11 May 1990 Income Tax Severed Letter ACC9070 - GST Legislation - Questions

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.

May 11, 1990

FROM - Specialty Rulings Directorate C. Tremblay 957-2095

TO - Audit Programs and Assessment Division Ken Warren Director

SUBJECT: G.S.T. Legislation - Questions

This is in reply to a memorandum of March 22, 1990 from E. Noel de Tilly requesting the Department's position with respect to the 4 questions posed. Our comments follow. We apologize for the delay.

QUESTION #1

Will the transitional credit or rebate to small businesses under section 346 of Bill C-62 be taxable under the Income Tax Act?

DEPARTMENT'S POSITION

The one-time transitional credit or rebate received by many small businesses to help offset the costs involved in changing over from the federal sales tax to the G.S.T. is taxable under paragraph 12(1)(x) of the Income Tax Act. It meets the definition of a payment from a government, municipality or other public authority where the amount can reasonably be considered to have been received as (iv) an reimbursement, contribution, allowance or assistance, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of assistance in respect of the cost of property or in respect of an expense.

QUESTION #2

Will the interest received on rebates be taxable?

DEPARTMENT'S POSITION

Interest receipts have been described in the Courts as "the return or consideration or compensation for use or retention by one person of a sum of money, belonging to, in a colloquial sense, or owed to, another". In our opinion, it follows that the interest received on the rebates are taxable pursuant to paragraph 12(1)(c) of the Act.

Our position on Interest Income is further explained in IT-396R .

QUESTION #3

Will the interest and penalty paid on G.S.T. assessments be deductible for income tax purposes? (same as F.S.T.?)

DEPARTMENT'S POSITION

Penalties such as statutory penalties are not deductible.

Examples of Statutory penalties are those imposed under subsection 50(4) of the Excise Tax Act on default of excise and federal sales tax, even though the penalty is computed in a manner similar to interest. See IT-104R , paragraphs 2, 3, 4 and 7, which further explains our position that fines and penalties are not outlays or expenses incurred for the purpose of producing income from a business or property as required under paragraph 18(1)(a) of the Act. Accordingly these fines or penalties do not qualify as either 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). The Excise Tax Act levies penalties only (rather than interest) for sales tax deficiencies.

HORTON STEEL WORKS LIMITED v. MINISTER OF NATIONAL REVENUE ( 72 DTC 1123) discusses sales tax and penalties. In that case, it was held that the penalty had been imposed as a consequence of a breach of the law and could not be considered an expenditure incurred in the normal course of business. Sales tax has always been recognized as a business expense, but sales tax penalties fall into a different category since they are imposed only as a result of default.

In our opinion, the G.S.T. interest should be considered in the same light as provincial sales tax interest and as such will be deductible from income. This is in keeping with the Department's long standing policy allowing a similar deduction for interest paid on sales tax reassessments as outlined in I.C. 77-11

QUESTION #4

INVENTORY VALUATIONS

The claimant will want his inventory valued at the highest possible amount on January 1991 in order to get a higher FST rebate. You are concerned that taxpayers may request to have their inventories valued at market value on December 31,1990 and later request to have their inventories valued as in their prior methods for the next fiscal period.

DEPARTMENT'S POSITION

Interpretation Bulletin IT-473 discusses Inventory valuations and as discussed in paragraph 4, once a taxpayer has adopted, or has been required to adopt one of the methods of valuing inventory pursuant to subsection 10(1) of the Act and section 1801 of the Regulations, he must continue to use that method on a consistent basis in subsequent years. However, in exceptional cases, the Department will accept a change in the method used where it is shown that the new method is, in the circumstances, a more appropriate method of computing the taxpayer's income, the new method is used for financial statement purposes by the taxpayer, and the new method is used consistently from year to year.

Accordingly your concern is unfounded. In our opinion, a taxpayer's request to have his inventory valued at market on December 31, 1990 followed by a request to revert to the old method of valuing inventory in the following year will not meet the criteria outlined above.

B.W. Dath Director Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch