8 November 1999 External T.I. 9914135 - INTEREST & PENALTY RE MICHIGAN SBT

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: Whether interest and penalty in respect of assessment or reassessment of Michigan Single Business tax is deductible

Position: Generally, interest is deductible but penalty is not.

Reasons: As Michigan single business tax is generally deductible so is the interest on such tax. However, penalty is not laid out to earn income. Therefore it is not deductible except in certain situations as described in the opinion letter.

XXXXXXXXXX 991413
S. Leung
Attention: XXXXXXXXXX

November 8, 1999

Dear Sirs:

Re: Michigan Single Business Tax ("SBT")

We are writing in response to your letter of February 26, 1999 to Mr. Ross Kauffman of Legislative Policy Division, Revenue Canada, who has forwarded your letter to us for reply. You requested our view as to whether interest and penalties paid to the State of Michigan in respect of SBT assessments or reassessments are deductible in computing income for Canadian tax purposes. You also requested our confirmation that SBT is deductible in computing income for Canadian tax purposes but not creditable under section 126 of the Income Tax Act (the "Act").

It is our view that SBT is not an income or profits tax for the purposes of section 126 of the Act and is therefore not creditable for Canadian foreign tax credit purposes. However, it is deductible as a business expense in computing income of the taxpayer under paragraph 18(1)(a) of the Act.

The Department's general position with respect to fines and penalties is stated in paragraph 2 of Interpretation Bulletin IT-104R2 dated May 28, 1993 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) or as an outlay or expense for the purpose of making a disposition of capital property under subsection 40(1)."

There is an exception to the above-noted general position if all the conditions stated in paragraph 3 of that Interpretation Bulletin are met. Nevertheless, it is always a question of fact as to whether a fine or penalty is deductible in computing income of a taxpayer by virtue of paragraph 18(1)(a) of the Act. In our view, penalties in respect of SBT assessments or reassessments do not meet all the conditions specified in paragraph 3 of IT-104R2 and unless the facts show otherwise, such penalties are not deductible in computing income of the taxpayer.

Where a "tax" is deductible in computing income by virtue of paragraph 18(1)(a) of the Act as a business expense, generally, interest in respect of such a "tax" is also deductible under that same paragraph unless the deduction is specifically prohibited under another paragraph in section 18 of the Act. In this regard, it is our general view that interest charged in respect of SBT assessments or reassessments is deductible in computing income of the taxpayer for Canadian tax purposes.

As stated in paragraph 22 of Information Circular 70-6R3 dated December 30, l996, the opinions expressed in this letter are not rulings and are consequently not binding on the Department.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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