31 May 2006 Internal T.I. 2006-0181651I7 - Application of Section 67 of the 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.

Principal Issues: Whether section 67 can be applied to disallow a subcontracting expense where the contractor has failed to provide sufficient information on Form T5018 to allow CRA to adequately identify the recipient.

Position: No.

Reasons: Section 67 cannot be used to disallow an expense to enforce an administrative obligation of a business, such as in this particular case, where section 238 of the Income Tax Regulations requires a construction contractor to file a complete T5018 Summary and T5018 slips in respect of a payment or credit of amounts to subcontractors. Where a taxpayer has failed to file an information return as or when required or fails to comply with a duty or obligation imposed by the Act or the Regulations, subsection 162(7) may impose penalties. As well, where the taxpayer fails to make a reasonable effort to obtain information from another person or partnership, paragraph 162(5)(a) may impose a penalty for failure to provide any information required on a prescribed form made pursuant to the Act or the Regulations.

								May 31, 2006

	Toronto Centre TSO				HEADQUARTERS
	Steve Kyskira					Tim Fitzgerald, CGA
	Tax Auditor						(519) 973-7999 ext. 6509

								2006-018165

Application of Section 67 of the Income Tax Act

You have described a situation where a corporate taxpayer ("contractor") is in the construction business of XXXXXXXXXX. The contractor subcontracts work to individuals ("subcontractors") and pays for the work by way of cheque. The contractor files form T5018 each year for the payments to the subcontractors but the forms are incomplete. You indicate that 90% of the forms lacked a proper identification number for the subcontractor and contained either no address or an invalid one.

Your Question:

Citing Lucy Humphrey v. the Queen (2006 TCC 168) as an example of where the application of section 67 of the Act was not based on an issue of quantum, you asked whether the provision might be applied to disallow the subcontracting expenses described above.

Our Comments:

The Humphrey case involved a taxpayer who embezzled funds from her employer and was required by way of court order to repay the employer. The taxpayer had not paid the income tax on the embezzled amount. Chief Justice Bowman said:

"While it was certainly reasonable for the appellant to pay back the amounts in accordance with the restitution order, it is, giving section 67 a textual, contextual and purposive interpretation, unreasonable for her to be able to deduct the repayments of amounts on which she has never paid tax."

We do not agree that the facts in the Humphrey case are analogous to your situation, which involves a construction contractor paying subcontracting fees by way of cheque and failing to properly identify the recipients on an information return. In our view, section 67 of the Act cannot be used to enforce an administrative obligation of a business, such as the requirement under Section 238 of the Income Tax Regulations that a contractor issue T5018 slips to subcontractors and file a summary of contract payments (T5018 Summary). If the quantum of the amounts paid by the contractor to the subcontractors is reasonable, section 67 will not apply to disallow the amounts claimed. However, by virtue of subsection 162(7), penalties may be imposed where a taxpayer fails to file an information return as and when required or fails to comply with a duty or obligation imposed by the Act or the Regulations. Also, where a reasonable effort has not been made by the taxpayer to obtain information from another person or partnership, a penalty may be imposed under paragraph 165(5)(a) for failure to provide any information required on a prescribed form made pursuant to the Act or the Regulations.

Finally, while not mentioned in your request, if the issue is that you are not satisfied that the contractor has maintained sufficient documentation to substantiate the subcontracting expenses, consideration would be given to the application of paragraph 18(1)(a) of the Act to limit deductibility.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Request for this latter version should be made by you to Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

We trust our comments are of assistance.

Randy Hewlett
Section Manager,
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch