This is in reply to your letter of November 1, 1990 concerning whether interest charged on unpaid taxes or late instalments is deductible.
In connection with your concern, you have indicated that since interest earned on overpayment of tax must be included in income, interest charged on income taxes should be deductible.
In the case of the Interest received, the Income Tax Act requires that it be reported as income by a taxpayer. On the other hand, the Act requires that expenses such as interest (whether on account of unpaid taxes or some other liability) must be incurred for the purpose of earning income from a business or property in order to be deductible. The courts have held that the liability for income taxes arises only after income has been earned and, as such, interest on unpaid taxes cannot be claimed as a deduction for tax purposes.
We trust the above comments are of assistance to you in understanding the application of the income tax rules in this situation.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch