Chapter History S4-F2-C1, Deductibility of Fines and Penalties

Introduction

The purpose of a Chapter History page is to highlight any amendments to the information contained in a chapter of an income tax folio, including amendments to the information originally contained in an interpretation bulletin that has been cancelled and replaced with a folio chapter. It outlines amendments that have been made as a result of legislative changes and proposed legislative changes, precedential court decisions, as well as new or revised interpretations of the Canada Revenue Agency (CRA).

Except as otherwise noted, all statutory references herein are references to provisions of the Income Tax Act, R.S.C., 1985, c.1 (5th Supp.), as amended and all references to a Regulation are to the Income Tax Regulations, C.R.C., c. 945, as amended.

Update May 16, 2019

¶1.21 is revised to reflect the repeal of the provisions concerning eligible capital expenditures. Generally, certain intangible property, which before 2017 was considered eligible capital property, is added to class 14.1 of Schedule II to the Regulations. The eligible capital property rules, in section 14, were repealed by S.C. 2016, c. 12, s. 4, effective January 1, 2017. Property that was eligible capital property will be depreciable property and expenditures and receipts that were accounted for under the eligible capital property rules will be accounted for under the rules for depreciable and capital property.

Minor revisions have been made to the French version of the chapter for readability and consistency purposes.

Update March 21, 2017

¶1.38 of this Chapter is revised to refer to and reflect the publication of Income Tax Folio S1-F3-C4, Moving Expenses, which replaced and cancelled Interpretation Bulletin IT-178R3, Moving Expenses.

Update December 22, 2015

¶1.1 has been revised in the section describing Statutory fines and penalties to indicate the legislative jurisdiction of the examples provided.

¶1.2(d) has been revised to replace "mortgage prepayment penalties" with "prepayment penalties".

¶1.3 has been revised to replace "fine or penalty under the Act" with "fine or penalty" to avoid ambiguity.

¶1.21 and 1.22 have been revised to include reference to the civil law concept of a hypothec. This affects the English version only. ¶1.22 has also been revised so that the cross reference to ¶1.30 refers to "prepayment penalties" rather than to "mortgage prepayment penalties".

Example 5 has been revised to clarify that the penalty described in this example is not deductible. This affects the French version only.

¶1.28 has been revised to replace "outlays or expenses incurred" with "an outlay made or expense incurred" to more closely reflect the wording of the Act. This change affects only the English version.

¶1.32 has been revised to change "must be paid" to "must have been paid". This change affects only the English version.

Throughout the French version of the Chapter, general revisions have been made to improve readability.

Update November 24, 2015

Minor changes have been made to improve the usability of the income tax folios:

  • the Summary section has been moved to the top of each folio chapter to be more immediately visible and helpful to readers;
  • the Application and Reference sections have been moved to the end of the Chapter which is more appropriate for administrative content of this nature. However, these sections now appear in the Table of contents for easy access;
  • the statement that folios are only available in electronic format has been moved to the end of the Application section; and
  • the words “as promulgated under the Act” in connection with the Income Tax Regulations have been removed from the Application section, in the interest of using plain language.

Update July 10, 2015

General

Income Tax Folio S4-F2-C1, Deductibility of Fines and Penalties, replaces and cancels Interpretation Bulletin IT-104R3, Deductibility of fines or penalties.

In addition to consolidating the content of the former interpretation bulletin, general revisions have been made to improve readability. Any substantive technical and interpretive changes to the information outlined in the former interpretation bulletin are described below.

Legislative and other changes

¶1.1 (formerly included in ¶1 of IT-104R3) has been expanded to note that the terms penalty and fine are not defined in the Act.

¶1.2 has been added to summarize the income tax provisions that should generally be considered in determining the deductibility of a fine or penalty.

¶1.3 has been added to note that the deductibility of a fine or penalty can only be determined after examining all relevant facts.

¶1.4 to 1.7 have been added to discuss section 67.6, which was added by S.C. 2005, c. 19, s. 16(1), applicable to fines and penalties imposed after March 22, 2004. Several examples have been added to demonstrate how section 67.6 would apply in various hypothetical situations. IT-104R3 contained preliminary comments concerning the 2004 Federal Budget proposals relating to section 67.6, prior to the enactment of this provision. That commentary has been eliminated.

¶1.8 to 1.13 have been added to discuss the deductibility of business expenses under subsection 9(1). The new content also discusses the circumstances under which a fine or penalty may be deducted under subsection 9(1). Relevant jurisprudence relating to the subject matter has also been noted.

¶1.14 to 1.18 (formerly included in ¶2 and 3 of IT-104R3) have been expanded to provide additional jurisprudence and discussion to assist taxpayers in determining whether an expense, and in particular, a fine or penalty, is precluded from deduction by paragraph 18(1)(a). ¶1.16 has been added to clarify several factors that are not relevant in determining the deductibility of a fine or penalty.

¶1.19 has been added to discuss paragraph 18(1)(b) in more detail as well as to note the legal criteria for distinguishing a payment on account of capital from a payment on account of income.

¶1.23 (formerly included in ¶6 of IT-104R3) has been expanded to discuss subparagraphs 18(1)(t)(ii) and (iii), which were added by S.C. 2006, c. 4, s. 161(1), applicable to tax years that begin on or after April 1, 2007. As well, an example has been added to demonstrate when paragraph 18(1)(t) would and would not apply. Former content relating to scientific research and experimental development and qualified expenditures for purposes of subsection 127(9) has been removed as it is outside the scope of the Chapter.

¶1.25 to 1.27 (formerly included in ¶8 of IT-104R3) have been revised to provide legislative references, as well as updated publication references.

¶1.28 to 1.29 have been added to discuss section 67.5 and the potential application of section 67.6 to fines or penalties levied as a result of a criminal conviction.

¶1.30 to 1.38 (formerly included in ¶7 of IT-104R3) have been expanded to discuss subsection 18(9.1) in greater detail.

¶1.39 has been added to discuss paragraph 60(o), as it relates to the deductibility of various fees incurred to prepare, object to, or appeal an assessment of certain penalties.

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