Principal Issues: [TaxInterpretations translation] 1-Are capital taxes deductible in computing federal income tax?
2-Is interest on capital tax deductible in computing of federal income tax?
Position: 1- Yes.
2- Yes.
Reasons: 1- The tax on capital is considered as an expense made by the taxpayer in order to earn business income.
2-Interest on capital tax may be deductible under section 9, provided that the interest expense meets the requirements of the Act, including those set out in paragraphs 18(1)(a) and 18(1)(b). Interest on capital tax will be deductible if the capital tax is deductible.
August 20, 2009
Montréal Tax Services Office Headquarters
Financial Sector and Exempt Entities Division
Attention: Marie-France Pleau
C. Ayotte, Notary, M.Fisc2009-032694
Capital Tax
This is further to your request for an interpretation dated June 10, 2009, concerning the above subject.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
The Facts
A corporation received a notice of assessment from Revenu Québec relating to capital tax under which it must pay an amount on account of this tax and the interest accrued on this amount.
Your Questions
Is capital tax deductible in computing income?
Is the Department of Finance News Release 2004-080 still in effect?
Is interest on capital tax deductible in computing income?
Our Opinion
Deductibility of capital tax and validity of Press Release 2004-080
Provincial income tax is not deductible under paragraph 18(1)(a) since such an amount is not an expense incurred for the purpose of gaining or producing income but rather is an expense incurred because income was earned. 1
In order to determine whether a tax, which is not an income tax, is deductible, it must be determined whether the payment of that amount is an expense incurred for the purpose of gaining or producing income.
Capital tax is not a tax that is calculated on the income of a business but rather a tax calculated on the paid-up capital of the corporation. Generally, this tax is considered an expense incurred for the purpose of earning income. The 1991Budget of the Department of Finance is consistent with this approach. Indeed, the explanations for the measure to prohibit the deductibility of any increase in payroll and capital taxes included the following:
"Currently, payroll and capital taxes are fully deductible in computing income while provincial income taxes are not deductible." 2
Since the 1991 Budget, the federal government has repeatedly reaffirmed its willingness to limit the deductibility of capital and payroll tax increases.3 The latest Finance Department press release on this subject is 2004-080, dated December 16, 2004. It reaffirms:
“Under the interim measure, any existing provincial payroll and capital taxes will remain deductible for federal income tax purposes, but increases in these taxes by way of provincial actions to increase the rate, change the definition of the base or introduce new taxes generally would not be deductible. The announcement of the extension of the interim measure ensures that all businesses and provinces are informed of the rules that apply to the deductibility of provincial payroll and capital taxes.”
Contrary to other press releases, the 2004 Press Release does not give any deadlines for this measure. It therefore applies until such time as news to the contrary is announced.
Deductibility of interest from capital tax
Fines and penalties are not deductible because of section 67.6. In order to determine whether they are fines and penalties, the Explanatory Notes to that section4 state:
"The federal, provincial, municipal or foreign law under which an amount is required to be paid will determine whether the amount is deductible: if it is not characterized as a fine or penalty, the amount may be deductible if it is otherwise incurred for the purpose of earning income; if it is characterized as a fine or penalty, the amount will not be deductible. This proposal would not apply to penalties or damages paid under a private contract."
Interest on capital tax may be deductible by virtue of section 9, provided that the interest expense satisfies the requirements of the Act, including those in paragraphs 18(1)(a) and 18(1)(b). Those paragraphs prohibit, respectively, the deduction of any expense that is not incurred for the purpose of gaining or producing income from a business or property and the deduction of any expense incurred on account of capital.5 Interest on capital tax will be deductible if the capital tax is deductible by virtue of section 9.
We hope that our comments are of assistance.
Manager
Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.
ENDNOTES
1 Roenisch v. M.N.R., 1 DTC 199 (Ex.C.R.1); First Pioneer Petroleums Ltd. v. M.N.R., 1 DTC 199 (S.C.); First Pioneer Petroleums Ltd. v. M.N.R., 74 DTC 6109 (F.C.T.D.); Teck Corporation v. The Queen, 2005 DTC 5338 (B.C.C.A.); 2008-0300361I7
2 Department of Finance, Budget 1991, Chapter 8: Supplementary Information, p.166
3 Department of Finance, news release 93-013; 93-059; 94-093, 95-114, 96-088, 97-106, 98-130; 99-113; 2000-092; 2001-122; 2002-110; 2003-065; 2004-080.
4 For more information, see also: IT 104R3: Deductibility of fines or penalties, available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tp/it104r3/it104r3-e.pdf .
5 2005-014762; Gifford v. The Queen [2004] 1 S.C.R. 411; IT-533: Interest deductibility and related issues, paras. 4 and 36, available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tp/it533/it533-e.pdf.