Lamarre
Proulx
J.T.C.C.:-These
appeals
were
heard
on
common
evidence.
The
years
under
appeal
are
the
appellants’
1990
and
1991
taxation
years.
In
these
appeals,
there
are
two
issues.
The
first
issue
is
whether
the
rental
payments
made
by
the
appellants
qualify
as
an
expenditure
made
for
scientific
research
and
experimental
development
for
the
purposes
of
the
investment
tax
credit
provided
for
by
subsection
127(5)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
’’Act”).
The
second
issue
is
whether
penalties
and
interest
incurred
for
the
late
remittance
of
deductions
at
source
are
an
expenditure
of
a
current
nature
within
the
meaning
of
paragraphs
18(l)(a),
20(1
)(c),
subsection
127(9)
and
paragraph
37(l)(a)
of
the
Act.
With
respect
to
the
first
issue,
there
is
no
dispute
that
the
rental
payments
were
made
pursuant
to
leases
entered
into
after
June
18,
1987.
(The
leases
were
produced
as
Exhibits
A-1,
A-2
and
A-3.)
Therefore
these
payments
were
non-qualifying
expenditures
of
research
and
experimental
development
under
paragraph
37(7)(f)
of
the
Act.
This
provision
of
the
Act
is
applicable
with
respect
to
rental
expenses
incurred
after
1987,
other
than
rental
expenses
incurred
pursuant
to
a
written
lease
agreement
entered
into
before
June
18,
1987.
The
dispute
lies
as
to
whether
paragraph
37(7)(f)
of
the
Act
applies
to
paragraph
37(1
)(a)
of
the
Act.
The
evidence
of
Mrs.
Helen
Foody,
the
appellants’
bookkeeper,
accountant
and
one
of
its
directors,
was
to
the
effect
that
the
remittances
of
the
deductions
at
source
were
late
because
the
government
funds
from
the
investment
tax
credit
were
late.
This
resulted
in
the
business
having
a
problem
of
cashflow.
The
witness
said
the
tardiness
of
the
remittance
of
the
deductions
at
source
was
not
done
in
bad
faith
but
because
the
business
had
no
other
choice.
By
not
receiving
the
aforementioned
credit
in
a
timely
manner,
it
did
not
have
the
sufficient
cashflow.
This
was
the
extent
of
the
evidence.
Counsel
for
the
appellants
submitted
that
paragraph
37(7)(f)
should
not
be
taken
into
account
to
determine
a
qualified
expenditure
under
subsection
127(9)
and
paragraph
37(1
)(a)
of
the
Act
for
the
purpose
of
the
investment
tax
credit
provided
for
in
subsection
127(5)
of
the
Act.
His
basis
is
that,
section
2902
of
the
Income
Tax
Regulations
("the
Regulations”),
a
provision
made
for
the
purpose
of
defining
"qualified
expenditure”
for
the
purpose
of
subsection
127(9)
of
the
Act,
contains
a
provision
concerning
an
expenditure
of
a
capital
nature
and
that
such
a
provision
concerning
a
capital
expenditure
is
also
contained
in
paragraph
37(7)(f)
of
the
Act.
Counsel
for
the
appellants’
view
is
that
there
was
surely
no
need
for
such
a
stipulation
in
section
2902
of
the
Regulations
if
paragraph
37(7)(f)
of
the
Act
applied.
The
only
logical
conclusion
is
that
paragraph
37(7)(f)
of
the
Act
has
no
application
for
the
purpose
of
the
definition
of
a
qualified
expenditure
under
subsection
127(9)
of
the
Act.
To
this,
counsel
for
the
respondent
answers
that
the
definition
of
a
qualified
expenditure
in
subsection
127(9)
of
the
Act
refers
to
an
ex
penditure
that
qualifies
as
an
expenditure
described
in
paragraph
37(1
)(a)
of
the
Act
and
that
paragraph
37(7)(f)
is
an
integral
part
of
paragraph
37(1
)(a)
of
the
Act
in
view
of
the
text
of
subsection
37(7)
of
the
Act.
In
my
view,
counsel
for
the
respondent
is
right.
If
we
examine
paragraph
37(1)(a)
of
the
Act,
it
becomes
abundantly
clear
that
this
paragraph
cannot
be
amputated
from
its
definition
subsection,
that
is
37(7)
of
the
Act.
That
subsection
begins
by
these
words:
"In
this
section".
These
words
refer
to
section
37
in
its
totality
and
paragraph
37(1
)(a)
is
a
part
of
this
section.
In
the
definition
subsection
is
found
the
said
paragraph
37(7)(f)
which
excludes
rental
payments
on
a
building
unless
the
leases
had
been
entered
into
before
June
18,
1987.
The
appellants’
have
admitted
that
the
leases
were
subsequent
to
that
date.
Therefore
the
rental
expenses
in
question
do
not
qualify
as
an
expenditure
described
in
paragraph
37(1
)(a)
of
the
Act.
The
appellants
do
not
succeed
on
the
first
issue.
The
second
point
at
issue
is
whether
the
penalties
and
interest
imposed
under
the
Income
Tax
Act
for
failure
to
remit
on
time
the
amounts
deducted
at
source
may
be
considered
as
an
expenditure
of
a
current
nature
for
the
purposes
of
paragraphs
18(l)(a),
20(1)(c)
and
subsections
127(5),
127(9)
and
paragraph
37(1
)(a)
of
the
Act.
Counsel
for
the
appellants
submits
that
penalties
and
interests
may
in
certain
circumstances
be
deductible
in
the
calculation
of
income.
He
also
submits
that
section
37
of
the
Act
creates
its
own
special
regime.
In
this
perspective,
he
refers
to
paragraph
2902(a)(i)(H)
of
the
Regulations
which
defines
a
prescribed
expenditure
as
a
fine
or
penalty.
This
Regulation,
without
making
any
exclusion
to
any
expenditure
prescribed,
continues
and
states:
"except
any
such
expenditure
incurred
by
a
taxpayer
who
derives
all
or
substantially
all
of
his
revenue
from
the
prosecution
of
scientific
research
and
experimental
development".
The
appellants
are
such
taxpayers.
It
would
then
appear
that
the
fine
and
penalty
incurred
in
respect
of
the
general
administration
or
management
of
business
could
be
included
as
a
qualified
expenditure.
If
counsel
for
the
appellants
is
right
in
his
induction,
what
could
be
these
fines
and
penalties
that
seem
to
be
encompassed
by
this
Regulation?
In
the
matter
of
Day
&
Ross
Ltd,
Re.,
[1976]
C.T.C.
707,
76
D.T.C.
6433
(F.C.T.D.),
the
Court
applied
the
following
principles
regarding
the
deductibility
of
fines,
and
I
quote
at
page
715
(D.T.C.
6438):
The
first
determination
must
be
as
to
whether
or
not
the
payment
of
the
fines
constituted
an
outlay
made
for
the
purpose
of
producing
income
for
the
plaintiff
so
as
to
meet
the
requirement
of
the
exception
to
the
prohibition
of
paragraph
12(l)(a).
If
the
determination
is
affirmative,
then
the
argument
of
public
interest
must
be
met.
The
Court
in
that
case
allowed
the
inclusion
of
the
fines
in
the
calcula-
tion
of
income
because
the
fines
resulted
from
the
day-to-day
operation
of
its
business.
It
was
in
a
matter
of
unintentional
violation
of
weight
restriction
ina
a
field
of
activity
where
violations
seemed
unavoidable.
This
is
not
the
case
here.
The
violations
were
intentional
and
in
a
field
of
activity
where
violations
were
avoidable.
In
Day
&
Ross,
supra,
it
was
said
as
above
cited,
that
it
had
first
to
be
determined
if
the
payment
of
the
fines
was
made
for
the
purpose
of
earning
income
and
if
the
determination
was
affirmative,
then
the
argument
of
public
interest
must
be
met.
In
my
view
even
if
the
determination
was
affirmative,
it
seems
quite
clear
to
me
that
the
argument
of
public
interest
cannot
be
met.
It
would
be
against
the
public
interest
to
allow
in
the
calculations
of
income
for
the
purpose
of
the
Act
the
deduction
of
payment
of
fines
imposed
for
failure
to
comply
with
the
same
Act.
Moreover,
those
are
mostly
penalties
under
the
Act.
There
has
been
a
long
standing
jurisprudence
that
such
penalties
paid
as
taxes
are
not
expenses
incurred
to
earn
income
and
are
not
deductible.
I
would
refer
to
Quemont
Mining
Corp.
Ltd.
v.
M.N.R.,
[1966]
C.T.C.
570,
66
D.T.C.
5376
at
598
and
600
(D.T.C.
5393
and
5394)
(Ex.
Ct.),
Roenisch
v.
M.N.R.,
[1931]
1
D.T.C.
199,
2
D.L.R.
90
(Ex.
Ct.),
Harrow
st
on
Corp.
v.
Canada,
[1993]
2
C.T.C.
2247
93
D.T.C.
995
(T.C.C.)
at
2251-52
(D.T.C.
998-99).
Paragraph
18(l)(t)
of
the
Act,
enacted
in
1990
and
applicable
to
the
1989
and
subsequent
taxation
years,
stipulates
that
no
amount
paid
or
payable
under
this
Act,
the
Income
Tax
Act,
may
be
deducted
in
the
calculation
of
income.
All
tax
commentators
will
say
that
this
provision
has
been
enacted
for
greater
certainty
and
did
not
change
the
law.
The
appeals
are
dismissed
with
costs.
Appeals
dismissed
with
costs.
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