Ottawa's heavy hand ends fine deductibility: Budget move means businesses feel full impact of penalties
Next time you're running late for that important business meeting, be forewarned
-- your speeding ticket will no longer be tax deductible. Tuesday's federal
budget prevents 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, the new 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 egg-producer that 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 about $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.
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, in announcing the change in the budget, the government was not happy
with this state of affairs. 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."
This is a most unfortunate and heavy-handed response by the government that
will interfere with a businessperson's ability to make a prudent business
decision, which may give rise to a fine or penalty, but otherwise makes economic
Let's take, for example, a courier company that promises to deliver an
important package to a client by 9 a.m. the next business day. Due to traffic
congestion and despite all the advance preparations possible, the courier must
stop outside the recipient's place of business to make the delivery, risking a
parking ticket. The courier company is making a calculated business decision,
whereby the benefit in terms of customer retention by honouring the service
guarantee outweighs the potential parking fine.
A better legislative response would have been to continue to allow the
deductibility of most fines and penalties but to have an exception, contemplated
by the SCC in its decision, which would have prevented the deduction of fines or
penalties resulting from "a breach [that was] so egregious or repulsive that the
fine subsequently imposed could not be justified as being incurred for the
purpose of producing income." One can only imagine what the SCC was
contemplating, however, "such a situation would likely be rare."
Unfortunately, we'll have to live with the new regime.