Mr. Speaker, the government takes very seriously the issue of whether fines and penalties should be deductible for income tax purposes. However it is first important to clarify what penalties are and are not deductible under the law today.
First, not all fines and penalties are deductible for tax purposes. Only fines and penalties that are business expenses are deductible, and they must have been incurred in order to earn business income. Illegal payments to government officials are specifically denied a deduction, as are fines and penalties levied under the Income Tax Act.
Finally, and most important, the Supreme Court of Canada has ruled:
It is conceivable that a breach could be so egregious or repulsive that the fine subsequently imposed could not be justified as being incurred for the purpose of producing income.
What types of fines or penalties are deductible as a business expense? The supreme court reviewed the case of an egg producer who was assessed an over quota surcharge by a marketing board. The court found that the levy imposed was a legitimate business expense.
The supreme court suggested that certain fines and penalties would not be deductible. If, for example, a business owner were to commit a criminal offence or deliberately and illegally dump toxic waste, would the resulting fine be deductible? The supreme court has left open the door to challenge the suggestion that penalties for such offences and repulsive acts would deducted. In this regard, the government will monitor the effects of the supreme court decision to ensure that the fines for serious infractions are not deductible.
Would the hon. member have the government dictate to the business community which infractions are worthy of deductibility in a business context and which are not? This goes beyond the concern for fairly and accurately calculating the net profit of a taxpayer that should be subject of tax. The object of such a rule would be to address public policy concerns.
What types of fine or penalties would be contrary to public policy? If a trucking company can buy a permit to carry freight overweight, is it contrary to public policy to allow a business deduction for overweight charges? What about the case of the egg producer? Should the farmer have destroyed the eggs in order to avoid a non-deductible levy? There are other examples.
These examples suggest that many fines and penalties levied against Canadian business owners can be regarded as a normal risk of doing business. Sometimes they are simply a means of encouraging acceptable behaviour, regulating the marketplace or are in the nature of user fees. It is not necessarily contrary to public policy to incur these charges. Likewise, it would be unfair to deny a deduction as an expense if such levies are incurred in the ordinary day to day operation of business.
In creating a specific rule to delineate the deductibility of fines and penalties, the government would be attempting to draw a line between levies that are acceptable versus those that are not, even though the acceptability of the underlying actions of the business owner would depend on the facts and the circumstances in each case.