November 2010 - The Bulletin Magazine

Individuals or businesses are entitled to deduct from their income most expenses incurred for the purpose of earning
that income. Some expenses, however, such as golf membership dues and green fees, for example, are disallowed
completely. Other expenses are subject to limitations, such as the 50 per cent limitation on the deductibility of meals
and entertainment expenses.
The law
Tax Tips
Deductibility of Fines, Interest and Penalties
by Ian Hawkins
The 2004 federal budget included a measure prohibiting individuals and businesses from deducting fines or
penalties from their income, even incurred solely for the purpose of earning income.
As is often the case, this rule was introduced to overturn a case decided by the Supreme Court of Canada (SCC),
specifically the decision in 65302 British Columbia Ltd. v. the Queen. In this case, the taxpayer was an eggproducer
and was only able to produce and sell a certain number of eggs as designated by its quota from the egg
marketing board in British Columbia. The company intentionally produced more eggs than it was allowed under its
quota because it wanted to meet the demand of a significant customer. The B.C. marketing board imposed a fine of
approximately $270,000, which the company paid and deducted as a cost of doing business - after all, the company
had to pay tax on the additional profits from the sale of the "over-quota" eggs.
The Canada Revenue Agency (CRA) objected to the deduction of this penalty arguing that in order for a penalty or
fine to be tax deductible, the jurisprudence to date indicated that the penalty or fine must have been unavoidable
and must not be against "public policy". The SCC disagreed and allowed the deduction of the fine, as it saw nothing
in the Income Tax Act that distinguished the deductibility of a fine or penalty incurred to earn income from any
other otherwise deductible business expense.
Clearly the tax man, unhappy with this state of affairs, introduced this measure to eliminate it. As the government
stated, "it is generally recognized that to allow a deduction for a fine or penalty that has been imposed in respect of
a particular act or omission by a taxpayer, diminishes the disincentive to engage in that activity. Generally, therefore,
such a deduction is contrary to overall public policy objectives".
Interest and penalties
Interest and penalties can be charged under the Income Tax Act for late-filing a tax return or late-payment of tax
owing. If a taxpayer files his or her return after April 30 (or June 15 for the self-employed), there is a five per cent
penalty on the amount of tax that was unpaid at the time the return was due plus an additional one per cent per
month penalty on the amount due for each month the return is late (up to a maximum of 12 per cent).
If this is the second time that the taxpayer has been late and he or she was previously charged a late-filing penalty
in any of the prior three years, the late-filing penalties double to 10 per cent of the unpaid amount plus two per cent
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