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Business -> Penalties and Fines Usually Not Deductible

Penalties and Fines are Usually Not Deductible Business Expenses

Income Tax Act s. 67.6, 18(1)(t)

Fines and penalties imposed after March 22, 2004 by federal, provincial, or municipal governments in Canada or by a foreign country are not deductible.

According to Interpretation Bulletin IT-104R3, this includes "any fines or penalties imposed by a government, a government agency, regulatory authority, court or other tribunal, or any other person with a statutory authority to levy a fine or penalty".  Municipal parking tickets issued after March 22, 2004 are thus not a deductible expense.  IT-104R3 has been replaced with Income Tax Folio S4-F2-C1: Deductibility of Fines and Penalties, which indicates that "the key provision is section 67.6, which specifically prohibits the deduction of a fine or penalty imposed under a statute".

The non-deductibility does not apply to penalties incurred pursuant to contracts, such as late performance penalties.  If you are in doubt about whether an amount you have paid is a fine or penalty that is not deductible, read the Income Tax Folio. If it is still not clear to you, check with your professional tax advisor (CPA).

Interest expense charged on overdue amounts are not considered fines or penalties.  However, the Income Tax Act specifically disallows the deduction of penalty interest paid regarding late income tax, GST/HST, or Air Travellers Security Charge payments.  The non-deductibility of penalty interest re GST/HST and Air Travellers Security Charge payments applies to amounts paid in taxation years that begin on or after April 1, 2007.  IT-104R3 has not been updated to reflect this change.

If your corporation has paid expenses incurred to earn business or property income, and these expenses are not deductible for tax purposes, the non-deductible amount is added back to income on Schedule 1 of the T2 tax return.

If your unincorporated business has paid expenses incurred to earn business or property income, and these expenses are not deductible for tax purposes, the non-deductible amount is excluded from expenses in the statement of business or professional activities included with the tax return.

Revised: October 26, 2023

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