Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether amounts assessed and/or reassessed under the Excise Tax Act, including penalties and interest, are deductible in computing income for income tax purposes.

Position: Question of fact.

Reasons:

--- If in respect of a capital property, GST assessed is part of the cost of the capital property.

--- If incurred for the purpose of gaining or producing income, GST is deductible in computing income.

--- For penalties, must meet the criteria set out in 65302 BC Ltd. v. HMQ to be deductible in computing income.

--- Interest paid on late or deficient payments of GST that relate to a business or property will be deductible.

--- IC 77-11 applies to GST reassessments.

2002-016234
XXXXXXXXXX A. Seidel
(613) 957-2058
November 21, 2002

Dear XXXXXXXXXX:

Re: GST Assessments and Penalties

We are writing in response to your letter dated September 6, 2002, concerning the deductibility, for income tax purposes, of various amounts assessed under the Excise Tax Act (the "ETA").

Background

The ETA imposes a liability for collecting and remitting the goods and services tax ("GST") on the provider of a taxable supply, the importer of goods or a person bringing goods into a participating province. A taxpayer may be audited for compliance with the GST legislation and may be assessed or re-assessed for amounts owing under the ETA. The amounts owing could include any, or all of, the GST, interest and penalties. You query whether any of these amounts are deductible in computing income for income tax purposes.

The particular circumstances in your letter, on which you have asked for our views, appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to offer the following general comments which may be of assistance.

Whether a particular expenditure is deductible in computing the income for the year of a taxpayer is a question of fact that can only be determined by reviewing all of the circumstances applicable to a particular situation.

Where the GST relates to the acquisition of capital property, the amount of the GST would be added to the cost of that property. Similarly, where the payment of GST relates to an item that is part of the inventory of a taxpayer, the amount of the GST would be added to the cost of the inventory. Other payments of GST may be deductible in computing income if they have been made for the purpose of gaining or producing income from business or property.

As stated in paragraph 2 of Information Circular 77-11 ("IC 77-11"), sales taxes, which would include the GST, are generally deductible for income tax purposes in the year in which they are payable. It goes on to discuss reassessments in respect of such sales taxes and states that it is the Department's (now Canada Customs and Revenue Agency) policy to allow the deduction of amounts payable in the year the liability and the amount payable is determined.

Paragraph 6 of IC 77-11 states that the interest element of a sales tax reassessment is deductible in computing income for income tax purposes provided that the sales tax itself is deductible in computing income for income tax purposes. It is our view that this would also apply to GST reassessments.

The deductibility of penalties was addressed in 65302 British Columbia Ltd. v. Her Majesty the Queen (99 DTC 5799, SCC). The Supreme Court concluded that a penalty is deductible in computing income from a business where a taxpayer can establish that the penalty was incurred for the purpose of gaining or producing income from that business and where the penalty is not in respect of a breach that is "so egregious or repulsive that the fine or penalty subsequently imposed could not be justified as being incurred for the purpose of producing income". This would be determined on the facts of each particular case.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch