13 March 1992 Internal T.I. 9204167 F - Provincial Sales Tax Reassessment

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.

March 13, 1992

Mr. Phil KeirsteadBusiness & GeneralBusiness Enquiries DivisionAudit Review (148-1-6)Toronto District Office     

24(1)

This is in reply to your memorandum dated February 4, 1992 in which you requested our comments on the deductibility for income tax purposes by

24(1)

Facts

24(1)

24(1)

Quebec Sales Tax Law

Section 6 of the QRSTA states, "Every purchaser, at the time of making a purchase at a retail sale in Quebec, shall pay a tax equal to 8% of the purchase price of any moveable property...".  Although the ultimate consumer or user of the moveable property must pay the tax, the law provides that vendors of moveable property in Quebec must obtain a registration certificate (section 3 of the QRSTA) and that they must collect (section 13 of the QRSTA) and remit (section 14 of the QRSTA) the tax as agent for the province.  If the vendor is not required to obtain a registration certificate the vendor is liable to remit the tax directly (section 14.1 of the QRSTA).  Also, if the vendor is required to obtain a registration certificate but does not or if the vendor does has a registration certificate but does not collect the tax, the purchaser is liable to remit the tax by virtue of section 6 of the QRSTA.  If the vendor fails to collect the tax from the purchaser at the time of sale, and is subsequently found liable for the tax, he is prohibited from collecting the tax from the purchaser (section 23 of the QRSTA) and if he does collect such amounts he must remit them to the province (section 24 of the QRSTA).

Taxpayers Position

The taxpayer claims that it made a conscious decision not to collect Quebec sales tax because it felt it may not be liable for such tax and that such action would increase both its sales and its profits.  Accordingly, it believes such amounts should be deductible for income tax purposes as a cost of doing business.

Your Position

It is your contention that the payment in 24(1) is on account of capital.  You believe that the payment of a tax that a company must collect as agent for the province is not a cost of doing business but merely a consequence of doing business.                     

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Our Comments

The Department's general position with respect to the deductibility of amounts and the interest thereon arising from reassessments of both federal and provincial sales tax is outlined in Information Circular No. 77-11, dated June 13, 1977.  It is our view that this bulletin represents the Department's current assessing practice with regards to this matter. 

The Tax Review Board decision in Horton Steel Works Ltd. v M.N.R. (72 DTC 1123) stated, "Sales tax has always been recognized as a business expense".  This decision has never been overturned and represents current law.  Although this case dealt exclusively with federal sales tax, the Department believes the decision is equally applicable to provincial sales tax.  In Leo Beauchesne Inc. v M.N.R. (75 DTC 119) the Tax Review Board found that statute-barred years may not be reassessed for sales tax reassessments with respect to those years and accordingly the taxpayer was unable to deduct for income tax purposes amounts relating to a reassessment of both provincial and federal sales tax.  Paragraph 5 of IC 77-11 specifically addresses the issue raised in the Beauchesne case.

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It is the Department's current position to deny any deduction for income tax purposes for penalties arising on federal or provincial sales tax reassessments.  Generally, judicial and statutory fines do not 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, dated June 5, 1978 is even more specific and states that a penalty imposed under the Excise Tax Act on default in payment of excise and federal sales tax is a non-deductible statutory penalty.  This position is consistent with the findings of the Tax Review Board in the Horton Steel Works case referred to above, and has recently been approved by our Legal Services as a correct statement of the present law.  In our view, provincial sales tax penalties should be treated in the same manner as federal sales tax penalties.  Accordingly, we concur with your proposal to deny a deduction for the penalty component (if any; your referral does not provide a break-down between tax, interest and penalty) of the Quebec provincial sales tax reassessment.

We trust our comments are of assistance.

E. Wheeler for DirectorBusiness and General DivisionLegislative and Intergovernmental Affairs Branch