After all, a penalty is meant to be a punishment and it seems wrong that a tax deduction should be allowed for the cost of breaking the rules. Taking a walk around your company is one way to spot obvious violations. Employers settling the employee’s liability. Based on financial reporting values disclosed on tax returns of C corporations, S corporations and Partnerships, firms with over $50,000 in total fines and penalties account for 99% of all fines and penalties. ), as amended and all references to a Regulation are to the Income Tax Regulations, C.R.C., c. 945, as amended. 10/2528 issued in 1985, tax penalties, surcharges, and criminal fines that are non-deductible for corporate income tax purposes only include those that are imposed under the Revenue Code. HMRC’s long-standing view is that no tax deduction is due for fines or penalties and, generally, tax experts go along with it. This position is consistent with the Exchequer Court of Canada’s decision in Clinton W. Roenisch v. MNR,  Ex. This means that the interest is not precluded from deduction by paragraph 18(1)(t). A fine or penalty will be on account of capital if it meets one of the following accepted legal criteria for distinguishing a payment on account of capital from a payment on account of income: 1.20 If a fine or penalty is incurred in connection with the acquisition of an asset for which capital cost allowance (CCA) may be claimed, the fine or penalty may be included in the capital cost of that asset (or the CCA class to which the asset belongs). For tax purposes, these terms should therefore be given their ordinary meaning having regard to the context in which the terms are used. Under the Income Tax Act, Section 67.6, generally, fines or penalties are not tax-deductible, and unfortunately, this includes CRA fines and penalties (According to the CRA – Income Tax Folio S4-F2- C1, ‘Deductibility of Fines and Penalties’). 1.22 If a fine or penalty (such as a penalty paid on the prepayment of a mortgage or hypothec) is incurred in connection with the disposition of a capital property, the fine or penalty is taken into account under subsection 40(1) for purposes of calculating any gain or loss on that disposition. That is: "… were the expenses incurred for the purpose of gaining or producing income from a business? To be considered deductible, the fine or penalty must also be a business expense and logically connected to the operations of the business. Courts will look for objective manifestations of purpose, and purpose is ultimately a question of fact to be decided with due regard for all the circumstances. If a fine or penalty is incurred in connection with the acquisition or production of inventory, the fine or penalty is included in the cost of inventory. whether the taxpayer attempted to prevent the act or omission that gave rise to the fine or penalty; whether the taxpayer’s income-earning purpose was achieved through the act or omission that gave rise to the fine or penalty; whether the fine or penalty was avoidable; whether it would be contrary to public policy to allow the taxpayer to deduct the fine or penalty in the circumstances; or. Talking to … This Supreme Court of Canada decision was heard prior to the introduction of section 67.6 but continues to be relevant where section 67.6 does not apply. 1.30 In some circumstances, a rate reduction fee or prepayment penalty paid in respect of a debt obligation will be deductible for income tax purposes. Fines and Penalties. Several provisions of the Act deny the deduction of a fine or penalty. 1.7 Section 67.6 also does not prohibit the deduction of: W Corp. operates in the construction industry. The interest charge imposed under subsection 18.1(1) of the Tobacco Tax Act of Ontario does not represent interest paid or payable under the Income Tax Act, Part IX of the Excise Tax Act or the Air Travellers Security Charge Act. If the payment is not made as part of the day-to-day operations of the business but instead as part of the acquisition of capital property, the fine or penalty may be considered part of the acquisition cost. 1.18 Even if a fine or penalty was incurred for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(1)(a), other provisions of the Act may prohibit deduction of the fine or penalty. No deductions may be taken regarding any fines or penalties paid to the government for the violation of any law. Section 67.6 will apply where such persons or public bodies are authorized to levy the fine or penalty that is imposed under a federal, provincial, municipal, or foreign law. 1.11 In determining whether a particular amount is deductible in computing profit for purposes of subsection 9(1), the Federal Court of Appeal in Canadian Imperial Bank of Commerce v The Queen, 2013 FCA 122, 2013 DTC 5098, stated: "…it may be necessary to consider whether there is a sufficient factual connection between the amount in issue and the business in respect of which the deduction is claimed.". can reasonably be considered to have been made in respect of the extension of the term of a debt obligation; can reasonably be considered to have been made in respect of the substitution or conversion of a debt obligation to another debt obligation or share; is contingent or dependent on the use of or production from property; is computed by reference to revenue, profit, cash flow, commodity price, or any other similar criterion; or. 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