12 January 2004 External T.I. 2003-0032635 - INTEREST TAX ARREARS

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 interest on tax arrears is deductible under the ITA

Position: No

Reasons:

SECTION: 18(1)(t)

		2003-003263
XXXXXXXXXX 	Denise Dalphy, LL.B.
(613) 941-1722
January 12, 2004

Dear XXXXXXXXXX:

Re: Interest Deductibility

We are writing in reply to your letter dated July 29, 2003 wherein you requested a technical interpretation as to the deductibility of interest paid on "corporate income tax arrears or any other interest paid to the federal government".

Our Comments

Written confirmation of the consequences inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. Nonetheless, we shall provide some comments of a very general nature.

Subsection 18(1) and paragraph 18(1)(t) of the Income Tax Act provide:

"In computing the income of a taxpayer from a business or property no deduction shall be made in respect of : ...

(t) any amount paid or payable under this Act (other than tax paid or payable under Part XII.2 or Part XII.6);"

Accordingly, interest that is paid or payable pursuant to the Act is not deductible. This may be contrasted with the Excise Tax Act, which does not contain a provision that is similar to paragraph 18(1)(t) of the Act.

You stated that you understand that the above position was appealed in favour of the taxpayer and that as such interest paid as assessed by the federal government may be claimed as an expense in calculating taxable income. We are not aware of any such decision of the courts.

The deductibility of penalties was addressed by the Supreme Court of Canada in 65302 British Columbia Ltd. v. Her Majesty the Queen, [2001] 1 C.T.C. 57, 99 D.T.C. 5799 (SCC). The Court held that, with respect to a fine or penalty that is not proscribed by a provision in the Income Tax Act, 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". We enclose a copy of IT Bulletin IT-104R3, Deductibility of Fines or Penalties, for your reference. In particular, paragraph 6 discusses the non-deductibility of interest levied under the Income Tax Act.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.

Yours truly,

Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate