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Tax-deductible fines
November 25, 1999
Fines and levies and related interest and legal
expenses may be deductible from income as a business expense,
the Supreme Court of Canada has ruled. The deductions, whether
the result of criminal or civil penalties, can be applied even
to create a loss.
In the ruling, 65302 British Columiba Ltd. v.
Canada, released November 25, 1999, the court said deductibility
applies:
only if the penalty was incurred for the purpose of earning
income, even if the penalized activity was carried out with
knowledge it was illegal; unless deductibility is specifically prohibited by law (e.g.,
the Income Tax Act precludes deductibility of bribe payments
and payments of interest and penalites levied for Income Tax
Act violations); or unless the case is "so egregious or repulsive that the
fine subsequently imposed could not be justified as being incurred
for the purpose of producing income." However, such a situation,
the court said, would "likely be rare."
The court observed that "in calculating
income, the deduction of expenses incurred to earn income generated
from illegal acts is allowed. For example, not only is the income
of a person living from the avails of prostitution liable to tax,
but the expenses incurred to earn this income are also deductible."
The court rejected the argument that deduction of penalties should
be disallowed as contrary to public policy, noting that Parliament
can prohibit deductions if it chooses.
The court said that even if the offence
that led to the penalty was avoidable, the taxpayer would still
be entitled to the deduction.
Deductibility does not create profit for
the taxpayer, the court noted. Rather the deduction is part of
calculating the taxpayer’s profit, which is then taxed. The taxpayer
may generate a loss as a consequence of recognizing the penalty
and legal expense.
The court was ruling in the case of a B.C.
egg producer penalized for producing over-quota and who had deducted
the over-quota levy and related legal fees as a business expense.
In its decision, the court examined the
interpretation of Section 18(1)(a) of the Income Tax Act which
states:
"In computing the income of a taxpayer
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."
Disclaimer: The material on this site is not intended as legal advice. It merely conveys general information on legal issues commonly encountered by persons facing criminal charges in Canada. If you are charged with an offence, you should contact a criminal lawyer.
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