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.
Principal Issues:
1. Whether interest paid because of late or incomplete payment of GST and QST is deductible.
2. Whether interest paid under any of paragraphs 280(1)b), 280(1.1)(b) and 280(2.1)(b) of the Excise Tax Act is deductible.
3. Whether interest on penalties imposed under the Quebec Sales Tax Act is deductible.
Position:
1. Generally, yes.
2. Generally, yes.
3. Generally, yes.
Reasons:
1. The interest element of a sales tax assessment or reassessment is deductible provided the related sales tax amount arises in the course of income from business or property.
2. The interest paid under any of paragraphs 280(1)(b), 280(1.1)(b) and 280(2.1)(b) of the Excise Tax Act is deductible provided the related GST/HST arises in the course of income from business or property.
3. Interest on penalties imposed under the Quebec Sales Tax Act is deductible provided the related QST arises in the course of income from business or property.
2004-010390
XXXXXXXXXX Patricia Taylor
(613) 952-8806
February 17, 2005
Dear XXXXXXXXXX:
Subject: Request for technical interpretations: GST and QST interest deductibility
We are writing in response to your letter dated November 17, 2004, concerning the deductibility of interest on goods and services tax (GST) and Quebec sales tax (QST) liabilities in light of proposed section 67.6 of the Income Tax Act (the Act), which was introduced in the September 16, 2004 draft legislation.
Background
New section 67.6 of the Act, as proposed in the September 16, 2004 draft legislation, states:
" 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. "
Paragraph (a) of draft section 7309 of the Income Tax Regulations states that, for the purposes of section 67.6 of the Act, an amount paid or payable under any of paragraphs 280(1)(a), 280(1.1)(a) and 280(2)(a) of the Excise Tax Act (the ETA) is each a prescribed penalty.
New section 67.6 applies to fines and penalties imposed after March 22, 2004.
Issues
Issue #1
It is your view that, since draft section 67.6 refers only to the deductibility of fines and penalties, it would not limit the deductibility of GST and QST interest. You are also of the view that, based on the Canada Revenue Agency's position with respect to GST and QST interest deductibility found in technical interpretations 2002-0177807 and 2003-0027361E5, interest would still be deductible because this interest is paid for the purpose of gaining or producing income.
We agree that, since section 67.6 applies to fines and penalties, it does not apply to interest. Paragraph 6 of Information Circular IC- 77-11, Sales Tax Reassessments: Deductibility in Computing Income, states that the interest element of a sales tax reassessment will be deductible provided the sales tax amount is itself deductible in computing income. In other words, the interest element of a sales tax assessment or reassessment of the GST or QST will be deductible provided the related sales tax amount arises in the course of earning income from business or property.
Issue # 2
Paragraphs 280(1)(a), 280(1.1)(a) and 280(2)(a) of the ETA impose a penalty of 6 percent per year. It is your understanding that these penalties are deductible in computing income for income tax purposes. Paragraphs 280(1)(b), 280(1.1)(b) and 280(2.1)(b) of the ETA impose interest.
The technical notes to section 67.6 state, in part, that:
" This prohibition on deductibility does not extend to prescribed fines or penalties. Draft section 7309 of the Income Tax Regulations lists such prescribed fines or penalties. This list includes penalty interest imposed under any of paragraphs 280(1)(a), 280 (1.1)(a) and 280(2)(a) of the Excise Tax Act, . . . "
You ask whether the words "penalty interest" in the technical notes refer to interest under paragraphs (b) of these subsections.
You also ask if paragraphs (a) of subsections 280(1), 280(1.1) and 280(2) of the ETA are specifically listed in draft section 7309 of the Income Tax Regulations in order to exclude the deductibility of the interest in those subsections? Or, are paragraphs (b) of those subsections not listed, because section 67.6 does not restrict the deductibility of the interest, only the deductibility of fines and penalties?
Your view is that the interest would be deductible because section 67.6 does not restrict the deductibility of interest and because the technical notes state that penalty interests are included in the list of prescribed fines and penalties.
Section 280 of the ETA imposes interest at a prescribed rate, plus penalty of 6 percent per year, on amounts not remitted or paid under Part IX of the ETA. Paragraph (a) of subsections 280(1), 280(1.1) and 280(2) impose the penalty; paragraph (b) of these subsections impose the interest. Draft section 7309 of the Income Tax Regulations refers only to paragraph (a) of these subsections, because these are the penalty provisions. Interest imposed under paragraphs 280(1)(b), 280(1.1)(b), and 280(2)(b) will be deductible provided the related GST/HST arises in the course of earning income from business or property.
Issue #3
Your understanding is that since penalties imposed under the Quebec Sales Tax Act are not specifically listed under draft section 7309 of the Income Tax Regulations, they are not deductible in computing income for income tax purposes.
However, since section 67.6 only restricts the deductibility of fines and penalties, your view is that the interest on penalties imposed under the Quebec Sales Tax Act would be deductible in computing income for income tax purposes.
Since penalties under the Quebec Sales Tax Act are not prescribed penalties pursuant to proposed section 67.6 of the Act and draft section 7309 of the Income Tax Regulations, the penalties are not deductible for income tax purposes.
Interest on penalties imposed under the Quebec Sales Tax Act will be deductible provided the related QST arises in the course of earning income from business or property.
We trust our comments will be of assistance to you.
Yours truly,
John Oulton, CA
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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