,canada ,cu/oms                       #a
& ,rev5ue ,ag5cy

          ,9t]pret,n ,bullet9
    
,numb]3 ,,it-#ajd;,r#c
,date3 ,augu/ #i1 #bjjb
,subject3 ,9come ,tax ,act--
  ,deductibil;y ( ,f9es or ,p5alties
,ref];e3 ,p>agraph #ah7#a77a7 7al
  subsec;ns #ah7#i.a71 #dj7#a7 &
  #abg7#i71 p>agraphs #ah7#a77b71
  #ah7#a77c71 #ah7#a77h71 #ah7#a77t7 &
  #bj7#a77c71 & p>agraph 7d7 (! def9i;n
  ( 8eligi# capital exp5diture0 9
  subsec;n #ad7#e7 (! ,act & clause
  #bijb7a77;i77,h7 (! ,9come ,tax
  ,regul,ns7

  ,at ! ,canada ,cu/oms & ,rev5ue ,ag5cy
7,,ccra71 we issue 9come tax 9t]pret,n
bullet9s 7,,it's7 9 ord] 6provide
te*nical 9t]pret,ns & posi;ns reg>d+
c]ta9 provi.ns 3ta9$ 9 9come tax law4
,due 6_! te*nical nature1 ,,it's >e   #a
             ,,it-#ajd;,r#c          a#a
us$ prim>ily 0\r /aff1 tax speciali/s1 &
o!r 9dividuals :o h an 9t]e/ 9 tax
matt]s4 ,= ^? r1d]s :o pref] a less
te*nical explan,n (! law1 we (f] o!r
public,ns1 s* z tax guides & pamphlets4
  ,:ile ! -;ts 9 a "picul> p>agraph 9 an
,,it may relate 6provi.ns (! law 9 =ce
at ! "t !y 7 made1 s* -;ts >e n a
sub/itute =! law4 ,! r1d] %d1 "!=e1
3sid] s* -;ts 9 li<t (! relevant
provi.ns (! law 9 =ce =! "picul> tax,n
ye> 2+ 3sid]$1 tak+ 96a3.t ! e6ect ( any
relevant am5d;ts 6^? provi.ns or
relevant c\rt deci.ns o3urr+ af ! date
on : ! -;ts 7 made4
  ,subject 6! abv1 an 9t]pret,n or
posi;n 3ta9$ 9 an ,,it g5],y applies z
(! date on : x 0 publi%$1 un.s o!rwise
specifi$4 ,if "! is a subsequ5t *ange 9
t 9t]pret,n or posi;n &! *ange is
b5eficial 6taxpay]s1 x is usu,y e6ective
= future assess;ts & reassess;ts4 ,if1
on ! o!r h&1 ! *ange is n fav\ra#
6taxpay]s1 x w norm,y 2 e6ective =!   #b
             ,,it-#ajd;,r#c          b#a
curr5t & subsequ5t tax,n ye>s or =
transac;ns 5t]$ 96af ! date on : ! *ange
is publi%$4
  ,if y h any -;ts reg>d+ matt]s 4cuss$
9 an ,,it1 pl1se s5d !m to3

  ,manag]1 ,te*nical ,public,ns &
    ,projects ,sec;n
  ,9come ,tax ,rul+s ,directorate
  ,policy & ,legisl,n ,bran*
  ,canada ,cu/oms & ,rev5ue ,ag5cy
  ,ottawa ,,on
  ,k#a;,a #j;,l#e

  ,mo/ ( \r public,ns >e availa# on \r
,web site at3 _+www.ccra.gc.ca_:
  ,? v].n is only availa# electronic,y4






                                      #c
                 ,3t5ts              c#a
    
,applic,n
,summ>y
,4cus.n & ,9t]pret,n
  ,9troduc;n--,types ( ,f9es & ,p5alties
    7p>agraph #a7
  ,! #fecjb ,briti% ,columbia ,ltd4
    ,deci.n 7p>agraph #b7
  ,p>agraph #ah7#a77a7 7p>agraph #c7
  ,o!r ,g5]al ,provi.ns 7p>agraphs #d-e7
  ,specific ,provi.ns 7p>agraphs #f-g7
  ,notewor?y ,c\rt ,deci.ns ,r5d]$
    ,prior 6! #fecjb ,briti% ,columbia
    ,ltd4 ,deci.n 7p>agraph #h7
,explan,n ( ,*anges

               ,applic,n
    
  ,? bullet9 replaces & c.els ,9t]pret,n
,bullet9 ,,it-#ajd;,r#b dat$ ,may #bh1
#aiic4


                                      #d
                ,summ>y              d#a
    
  ,! deci.n f ! ,supreme ,c\rt ( ,canada
9 #fecjb ,briti% ,columbia ,ltd4 v4 ,!
,que5 is ! l1d+ case 3c]n+ !
deductibil;y ( f9es & p5alties4
  ,? bullet9 4cusses ! impact ( ?
deci.n1 & al ref]s 6g5]al & specific
provi.ns 9 ! ,9come ,tax ,act t cd 2
relevant 6! "q (! deductibil;y ( c]ta9
f9es or p5alties4

          ,4cus.n & ,9t]pret,n
    
      ,9troduc;n--,types ( ,f9es &
        ,p5alties 7p>agraph #a7
    
#a4 ,f9es & p5alties c 2 categoriz$ z
  foll[s3
  --,judicial--,^! >e impos$ 0a c\rt (
    law or o!r -pet5t tribunal =a br1* (
    any public law1 9clud+ c>ry+ on an
    illegal busi;s4
  --,/atutory--,^! >e impos$ z a result
    (! applic,n ( /atutes 7=          #e
             ,,it-#ajd;,r#c          e#a
    example1 ! ,9come ,tax ,act1 ,cu/oms
    ,act1 ,-peti;n ,act or prov9cial
    busi;s practices legisl,n74
--------------------------------------#b
  --,levi$ 0profes.nal & simil>
    organiz,ns--,c]ta9 organiz,ns
    recogniz$ 0/atute z ! gov]n+ bodies
    ( specific busi;ses1 profes.ns or
    trades >e emp[]$ 6levy f9es &
    p5alties ag/ _! memb]s = 9frac;ns (
    _! [n rules4 ,prov9cial law
    societies1 a3.t+ 9/itutes1 colleges
    ( physicians & /ock ex*anges >e
    examples ( s* organiz,ns4
  --,levi$ 0trade organiz,ns & simil>
    bodies--,associ,ns 9 : p]sons ) -mon
    busi;s or voc,nal 9t]e/s "picipate
    =! collective b5efit ( ^? 9t]e/s 7s*
    z trade associ,ns1 f>m]s' associ,ns
    & simil> bodies7 (t5 set /&>ds (
    p]=m.e 6be met 9 ! op],ns ( _!
    memb]s &1 pursuant 6volunt>y
    agree;ts1 impose p5alties on
    9frac;ns4                         #f
             ,,it-#ajd;,r#c          a#b
  --,p5alties levi$ "u private 3tracts--
    ,a "py 6a private 3tract may 9cur a
    p5alty = failure 6fulfil an oblig,n
    "!"u4
  
      ,! #fecjb ,briti% ,columbia
      ,ltd4 ,deci.n 7p>agraph #b7
    
#b4 ,! l1d+ deci.n f ! c\rts ) respect
  6! deductibil;y ( f9es or p5alties is
  #fecjb ,briti% ,columbia ,ltd4 v4 ,!
  ,que51 ,7#bjjj7' #a ,,ctc #eg1 #ii
  ,,dtc #egii1 9 : ! ,supreme ,c\rt (
  ,canada all[$ z a deducti# exp5se an
  ov]-quota levy 9curr$ 0! taxpay] 9
  respect ( xs egg-produc+ h5s4 ,!
  foll[+ g5]al pr9ciples >e f.d 9 !
  r1sons = ? deci.n3
  --,! "*iz,n (a levy z a 8f9e0 or
    8p5alty0 is ( no 3sequ;e 7i4e41 does
    n make x any less deducti#71 2c !
    9come tax sy/em does n 4t+ui% 2t
    levies 7: >e ess5ti,y -p5satory 9
                                      #g
             ,,it-#ajd;,r#c          b#b
    nature7 & f9es & p5alties 7: >e
    punitive 9 nature74
  --,! deduc;n (a f9e or p5alty _c 2
    4all[$ solely on ! basis t 6all[ x
    wd 2 3sid]$ 3tr>y 6public policy4
  --,prohibit+ ! deductibil;y ( f9es &
    p5alties is 9consi/5t )! practice (
    all[+ ! deduc;n ( exp5ses 9curr$
    6e>n illegal 9come4
  --,in ord] =a f9e or p5alty 6be
    deducti# 9 -put+ 9come f a busi;s or
    prop]ty1 p>agraph #ah7#a77a7 (! ,act
    requires t x 2 9curr$ =! purpose (
    ga9+ or produc+ 9come f t busi;s or
    prop]ty4
  --,p>agraph #ah7#a77a7 3ta9s no
    require;t t a f9e or p5alty m/ 2
    unavoida# 9 ord] = x 6be deducti#4
  --,not)/&+ t a f9e or p5alty may h be5
    9curr$ =! purpose ( ga9+ or produc+
    9come f a busi;s or prop]ty )9 !
    m1n+ ( p>agraph #ah7#a77a71 xs
  
                                      #h
             ,,it-#ajd;,r#c          c#b
    deductibil;y c n"e!.s 2 4all[$
    0ano!r provi.n 9 ! ,9come ,tax ,act4
  ,= fur!r -;ts on p>agraph #ah7#a77a71
  see p>agraph #c & al p>agraph #h4 ,o!r
  provi.ns 9 ! ,act t c h a be>+ on !
  deductibil;y ( f9es & p5alties >e
  4cuss$ 9 p>agraph #d 6p>agraph #g4

          ,p>agraph #ah7#a77a7
             7p>agraph #c7
    
#c4 ,p>agraph #ah7#a77a7 (! ,act
  provides t1 9 -put+ a taxpay]'s 9come
  f a busi;s or prop]ty1 no deduc;n % 2
  made 9 respect ( an \tlay or exp5se
  except 6! ext5t t x 0 made or 9curr$
  0! taxpay] =! purpose ( ga9+ or
  produc+ 9come f ! busi;s or prop]ty4
  ,z /at$ 0! ,supreme ,c\rt ( ,canada 9
  ! #fecjb ,briti% ,columbia ,ltd4
  deci.n3 8''' if ! taxpay] _c e/abli% t
  ! f9e 0 9 fact 9curr$ =! purpose (
  ga9+ or produc+ 9come1 !n ! f9e or
  p5alty _c 2 deduct$ '''40           #i
             ,,it-#ajd;,r#c          d#b
  ,= purposes ( e/abli%+ :e!r a f9e or
  p5alty has be5 9curr$ =! purpose (
  ga9+ or produc+ 9come3
  --! taxpay] ne$ n h attempt$ 6prev5t !
    act or omis.n t result$ 9 ! f9e or
    p5alty2 &
  --! taxpay] ne$ only e/abli% t "! 0 an
    9come-e>n+ purpose =! act or omis.n1
    reg>d.s ( :e!r t purpose 0 actu,y
    a*iev$4
  ,9 ! #fecjb ,briti% ,columbia ,ltd4
  deci.n1 ! ,supreme ,c\rt ( ,canada al
  /at$3 8,x is 3ceiva# t a br1* cd 2 s
  egregi\s or repulsive t ! f9e
  subsequ5tly impos$ cd n 2 ju/ifi$ z 2+
  9curr$ =! purpose ( produc+ 9come40 ,!
  ,c\rt did n1 h["e1 give any guidel9es
  ) respect 6? /ate;t o!r ?an 69dicate t
  8''' s* a situ,n wd likely 2 r>e '''40
  ,x wd h 6be "o 9 : ! egregi\s;s or
  repulsive;s (! act or omis.n giv+ rise
  6! f9e or p5alty is su6ici5t 6refute
  any alleg,n t ! purpose (! act or
  omis.n 0 6ga9 or produce 9come4    #aj
         ,o!r ,g5]al ,provi.ns       e#b
            7p>agraphs #d-e7
    
#d4 ,9 a4i;n 6p>agraph #ah7#a77a71 "! >e
  o!r g5]al provi.ns 9 ! ,act t cd apply
  64all[ ! deduc;n ( an \tlay =a f9e or
  p5alty z a curr5t exp5se3
  --p>agraph #ah7#a77b7--if x is a
    capital \tlay 7see1 h["e1 p>agraph
    #e72
  --p>agraph #ah7#a77h7--if x is a
    p]sonal exp5se2 or
  --p>agraph #ah7#a77c7--if x is 9curr$
    6e>n tax-exempt 9come4
  ,subject 6subsec;n #ah7#i.a7 7see
  p>agraph #g71 a p5alty pd on prepay;t
  (a mortgage wd n 2 deducti# z a curr5t
  exp5se1 pursuant 6p>agraph #ah7#a77b71
  un.s ! p5alty is 9curr$ 9 ! c\rse (
  c>ry+ on a busi;s1 e4g41 trad+ 9
  mortgages4 7,see al ! 4cus.n (
  mortgage prepay;t p5alties 9 p>agraphs
  #e1 #f & #g47

                                     #aa
             ,,it-#ajd;,r#c           #c
#e4 ,if a f9e or p5alty is 9curr$ 9
  3nec;n )! acquisi;n ( an asset = :
  capital co/ all[.e 7,,cca7 may 2
  claim$1 ! co/ (! f9e or p5alty is
  9clud$ 9 ! capital co/ ( t asset 7or !
  ,,cca class 6: ! asset 2l;gs74

  ,if a f9e or p5alty is 9curr$ 9 3nec;n
  )! acquisi;n ( an eligi# capital
  prop]ty1 ! co/ (! f9e or p5alty is an
  eligi# capital exp5diture provid$ all
  ! o!r te/s 9 ! subsec;n #ad7#e7
  def9i;n ( 8eligi# capital exp5diture0
  >e met4

  ,if a f9e or p5alty is 9curr$ 9 3nec;n
  )! acquisi;n or produc;n ( 9v5tory1 !
  co/ (! f9e or p5alty is 9clud$ 9 ! co/
  ( 9v5tory4

  ,if a f9e or p5alty 7e4g41 a mortgage
  prepay;t p5alty7 is 9curr$ 9 3nec;n )!
  4posi;n (a capital prop]ty1 ! co/ (!
  f9e or p5alty is tak5 96a3.t "u    #ab
             ,,it-#ajd;,r#c          a#c
  subsec;n #dj7#a7 = purposes (
  calculat+ any ga9 or loss on t
  4posi;n4

     ,specific ,provi.ns 7p>agraphs
                 #f-g7
    
#f4 ,a f9e or p5alty may 2 subject 6"o
  (! foll[+ specific 4all[.e provi.ns 9
  ! ,9come ,tax ,act3
  --,p>agraph #ah7#a77t7 prohibits a
    deduc;n = any am.t pd or paya# "u !
    ,9come ,tax ,act 7o!r ?an tax "u ,"p
    ,,xii4#b or ,,xii4#f74 ,?us1 no
    deduc;n is all[$ = any 9t]e/1 p5alty
    or f9e impos$ "u ! ,act4
  --,f9es & p5alties >e li/$ z
    8prescrib$ exp5ditures0 9 clause
    #bijb7a77i77,h7 (! ,9come ,tax
    ,regul,ns4 ,z a result1 any type (
    f9e or p5alty is exclud$ f ! def9i;n
    ( 8qualifi$ exp5diture0 = sci5tific
    rese>* & exp]i;tal develop;t 9
                                     #ac
             ,,it-#ajd;,r#c          b#c
    subsec;n #abg7#i7 & is n all[a# =
    9ve/;t tax cr$it purposes4
  --,a p5alty pd on prepay;t (a mortgage
    does n qualify z an 8eligi# capital
    exp5diture01 0virtue ( p>agraph 7d7
    ( t def9i;n 9 subsec;n #ad7#e74
#g4 ,"o (! foll[+ specific all[.e
  provi.ns 9 ! ,9come ,tax ,act may 2
  relevant3
  --,subsec;n #ah7#i.a7 applies 9 c]ta9
    cases 6a p5alty or bonus paya#
    0r1son (! repay;t 2f matur;y ( all
    or "p (! pr9cipal ( an \t/&+ debt
    oblig,n4 ,x may al apply 6a fee or
    p5alty pd 6reduce ! rate ( 9t]e/
    paya# on s* an oblig,n4 ,^! am.ts >e
    3sid]$ prepd 9t]e/ &1 provid$ ! o!r
    require;ts ( p>agraph #bj7#a77c7 >e
    satisfi$1 >e deducti# 9 -put+ a
    taxpay]'s 9come f busi;s or prop]ty
    ov] ! p]iod t ! 9t]e/ rate is 6be
    reduc$1 or ov] ! p]iod t wd h be5 7b
    =! prepay;t7 ! rema9+ t]m (! debt
    oblig,n4                         #ad
             ,,it-#ajd;,r#c          c#c
  --,a mortgage prepay;t p5alty may
    qualify z an eligi# mov+ exp5se =!
    purposes ( subsec;n #fb7#c72 see !
    curr5t v].n ( ,,it-#agh1 ,mov+
    ,exp5ses4
  
       ,notewor?y ,c\rt ,deci.ns
        ,r5d]$ ,prior 6! #fecjb
        ,briti% ,columbia ,ltd4
         ,deci.n 7p>agraph #h7
    
