By: Professor Vern Krishna, CM, QC, FRSC, FCPA
Section 67.6: “In computing income, no deduction shall be made in respect of any amount that is a fine or penalty (other than a prescribed fine or penalty) imposed under a law of a country or of a political subdivision of a country (including a state, province or territory) by any person or public body that has authority to impose the fine or penalty.”
An expense is generally deductible for tax purposes if the taxpayer incurs it for the purposes of gaining or producing income. Under accounting principles, a taxpayer may usually deduct expenses incurred from illegal acts to the extent that he or she incurs them for the purpose of earning income. However, for public policy reasons, the Income Tax Act limits this principle in the case of fines and penalties.
Section 67.6 denies a deduction for fines or penalties imposed by law. The provision effectively overturned the decision of the Supreme Court in 65302 B.C. Ltd., which held that fines and penalties incurred for the purpose of gaining or producing income were deductible expenses and were not caught by the purpose prohibition in paragraph 18(1)(a).
The rationale behind the prohibition is that allowing a deduction for fines and penalties would diminish their deterrence value, which would be contrary to public policy. However, the Act leaves open the door for the deduction of prescribed fines where it would be contrary to public policy to deny deductibility.
Apart from the exception prescribed under Regulation 7309, the characterization of the amount under federal, provincial, municipal or foreign law determines whether the amount may be deducted. Hence, if the amount is not characterized as a fine or penalty and is incurred for the purpose of earning income, it should be deductible. For example, section 67.6 does not apply to the purchase of carbon offset credits or to penalties or damages under private contracts.
However, section 67.6 does not preclude the deduction of legal fees to defend against prosecutions that may lead to fines if the legal fees are otherwise deductible.
The CRA considers that 67.6 applies to:
- Penalties imposed by self-regulating organizations recognized by a provincial securities commission, such as, the Investment Dealers Association (VIEWS docs 2006-0185611I7, 2007-0256591M4);
- Court-ordered payments to a charity on conviction under workplace safety legislation (2008-0294701E5);
- Penalties under Ontario Tobacco Tax Act (but interest on the penalties may be deductible): 2012-0472261E5;
- Administrative penalties under Alberta’s Climate Change and Emissions Management Act (2012-04404715), but not contributions to the CCEM Fund to comply with that Act (2012-0462621E5).
The section also applies to proceeds of crime forfeited under Criminal Code s. 462.37 or the Proceeds of Crime (Money Laundering) and Terrorist Financing Act: (See: Chow, 2011 CarswellNat 1519 (TCC), para. 29: “Forfeiture of the proceeds of crime is a penalty for illegal activities”).