21 November 2002 External T.I. 2002-0163935 - DRAFT IT-104R3-FINES AND PENALTIES

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 CCRA.

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

Principal Issues: Deductibility of fines and penalties in a hypothetical situation

Position:

General information provided.

Reasons:

Always a question of fact.

XXXXXXXXXX
2002-016393

Randy Hewlett, B.Comm.

November 21, 2002

Dear XXXXXXXXXX:

Re: Technical Interpretation Request: IT-104R3 - Fines and Penalties

We are writing in reply to your letter dated August 30, 2002, wherein you requested a technical interpretation on the deductibility of fines and penalties under the Income Tax Act (the Act).

In your letter, you note that you have reviewed draft Interpretation Bulletin IT-104R3, Deductibility of Fines and Penalties. Based on comments in paragraph 3 of the bulletin, you inquire "whether or not it is sufficient for a fine or penalty to be incurred while a taxpayer is engaged in business-related activities for it to be considered to have been incurred for an income-earning purpose". To illustrate your concern, you inquire whether a fine imposed for exceeding the speed limit in a motor vehicle would be deductible in the situation where an individual feels that speeding is necessary to avoid being late for a business appointment. You also inquire whether the "same logic should apply" to establish deductibility of the fine as a motor vehicle expense under paragraph 8(1)(h.1) of the Act.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. However, we are prepared to provide the following general comments.

Draft IT-104R3 discusses the deductibility of fines and penalties under the Act and the impact of the Supreme Court of Canada's decision in 65302 British Columbia Limited [1999 DTC 5799] (the "65302 decision"). As noted in paragraph 3 of the bulletin:

Paragraph 18(1)(a) of the Act provides that, in computing a taxpayer's income from a business or property, no deduction shall be made in respect of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property. As stated by the Supreme Court of Canada in the 65302 British Columbia Ltd. decision: "...if the taxpayer cannot establish that the fine was in fact incurred for the purpose of gaining or producing income, then the fine or penalty cannot be deducted ...."

Whether or not a particular expense is incurred for the purpose of "gaining or producing income" under paragraph 18(1)(a) of the Act is a question of fact. Such a determination can only be made after a review of all the circumstances surrounding a particular situation. This review is carried out by Audit officials in your local Tax Services Office. In any event, it is our view that the principles enunciated in the 65302 decision do not mean that a taxpayer automatically establishes deductibility of a fine or penalty under paragraph 18(1)(a) of the Act by the mere fact that it was imposed while "engaged in business-related activities".

With respect to your inquiry regarding paragraph 8(1)(h.1) of the Act, we note that this provision provides for a deduction from employment income for "motor vehicle expenses" incurred in the course of performing the duties of an office or employment. In our view, a fine or penalty imposed in the situation you describe above would not be considered a "motor vehicle expense" that is deductible from employment income under paragraph 8(1)(h.1) of the Act.

We trust our comments will be of assistance to you.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch