problem was reported to Revenue Canada promptly. In their view, the expenditure was incurred in the course of the company's business operations and should be allowed as a deduction.

Our Comments

In our view, the Department should maintain its assessing position and deny the deduction of these penalties.  Judicial and statutory fines (such as subsection 50(4) of the Excise Tax Act) do not generally qualify as a deduction in computing income from a business or property under paragraph 18(1)(a) of the Income Tax Act.  Paragraph 7 of Interpretation Bulletin IT-104R is even more specific and states that a penalty imposed under subsection 79(1) of the Excise tax Act (or its predecessor) {subsection 50(4)} on default in payment of excise and federal sales tax is a non-deductible statutory penalty, even though the penalty is computed in a manner similar to interest.  This is the result found in Horton Steel Works Ltd v. MNR, ~JL:Jump,"

Counsel's comments on page 6339 of TNT Canada Inc. v the Queen (88 DTC 6334) regarding the failure to pay the related excise tax on the repair done in the U.S. may suggest a radical liberalization of our approach to fines and penalties, however, it is our view that current jurisprudence does not require such an approach.  In the TNT decision, the Department's counsel conceded that pursuant to Dube, J., in Day & Ross, the penalty imposed for having repair work done in the United States and purchasing parts there without paying the necessary sales and excise tax was deductible.  We feel the better view is that the penalties were allowed in the Day & Ross case for the reasons summed up by Dube, J. at p.6440.

     "In the absence of constant control by the plaintiff over the exact cargo weight carried in its trailers, and the uncontradicted evidence would suggest that such a tight control would be impractical if not impossible in a very highly competitive road transport industry, then unintentional violations of weights restrictions would seem to be inevitable."

     23

Accordingly, fines and penalties generally remain non-deductible except in exceptional circumstances where all the following criteria is met:

     a)     the fine or penalty can be shown to have been laid out for the purpose of earning income;

     b)     the nature and circumstances of the penalized conduct are such that allowing the deduction of the expense would not be offensive to public   policy;

     c)     incurring the particular type of fine or penalty is a normal risk of carrying on business or earning the income and even though due care is exercised, the violation is inevitable and beyond the control of the taxpayer and the taxpayer's employees;

     d)     the breach of law giving rise to the fine or penalty does not result from negligence, ignorance or deliberate disobedience of the law and does not endanger public safety; and

     e)     the deduction of the expense is not otherwise prohibited under the Act, for example, is not a capital outlay, is not incurred to earn tax-exempt income and is not in excess of a reasonable amount.

In our view, the penalty does not satisfy all 5 of these conditions.  For example, it is doubtful that the penalty was incurred to earn income, because the income earned would have been no less had the penalty not been incurred.

With respect to the third condition described above, the inevitability of the penalty (i.e. was the penalty a normal risk of business as stated in the Day and Ross case) is examined.  The taxpayer's representation concentrates on the due diligence exercised and the difficulty encountered by the vice president of Finance.  Considering this issue in light of the penalty being a normal risk of carrying on business is equivalent to suggesting that the Excise Tax Act is too complex to expect perfect compliance or that ignorance of the law is itself a defence.  In addition, the fourth condition is not met in that the breach of law which gave rise to the penalty resulted from ignorance or negligence of its application to the taxpayer.  In the Day & Ross case, there is an implication that the company could not assure itself of compliance with the law because loads necessarily were made up based on weights declared by shippers.  In the present case, the ignorance of or negligence concerning the requirements of the Excise Tax Act was entirely that of the taxpayer (acting through its employees, as a corporation must do) and not of suppliers or customers.

As stated in the Queen v Atkins (76 DTC 6258), the fact that an amount is calculated in a manner similar to salary (or interest) does not necessarily deem that amount to be salary (or interest). 

In 1985 the Excise Tax Act was amended to make provision for both interest and penalties, thus suggesting that in 1985 the legislators did not consider the penalty to be interest in disguise. 

In summary, it is still our view that the penalty assessed under the Excise Tax Act is non-deductible for income tax purposes. 

We trust that these comments will be of some assistance.

E. Wheelerfor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental  Affairs Branch