#h4 ,! c\rt deci.ns 4cuss$ 2l 7 r5d]$
  prior 6! #fecjb ,briti% ,columbia
  ,ltd4 deci.n4 ,n"e!.s1 !y c / 2 reli$
  ^u1 2c !y did n 9volve ! 4all[.e (a
  deduc;n =a f9e or p5alty =! sole r1son
  t x 0 avoida# or 3tr>y 6public policy
  7see p>agraph #b74
  --,in ,cl9ton ,w4 ,roenis* v4 ,,mnr1
    ,7#aibh-cd7' ,,ctc #fi1 #a ,,dtc
    #aii1 ! ,ex*equ] ,c\rt ( ,canada
    3clud$ t 9come tax pd 6! prov9ce (
    ,briti% ,columbia 0 n an exp5se =!
    purpose ( e>n+ 9come1 )9 !       #ae
             ,,it-#ajd;,r#c          d#c
    m1n+ ( :at has 2come a pr$ecessor (
    pres5t-"d p>agraph #ah7#a77a73
  
    8,x is self-evid5t t ! am.t (! 9come
    tax pd 6! prov9ce is n an exp5se =!
    purpose ( e>n+ ! 9come1 )9 ! m1n+ (
    #f7#a77a74 ,:5 s* pay;t ( taxes is
    made 6! prov9ce1 x is n s made 6e>n
    ! 9come1 x is pd 2c "! is an 9come
    %[+ ga9 & pr(it4 ,! ^w pr(it is 6be
    "u/ood 9 xs natural & prop] s5se1 9
    ! s5se 9 : no -m]cial man wd mis"u/&
    x40
  
    ,4cus.n3 ,? deci.n 3firms t a
    prov9cial 9come tax is n an exp5se
    9curr$ =! purpose ( ga9+ or produc+
    9come4 ,any f9e or p5alty impos$ "u
    a prov9ce's 9come tax law is al
    3sid]$ n 6be an exp5se 9curr$ =!
    purpose ( ga9+ or produc+ 9come4
  --,in ,quemont ,m9+ ,corpor,n ,limit$1
    ,rio ,algom ,m9es ,limit$1 &
    ,mac,leod-,cock%utt ,gold        #af
             ,,it-#ajd;,r#c          e#c
    ,m9es ,limit$ v4 ,,mnr1 ,7#aiff7'
    ,,ctc #egj1 #ff ,,dtc #ecgf1 !
    ,ex*equ] ,c\rt ( ,canada1 rely+ on !
    abv-m5;n$ ,roenis* deci.n1 3clud$ t
    x is cle> t a tax on pr(its impos$
    0a di6]5t or =eign jurisdic;n is n
    an exp5diture laid \ 6e>n pr(it4
  
    ,4cus.n3 ,? deci.n 3firms t a =eign
    9come tax is n an exp5se 9curr$ =!
    purpose ( ga9+ or produc+ 9come4
    ,any f9e or p5alty impos$ "u a =eign
    jurisdic;n's 9come tax law is al
    3sid]$ n 6be an exp5se 9curr$ =!
    purpose ( ga9+ or produc+ 9come4
    ,n"e!.s1 x %d 2 not$ t an 9come or
    pr(its tax pd 6a =eign jurisdic;n
    may qualify1 "u ! provi.ns (! ,9come
    ,tax ,act1 =a =eign tax cr$it or =a
    deduc;n 9 -put+ 9come4 ,h["e1 nei a
    f9e nor a p5alty pd 6a =eign
    jurisdic;n wd s qualify 2c nei is an
    9come or pr(its tax4 7,= fur!r
    "picul>s1 see ! curr5t v].n (    #ag
             ,,it-#ajd;,r#c          f#c
    ,,it-#bgj1 ,=eign ,tax ,cr$it &
    ,,it-#ejf1 ,=eign ,9come ,taxes z a
    ,deduc;n ,f ,9come1 respectively47
--------------------------------------#d
          ,explan,n ( ,*anges
    
               ,9troduc;n
    
  ,! purpose (! ,explan,n ( ,*anges is
6give ! r1sons =! revi.ns 6an 9t]pret,n
bullet94 ,x \tl9es revi.ns t we h made z
a result ( *anges 6! law1 z well z
*anges reflect+ new or revis$ 9t]pret,ns
(! ,,ccra4

           ,r1son =! ,revi.n
    
  ,? bullet9 has be5 revis$ 6reflect !
deci.n (! ,supreme ,c\rt ( ,canada 9
#fecjb ,briti% ,columbia ,ltd4 v4 ,!
,que51 ,7#bjjj7' #a ,,ctc #eg1 #ii ,,dtc
#egii4

                                     #ah
      ,legislative & ,o!r ,*anges    a#d
    
  ,! bullet9 has be5 5tirely rewritt5 2c
(! #fecjb ,briti% ,columbia ,ltd4
deci.n4 ,= fur!r "picul>s see ! ,summ>y
/ate;t at ! 2g9n+ (! bullet94


















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