19 December 1995 External T.I. 9527565 - DEDUCTIBILITY OF FINE (OCCUP. HEALTH & SAFETY ACT)

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Is a fine imposed under the Occupational Health & Safety Act deductible in computing business or property income?

Position TAKEN:

No, based on the facts provided.

Reasons FOR POSITION TAKEN:

The Department's general position is that judicial and statutory fines are not deductible in computing business or property income by virtue of paragraph 18(1)(a). Nevertheless, such fines, for relatively minor matters, may be deductible in exceptional circumstances where the expense satisfies all of the 5 tests described in paragraph 3 of IT-104R2. Based on the limited information provided by the taxpayer, it appears that at least tests (a) and (c), of paragraph 3 of IT-104R2, have not been met in these particular circumstances.

			5-952756
XXXXXXXXXX			M. Azzi

December 19, 1995

Dear Sir:

Re: Deductibility of Fines or Penalties

This is in reply to your letter of October 10, 1995, wherein you request our views as to the deductibility of a fine imposed under the Occupational Health & Safety Act. You indicate that you have a client who was charged and found guilty of failing to carry out safety measures, in that your client's employees were caught working outside a trench box.

Our Comments

As indicated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, a request for a written opinion on a completed transaction is generally considered by the taxpayer's Tax Services Office. However, we are prepared to offer the following general comments.

The Department's general position with respect to fines and penalties is stated in paragraph 2 of IT-104R2 as follows:

"...judicial and statutory fines or penalties do not generally qualify as a deduction in computing income from a business or property under paragraph 18(1)(a), or as an eligible capital expenditure as defined in paragraph 14(5)(b) (now subsection 14(5)) or as an outlay or expense for the purpose of making a disposition of capital property under subsection 40(1)."

However, as indicated in paragraph 3 of IT-104R2, judicial and statutory fines or penalties, for relatively minor matters, may nevertheless be deductible in computing business or property income, in exceptional circumstances where the expense satisfies all of the following tests and factors:

"(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 contrary to public policy;

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

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

Based on the limited information provided in your letter, it appears that at least tests (a) and (c) above have not been met. That is, it is doubtful that the fine imposed on your client was incurred to earn income, as your client's income would most likely have been no less had the fine not been incurred. Furthermore, it does not appear that the violation resulting in the imposition of the fine was inevitable and beyond the control of your client and your client's employees, as the fine resulted from the employees not following occupational health and safety regulations. Consequently, in our view, the above-described fine would not be deductible by your client in computing business or property income.

We trust that our comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch