65302 British Columbia Ltd. v. Canada, [1999] 3 S.C.R. 804
65302 British Columbia Limited Appellant
v.
Her Majesty The Queen Respondent
Indexed as: 65302 British Columbia Ltd. v. Canada
1999: April 20; 1999: November 25.
Present: L’Heureux‑Dubé, Gonthier, McLachlin, Iacobucci, Major, Bastarache and Binnie JJ.
on appeal from the federal court of appeal
Income tax – Deductions – Levies – Egg producer exceeding its quota from 1984 to 1988 and including profit from over-quota production in declaration of income – Over-quota levy paid by egg producer in 1988 – Whether over-quota levy deductible as business expense – Whether over-quota levy can be characterized as capital outlay – Proper approach to deduction of fines, penalties or statutory levies from income – Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.), s. 18(1)(a), (b).
The appellant carried on a poultry farm business in British Columbia. It was a registered egg producer and, due to local market conditions, it decided to produce over-quota from 1984 to 1988. In 1988, an inspector from the B.C. Egg Marketing Board discovered the over-quota layers on the appellant’s farm and the appellant paid an over-quota levy of approximately $270,000. When filing its returns under the Income Tax Act, the appellant included the profit from its over-quota production in its income. In 1988, the appellant deducted the over-quota levy as a business expense pursuant to ss. 9(1) and 18(1)(a) of the Act, which resulted in a non-capital loss that was carried back to its 1985 taxation year. In its 1989 taxation year, the appellant deducted the interest paid on the unpaid balance of the levy and legal expenses incurred for representation in respect of the over-quota levy. Upon reassessment of its 1985, 1988, and 1989 tax returns, the Minister of National Revenue disallowed the deductions of the over-quota levy, loss carry back, interest and legal expenses. In the Tax Court of Canada, the parties agreed that the deductibility of the loss carry back, interest, and legal expenses depended upon the deductibility of the over-quota levy. The Tax Court held that the over-quota levy was deductible as a business expense and that this deduction was not prohibited by s. 18(1)(b) of the Act. The Federal Court of Appeal set aside the Tax Court’s decision. The central question in this appeal is whether the over-quota levy may be deducted as a business expense from a taxpayer’s business income.
Held: The appeal should be allowed.
Per Gonthier, McLachlin, Iacobucci, Major and Binnie JJ.: The over-quota levy is an allowable deduction pursuant to ss. 9(1) and 18(1)(a). The levy was incurred as part of the appellant’s day-to-day operations, and the decision to produce over-quota was a business decision made in order to realize income. The characterization of the levy as a “fine or penalty” is of no consequence because the income tax system does not distinguish among levies, fines and penalties.
If the expense is incurred for the purpose of gaining or producing business income, it is deductible. There is nothing in the language of s. 18(1)(a) to suggest that a penalty or fine should be “unavoidable” in order to be deductible. Nor should the deduction of fines and penalties incurred for the purpose of gaining or producing income from a business be disallowed for reasons of public policy. For courts to intervene in the name of public policy would only introduce uncertainty, as it would be unclear what public policy was to be followed, whether a particular fine or penalty was to be characterized as deterrent or compensatory in nature, and whether the body imposing the fine intended it to be deductible. Moreover, allowing the deduction of fines is consistent with the tax policy goals of neutrality and equity. Although it may be said that the deduction of such fines and penalties “dilutes” the impact of the sanction, this effect does not introduce a sufficient degree of disharmony so as to lead this Court to disregard the ordinary meaning of s. 18(1)(a) when that ordinary meaning is harmonious with the scheme and object of the Act. While fully alive to the need in general to harmonize the interpretation of different statutes, the question here arises in the specific context of a tax collection system based on self-assessment. In this connection, it is up to Parliament to decide which expenses incurred for the purpose of earning business income should not be deductible, as it has so decided on other occasions. In the absence of Parliamentary direction in the Income Tax Act itself, outlays and expenses are deductible if made for the purpose of gaining or producing income. However, while such a situation would likely be rare, it is conceivable that a breach could be so egregious or repulsive that the fine or penalty subsequently imposed could not be justified as being incurred for the purpose of producing income.
The appellant’s expenditures for the over-quota levy are best characterized as a current expense, the deduction of which is permitted by ss. 9(1) and 18(1)(a) of the Income Tax Act, rather than an outlay of capital prohibited by s. 18(1)(b) of the Act.
Per L’Heureux-Dubé and Bastarache JJ.: The over-quota levy incurred by the appellant can be deducted as a business expense for the purposes of the Income Tax Act as it was a compensatory levy charged primarily to defray the costs of over-production and incurred for the purposes of gaining or producing income. However, penal fines are not expenditures incurred for the purpose of gaining or producing income in the legal sense. In order to be consistent with a realistic understanding of the accretion of wealth concept and the court’s duty to uphold the integrity of the legal system in interpreting the Act, the distinction between deductible and non-deductible levies and penalties must be determined on a case-by-case basis. Absent an express indication to the contrary, the presumption that Parliament would not intend to encourage the violation of other laws must be considered. The main factor in determining whether a payment is deductible is whether the primary purpose of the statutory provision under which the payment is demanded would be frustrated or undermined. Statutory provisions imposing payments either as punishment for past wrongdoing or as a general or specific deterrence against future lawbreaking would be undermined if the fine could then be deducted as a business expense. This kind of deduction should be disallowed, not for reasons of public policy, but because deductions not specifically authorized by the Income Tax Act, would frustrate the expressed intentions of Parliament in other statutes. In contrast, if the legislative purpose behind a provision is primarily compensatory, its operation would not be undermined by the deduction of the expense. Where the purpose is mixed and the charging provisions have both a penal and a compensatory aim, a court should look for the primary purpose of the payment. In approaching this task, the court should consider, in particular, the nature of the mischief that the provision was designed to address.
Cases Cited
By Iacobucci J.
Disapproved: Amway of Canada Ltd. v. M.N.R. (1996), 193 N.R. 381; distinguished: Imperial Oil Ltd. v. Minister of National Revenue, 1947 CanLII 293 (CA EXC), [1947] Ex. C.R. 527; Commissioners of Inland Revenue v. Alexander von Glehn & Co., [1920] 2 K.B. 553; Robinson v. Commissioner of Inland Revenue, [1965] N.Z.L.R. 246; Herald and Weekly Times v. Federal Commissioner of Taxation (1932), 2 A.T.D. 169; Mayne Nickless Ltd v. Federal Commissioner of Taxation (1984), 71 F.L.R. 168; Beresford v. Royal Insurance Co., [1938] 2 All E.R. 602; considered: TNT Canada Inc. v. The Queen, [1988] 2 C.T.C. 91; Day & Ross Ltd. v. The Queen, 1976 CanLII 2413 (FC), [1977] 1 F.C. 780; Tank Truck Rentals, Inc. v. Commissioner of Internal Revenue, 356 U.S. 30 (1958); Commissioner of Internal Revenue v. Sullivan, 356 U.S. 27 (1958); referred to: Reference re Agricultural Products Marketing Act, 1978 CanLII 10 (SCC), [1978] 2 S.C.R. 1198; Royal Trust Co. v. M.N.R., 1957 CanLII 302 (CA EXC), 57 D.T.C. 1055; Symes v. Canada, 1993 CanLII 55 (SCC), [1993] 4 S.C.R. 695; Rizzo & Rizzo Shoes Ltd. (Re), 1998 CanLII 837 (SCC), [1998] 1 S.C.R. 27; Stubart Investments Ltd. v. The Queen, 1984 CanLII 20 (SCC), [1984] 1 S.C.R. 536; Canada v. Antosko, 1994 CanLII 88 (SCC), [1994] 2 S.C.R. 312; M.N.R. v. Eldridge, 1964 CanLII 1110 (CA EXC), [1964] C.T.C. 545; Espie Printing Co. v. Minister of National Revenue, 1960 CanLII 762 (CA EXC), [1960] Ex. C.R. 422; Royal Bank of Canada v. Sparrow Electric Corp., 1997 CanLII 377 (SCC), [1997] 1 S.C.R. 411; Canderel Ltd. v. Canada, 1998 CanLII 846 (SCC), [1998] 1 S.C.R. 147.
By Bastarache J.
Referred to: Symes v. Canada, 1993 CanLII 55 (SCC), [1993] 4 S.C.R. 695; Rizzo & Rizzo Shoes Ltd. (Re), 1998 CanLII 837 (SCC), [1998] 1 S.C.R. 27; Alberta (Treasury Branches) v. M.N.R., 1996 CanLII 244 (SCC), [1996] 1 S.C.R. 963; Friesen v. Canada, 1995 CanLII 62 (SCC), [1995] 3 S.C.R. 103; Stubart Investments Ltd. v. The Queen, 1984 CanLII 20 (SCC), [1984] 1 S.C.R. 536; Tank Truck Rentals, Inc. v. Commissioner of Internal Revenue, 356 U.S. 30 (1958); McKnight (Inspector of Taxes) v. Sheppard, [1999] 3 All E.R. 491; Hall v. Hebert, 1993 CanLII 141 (SCC), [1993] 2 S.C.R. 159.
Statutes and Regulations Cited
British Columbia Egg Marketing Board Standing Order (Rev. January 1989), ss. 6, 17(g).
British Columbia Egg Marketing Scheme, 1967, B.C. Reg. 173/67, s. 37(v).
Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.), ss. 9(1), 18(1)(a), (b), (l.1), (m), (t) [ad. 1990, c. 39, s. 8], 67, 67.5 [ad. 1994, c. 7, Sch. II, s. 46(1)], 111.
Income War Tax Act, R.S.C. 1927, c. 97, 6(a).
Internal Revenue Code § 162(f) [ad. P.L. 97-172, § 902(a)].
Natural Products Marketing (BC) Act, R.S.B.C. 1979, c. 296, ss. 12(1), 13(1)(k), 20(1).
Authors Cited
Brooks, Neil. “The Principles Underlying the Deduction of Business Expenses”. In Brian G. Hansen, Vern Krishna and James A. Rendall, contributing eds., Canadian Taxation. Toronto: Richard De Boo, 1981, 189.
Côté, Pierre-André. Interprétation des lois, 3e éd. Montréal: Thémis, 1999.
Driedger, Elmer. Construction of Statutes, 2nd ed. Toronto: Butterworths, 1983.
Driedger on the Construction of Statutes, 3rd ed. By Ruth Sullivan. Toronto: Butterworths, 1994.
Hogg, Peter W., and Joanne E. Magee. Principles of Canadian Income Tax Law, 2nd ed. Scarborough, Ont.: Carswell, 1997.
Krasa, Eva M. “The Deductibility of Fines, Penalties, Damages, and Contract Termination Payments” (1990), 38 Can. Tax J. 1399.
Krever, Richard. “The Deductibility of Fines: Considerations From Law and Policy Perspectives” (1984), 13 Austl. Tax Rev. 168.
Krishna, Vern. “Public Policy Limitations on the Deductibility of Fines and Penalties: Judicial Inertia” (1978), 16 Osgoode Hall L.J. 19.
APPEAL from a judgment of the Federal Court of Appeal (1997), 221 N.R. 175, 98 D.T.C. 6002, [1998] 1 C.T.C. 131, [1997] F.C.J. No. 1544 (QL), allowing an appeal from a judgment of the Tax Court of Canada, 1995 CanLII 18971 (TCC), [1995] 2 C.T.C. 2294, [1995] T.C.J. No. 81 (QL), allowing an appeal from notices of reassessment. Appeal allowed.
S. Kim Hansen, for the appellant.
Gordon Bourgard and Brent Paris, for the respondent.
The reasons of L’Heureux-Dubé and Bastarache JJ. were delivered by
I. Introduction
1This appeal raises the narrow question of whether a levy imposed pursuant to a provincial egg marketing scheme can be deducted as a business expense for the purposes of the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.) (the “Act”). The broader question posed by my colleague Justice Iacobucci is whether fines or other types of payments may be deductible from a taxpayer’s income. While I agree with his answer to the narrow question, as well as with his characterization of the payment as a current expense rather than a capital outlay, and adopt his statement of the facts and judgments of the lower courts, I respectfully cannot agree that all types of fines and penalties are deductible as a matter of course.
II. Analysis
1. The Concept of Profit and the Scheme of the Income Tax Act
2The Act sets out the mechanism for deducting expenses for the purpose of determining taxable income in broad language. Section 9 provides that “a taxpayer’s income for a taxation year from a business or property is the taxpayer’s profit from that business or property for the year”. The Act provides no definition of the term “profit”. In Symes v. Canada, 1993 CanLII 55 (SCC), [1993] 4 S.C.R. 695, this Court examined the calculation of profit in detail and determined that the correct approach is to begin by asking whether a particular expense would be deductible according to well accepted principles of business practice. However, even if the deduction is otherwise consistent with the principles of commercial trading, it may still be disallowed through the express limitations in s. 18(1). In particular, s. 18(1)(a) prohibits deductions in respect of:
. . . an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property; . . . .
3Symes, supra, explains that the calculation of profit is a question of law that does not necessarily coincide with generally accepted accounting principles. As Iacobucci J. instructs, at p. 724, “the s. 9(1) test is a legal test rather than an accountancy test” (emphasis added). While the definition of profit for balance sheet purposes and for income tax purposes may coincide, they are not necessarily identical.
4Accordingly, the question of statutory interpretation raised in the present case is whether levies, fines and other payments should, in the legal sense, be considered to be “made or incurred by the taxpayer for the purpose of gaining income from the business”.
2. Legislative Intention and Statutory Interpretation
5It is well established that the correct approach to statutory interpretation is the modern contextual approach, set out by E. A. Driedger in Construction of Statutes (2nd ed. 1983), at p. 87:
. . . the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.
The modern rule is again described in Driedger on the Construction of Statutes (3rd ed. 1994), by R. Sullivan, at p. 131:
There is only one rule in modern interpretation, namely, courts are obliged to determine the meaning of legislation in its total context, having regard to the purpose of the legislation, the consequences of proposed interpretations, the presumptions and special rules of interpretation, as well as admissible external aids. In other words, the courts must consider and take into account all relevant and admissible indicators of legislative meaning.
See also P.-A. Côté, Interprétation des lois (3rd ed. 1999), at pp. 364-73. Recent decisions have applied the modern approach in both tax and non-tax cases: Rizzo & Rizzo Shoes Ltd. (Re), 1998 CanLII 837 (SCC), [1998] 1 S.C.R. 27, at para. 21; Alberta (Treasury Branches) v. M.N.R., 1996 CanLII 244 (SCC), [1996] 1 S.C.R. 963, at paras. 14-15; Friesen v. Canada, 1995 CanLII 62 (SCC), [1995] 3 S.C.R. 103, at para. 10; Symes, supra, at p. 744; Stubart Investments Ltd. v. The Queen, 1984 CanLII 20 (SCC), [1984] 1 S.C.R. 536, at p. 578.
6When considering the operation of ss. 9 and 18 in their entire context, I am persuaded that it was not the intention of Parliament to allow all fines to be deductible. I principally reach this conclusion for the simple reason that to so allow would operate to frustrate the legislative purpose of other statutes.
7The statute book as a whole forms part of the legal context in which an act of Parliament is passed. As Driedger notes in the second edition, at p. 159, “one statute may influence the meaning of the other, so as to produce harmony within the body of the law as a whole”; see also Côté, supra, at pp. 433-40. Sullivan in Driedger on the Construction of Statutes is even more explicit in this regard, at p. 288:
The meaning of words in legislation depends not only on their immediate context but also on a larger context which includes the Act as a whole and the statute book as a whole. The presumptions of coherence and consistency apply not only to Acts dealing with the same subject but also, albeit with lesser force, to the entire body of statute law produced by a legislature. The legislature is presumed to know its own statute book and to draft each new provision with regard to the structures, conventions, and habits of expression as well as the substantive law embodied in existing legislation.
. . . It is presumed that the legislature does not intend to contradict itself or to create inconsistent schemes. Therefore, other things being equal, interpretations that minimize the possibility of conflict or incoherence among different enactments are preferred. [Footnotes omitted.]
She explains, at footnote 14, that the Act as a whole combined with the statute book as a whole “constitutes the complete text of a legislative provision”. Similarly, Côté, supra, explains, at p. 433, that:
[translation] Different enactments of the same legislature are supposedly as consistent as the provisions of a single enactment. All legislation of one Parliament is deemed to make up a coherent system. Thus interpretations favouring harmony between statutes should prevail over discordant ones, because the former are presumed to better represent the thought of the legislator.
8To allow all fines to be deductible as a matter of course would therefore be inconsistent with the modern contextual approach to statutory interpretation, which requires that weight be given to the total context of the Act, including its relationship to other statutes. As N. Brooks argues in “The Principles Underlying the Deduction of Business Expenses”, in B. G. Hansen, V. Krishna and J. A. Rendall, eds., Canadian Taxation (1981), 189, at pp. 242-43:
If the legislative bodies and the courts are perceived as engaged in a co-operative venture of law-making, then the courts must assume the task of ensuring, as much as possible, that the matrix of statutory instruments do not operate at cross-purposes.
9This is similar to the approach adopted by the United States Supreme Court in Tank Truck Rentals, Inc. v. Commissioner of Internal Revenue, 356 U.S. 30 (1958). At issue there was whether fines imposed for violations of state maximum weight laws were deductible. The court unanimously held they were not, explaining, at p. 35:
We will not presume that the Congress, in allowing deductions for income tax purposes, intended to encourage a business enterprise to violate the declared policy of a State. To allow the deduction sought here would but encourage continued violations of state law by increasing the odds in favor of noncompliance. This could only tend to destroy the effectiveness of the State’s maximum weight laws.
The court recognized, however, that this presumption against congressional intention to encourage violations of other laws had to be balanced against the intention to tax only the profits of a business.
10I observe the same complexity in the Canadian context. Nevertheless, it would clearly frustrate the purposes of the penalizing statute if an offender was allowed to deduct fines imposed for violations of the Criminal Code, R.S.C., 1985, c. C-46, or related statutes as business expenses. The deduction of a fine imposed for a Criminal Code violation would suggest that the decision to commit a criminal offence may be a legitimate business decision. Moreover, such a deduction would have the unsavoury effect of reducing the penal and deterrent effect of the penalizing statute.
11The Act has since been amended to prohibit the deduction of illegal bribery expenses (s. 67.5 (added by S.C. 1994, c. 7, Sch. II, s. 46(1)) and fines imposed pursuant to the Act itself (s. 18(1)(t) (added by S.C. 1990, c. 39, s. 8)). It is argued that this indicates that Parliament did not intend to prohibit the deduction of other fines and penalties. In my view, this observation does not address the general consistency issue or require that the principles sustaining the coherence of our statutory framework be set aside when deciding whether an expense is incurred for the purpose of producing income under s. 18(1)(a). Côté, supra, explains the frailties of the type of a contrario argument proposed by the appellant, at p. 426:
[translation] A contrario, especially in the form expressio unius est exclusio alterius, is widely used. But of all the interpretative arguments, it is among those which must be used with the utmost caution. The courts have often declared it an unreliable tool, and, as we shall see, it is frequently rejected.
He concludes, at p. 429:
[translation] Since it is only a guide to the legislature’s intent, a contrario reasoning should certainly be set aside if other indications reveal that its consequences go against the statute’s purpose, are manifestly absurd, or lead to incoherence and injustice that could not have been the desire of Parliament. [Footnotes omitted.]
12In this case, it is possible to interpret the Act in a manner that is consistent with the object of other legislative enactments. To adopt the position that fines are always or generally deductible, without reference to the Act under which the fine was imposed, ignores the obligation to consider the intention of Parliament and to determine whether the deduction would defeat or impair the effectiveness of other legislative enactments. Absent express provision to the contrary, the presumption that Parliament would not intend to encourage the violation of other laws must be considered.
13In my view, it is important not to overlook the importance of the characterization of the expenditure. When considering other types of payments, such as fees levied under regulatory regimes with compensatory aims, it might be wholly consistent with the scheme to allow the charges to be deductible. Such charges, like user fees generally, are costs of engaging in a particular type of business and are levied to compensate for different types of regulated activities or to claw back profits earned in violation of the regulations. Allowing such charges to be deducted does not undermine their function, as the money still goes to the compensatory scheme. Thus, it would not undermine the charging statute for these levies to be deducted from a taxpayer’s income.
14The nature of the expenditure and the specific policy of the rule under which it became payable have also been recognized as the fundamental criteria for determining non-deductibility in a unanimous decision of the House of Lords in the very recent case of McKnight (Inspector of Taxes) v. Sheppard, [1999] 3 All E.R. 491, at p. 496. In that case, Lord Hoffmann reviewed prior case law in which expenditures resulting from a taxpayer’s own misconduct had been disallowed because it constituted “behaviour outside the proper scope of his trade” or because they constituted “incidents which followed after the profits had been earned” (p. 495). He agreed with those decisions but found the explanations given too uncertain. As noted above, he concluded that the divergent answers given by the courts in cases on fines, penalties, damages and costs could be explained by looking to the nature of the expenditure and the policy of the rule providing for its payment. These criteria would permit the court to “easily conclude that the legislative policy would be diluted if the taxpayer were allowed to share the burden with the rest of the community by a deduction for the purposes of tax” (p. 496).
15The distinction between deductible and non-deductible payment must therefore be determined on a case-by-case basis. The main factor in such a determination is whether the primary purpose of the statutory provision under which the payment is demanded would be frustrated or undermined. Statutory provisions imposing payments either as punishment for past wrongdoing or as general or specific deterrence against future law-breaking would be undermined if the fine could then be deducted as a business expense.
16In contrast, if the legislative purpose behind a provision is primarily compensatory, its operation would not generally be undermined by the deduction of the expense. Where the purpose is mixed and the charging provisions have both a penal and a compensatory aim, a court should look for the primary purpose of the payment. In approaching this task, the court should consider, in particular, the nature of the mischief that the provision was designed to address.
17I agree with my colleague, Iacobucci J., that public policy determinations are best left to Parliament. However, I am not suggesting that the deduction of penal fines be disallowed for public policy reasons, but instead because their deduction, not specifically authorized by the Act, would frustrate the expressed intentions of Parliament in other statutes if they were held to come under s. 18(1)(a) of the Act. In my view, penal fines are not expenditures incurred for the purpose of gaining or producing income in the legal sense. This concern is not so much one of public policy, morality or legitimacy, but one consistent with a realistic understanding of the accretion of wealth concept and the court’s duty to uphold the integrity of the legal system in interpreting the Income Tax Act. As explained by McLachlin J. in Hall v. Hebert, 1993 CanLII 141 (SCC), [1993] 2 S.C.R. 159, at p. 169, in finding that a court could bar recovery in tort on the ground of the plaintiff’s immoral or illegal conduct:
The basis of this power, as I see it, lies in duty of the courts to preserve the integrity of the legal system, and is exercisable only where this concern is in issue. This concern is in issue where a damage award in a civil suit would, in effect, allow a person to profit from illegal or wrongful conduct, or would permit an evasion or rebate of a penalty prescribed by the criminal law. The idea common to these instances is that the law refuses to give by its right hand what it takes away by its left hand. [Emphasis added.]
3. Application to the Facts
18The impugned levy in the case at bar was imposed under s. 6 of the British Columbia Egg Marketing Board Standing Order (Rev. January 1989), which derives its authority from s. 13(1)(k) of the Natural Products Marketing (BC) Act, R.S.B.C. 1979, c. 296 (the “Marketing Act”), permitting the Lieutenant Governor in Council to vest in a marketing board or commission the power to:
. . . fix and collect levies or charges from designated persons engaged in the production or marketing of the whole or part of a regulated product and for that purpose to classify those persons into groups and fix the levies or charges payable by the members of the different groups in different amounts, and to use those levies or charges and other money and licence fees received by the commission
(i) to carry out the purposes of the scheme;
(ii) to pay the expenses of the marketing board or commission;
(iii) to pay costs and losses incurred in marketing a regulated product;
(iv) to equalize or adjust returns received by producers of regulated products during the periods the marketing board or commission may determine; and
(v) to set aside reserves for the purposes referred to in this paragraph;
19In contrast, penalties are authorized by s. 20 of the Marketing Act which contemplates both fines and imprisonment as punishment for failing to comply with the Act or subordinate legislation:
(1) Every person who fails to comply with this Act or the regulations or an order, rule, regulation, determination or decision made by the Provincial board or a marketing board or commission or made by virtue of a power exercisable under the federal Act, is liable on conviction, to a fine of not less than $100 and not more than $500 or to imprisonment not exceeding 6 months or to both a fine and imprisonment.
20The comparison of these two provisions confirms that the over-quota levy assessed by the board pursuant to s. 13 of the Marketing Act was primarily compensatory and not penal. I would thus accept the trial judge’s determination that this type of levy was akin to a “fee for service” incurred for the purpose of producing income:
. . . I do not view the levy imposed by the Board under the authority of paragraph 6(e) of the Standing Order, as a penalty. Indeed, there is a specific section in the B.C. Act dealing with penalties (section 20), and I do not see that these levies are assessed as a punishment imposed by statute as a consequence of the commission of an offence, but rather as an additional cost to the producer in the carrying on of his business.
(1995 CanLII 18971 (TCC), [1995] 2 C.T.C. 2294, at p. 2304)
The deduction of such a levy does not operate to frustrate or undermine the purposes of the Marketing Act or of the British Columbia Egg Marketing Board Standing Order because such levies are not primarily geared towards punishment or deterrence, but instead to the efficient operation of the regulatory scheme.
21Thus, as the over-quota levy was a compensatory fee charged primarily to defray the costs of over-production and incurred for the purpose of gaining or producing income, I would allow its deduction for the purposes of the computation of profit.
III. Disposition
22I would accordingly allow the appeal with costs in this Court and the court below.
The judgment of Gonthier, McLachlin, Iacobucci, Major and Binnie JJ. was delivered by
I. Introduction
23At issue in the present appeal is whether levies, fines and penalties may be deducted as business expenses from a taxpayer’s income. The resolution of this issue involves questions of statutory interpretation and the extent to which public policy considerations may enter into this interpretation. It is my opinion that as a general principle, it is Parliament, and not the courts, who should decide which expenses incurred for the purpose of earning business income should not be deductible. Parliament has made such decisions on many occasions; this is simply not one of them. As such, levies, fines and penalties which are incurred for the purpose of earning income are deductible business expenses.
II. Facts
24The appellant, 65302 British Columbia Ltd. (formerly Veekens Poultry Farms Ltd.), carries on a poultry farm business near Prince George, British Columbia. The farm produces both meat production chickens and egg-laying chickens that produce eggs for the table market. At the relevant times, the appellant was a registered producer under British Columbia Regulation 173/67, otherwise known as the British Columbia Egg Marketing Scheme, 1967 (the “Scheme”). The Scheme was enacted under the Natural Products Marketing (BC) Act, R.S.B.C. 1979, c. 296, previously R.S.B.C. 1960, c. 263, and established the British Columbia Egg Marketing Board (the “Board”) to administer the Scheme.
25Pursuant to its authority under the Scheme, the Board established a quota system whereby egg producers in the province are assigned quotas for egg production. The quota determines the number of layer hens that may be kept by each producer. Because of local market conditions, the appellant made a decision to operate over his allocated quota for the years 1984 to 1988. The appellant was concerned that if it did not produce over quota, it would lose its major customer, Overwaitea Foods, which was expanding in the area. Additional quota was not available for purchase in the Prince George area during these years, but quota was available in the Lower Mainland. However, the price was $50 per bird compared to $30 per bird in the Prince George area.
26The appellant did not inform the Board of its over-quota production. In 1988 an inspector from the Board, acting under a new policy requiring him to check all the barns on the appellant’s property, discovered an estimated 6,700 more layers than permitted under the appellant’s quota. The Board imposed an over-quota levy on the appellant pursuant to its authority under s. 6(e) of the British Columbia Egg Marketing Board Standing Order. After negotiations with the Board, the appellant agreed to pay an over-quota levy of $269,629.69 and to dispose of its excess layers. In 1989 the appellant purchased additional quota.
27When filing its returns under the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.) (the “Act”), the appellant included in its income the profit from its over-quota production. In 1988, the appellant deducted the over-quota levy as a business expense pursuant to ss. 9(1) and 18(1)(a) of the Act. This deduction resulted in a non-capital loss of $61,876 that was carried back, pursuant to s. 111 of the Act, to its 1985 taxation year. Subsequently, in its 1989 taxation year, the appellant deducted $9,704.50 for interest paid on the unpaid balance of the levy and legal expenses of $3,766 incurred for representation in respect of the over-quota levy.
28The appellant was reassessed in respect of its 1985, 1988, and 1989 taxation years by Notices of Reassessment, dated November 14, 1991, which disallowed the deduction of the over-quota levy, loss carry back, interest and legal expenses. The appellant appealed to the Tax Court of Canada, where the parties agreed that the deductibility of the loss carry back, interest, and legal expenses depended upon the deductibility of the over-quota levy. The Tax Court held that the over-quota levy was deductible as a business expense and that this deduction was not prohibited by s. 18(1)(b) of the Act, which prevents taxpayers from deducting payments made on account of capital. The Minister of National Revenue (the “Minister”) appealed this decision to the Federal Court of Appeal, which allowed the appeal and held that the over-quota levy was not deductible. The appellant now appeals from that decision to this Court.
III. Relevant Statutory Provisions
29Natural Products Marketing (BC) Act, R.S.B.C. 1979, c. 296
(1) The Lieutenant Governor in Council may, in accordance with section 2, provide for the establishment of a marketing board to administer, under the supervision of the Provincial board, regulations for the marketing of a regulated product.
(1) Without limiting the generality of other provisions of this Act, the Lieutenant Governor in Council may vest in a marketing board or commission any or all of the following powers:
(k) to fix and collect levies or charges from designated persons engaged in the production or marketing of the whole or part of a regulated product and for that purpose to classify those persons into groups and fix the levies or charges payable by the members of the different groups in different amounts, and to use those levies or charges and other money and licence fees received by the commission
(i) to carry out the purposes of the scheme;
(ii) to pay the expenses of the marketing board or commission;
(iii) to pay costs and losses incurred in marketing a regulated product;
(iv) to equalize or adjust returns received by producers of regulated products during the periods the marketing board or commission may determine; and
(v) to set aside reserves for the purposes referred to in this paragraph;
- (1) Every person who fails to comply with this Act or the regulations or an order, rule, determination or decision made by the Provincial board or a marketing board or commission or made by virtue of a power exercisable under the federal Act, is liable on conviction, to a fine of not less than $100 and not more than $500 or to imprisonment not exceeding 6 months or to both a fine and imprisonment.
British Columbia Egg Marketing Scheme, 1967, B.C. Reg. 173/67
37 The board shall have authority within the Province to promote, regulate and control the production, transportation, packing, storing and marketing, or any of them, of the regulated product, including the prohibition of such production, transportation, packing, storing and marketing, or any of them, in whole or in part, and without limiting the generality of the foregoing shall have the following authority:
(v) to make orders fixing, imposing and collecting levies or charges from registered producers engaged in the marketing of any category of the regulated product, and for such purposes to classify registered producers into groups and to fix the levies or charges payable by the members of the different groups in different amounts, and to use such levies or charges for the board’s purposes, including the creation of reserves and the payment of expenses and losses resulting from the sale or disposal of regulated product and the equalization or adjustment among registered producers of moneys realized from the sale thereof during such period or periods of time as the board may determine.
British Columbia Egg Marketing Board Standing Order (Rev. Jan. 1989)
SECTION 6
LEVIES AND FEES
(a) Levy - A levy (the provincial levy) is hereby imposed on each Registered Producer of an amount per dozen from time to time fixed by the Board, on the number of dozens of eggs marketed by him excluding any eggs, if any, marketed by him in interprovincial and export trade.
(b) Levy-Layers - A levy is hereby imposed on each Registered Producer of an amount from time to time fixed by the Board for each layer which may be kept or maintained by the Registered Producer for a period less:
(i) The aggregate amount for that period fixed by the Board as the levy payable per dozen in respect of eggs marketed by him in intraprovincial trade, and:
(ii) If applicable, the amount for that period fixed by the Canadian Egg Marketing Agency as the federal levy payable per dozen in respect of eggs marketed by him in interprovincial and export trade.
(e) Over-Quota Levy -- A levy is hereby imposed in the amount of $0.08 (eight cents) per day in respect of each layer kept or maintained by a Registered Producer or Commercial Hatching Egg Producer at any time in excess of the number of layers which may be kept or maintained by that Registered Producer or Commercial Hatching Egg Producer for the period in question. The levy shall be calculated and payable for the entire period for which excess layers are kept or maintained until such date as it is established to the Board’s satisfaction that the excess layers have been disposed of by the Registered Producer or Commercial Hatching Egg Producer.
Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.)
(1) Subject to this Part, a taxpayer’s income for a taxation year from a business or property is the taxpayer’s profit from that business or property for that year.
(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;
(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part;
- In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.
IV. Judicial History
A. Tax Court of Canada, 1995 CanLII 18971 (TCC), [1995] 2 C.T.C. 2294
30Lamarre J.T.C.C. noted that the Natural Products Marketing (BC) Act drew a distinction between the Board’s powers to fix and collect levies and charges (s. 13) and the power to impose a penalty (s. 20). Further, when dealing with similar legislation in Reference re Agricultural Products Marketing Act, 1978 CanLII 10 (SCC), [1978] 2 S.C.R. 1198, the Supreme Court of Canada mentioned that the purpose of the levies was to fund the boards and to provide for surplus removal of over-quota production. Laskin C.J. said the levies could be regarded as a “fee for services”. In light of these considerations, Lamarre J.T.C.C. concluded that the levy imposed by the Board under s. 6(e) of the Standing Order was not a penalty. Such levies are not assessed as a punishment imposed by statute as a consequence of the commission of an offence, but are instead an additional cost to a producer of carrying on his or her business. In Lamarre J.T.C.C.’s view, both the regular and the over-quota levies can be characterized as “fees for services”. Simply because the levy resulted in a loss to the appellant in 1988 is not proof that the Standing Order was penalizing in the legal sense.
31Even if the levy could be described as a penalty, Lamarre J.T.C.C. concluded that it could still be deductible as a business expense pursuant to s. 18(1)(a) of the Act. In Imperial Oil Ltd. v. Minister of National Revenue, 1947 CanLII 293 (CA EXC), [1947] Ex. C.R. 527, a payment of damages and legal costs by the taxpayer company to the owners of a vessel sunk in a collision with one of the taxpayer company’s vessels was held to be deductible on the grounds that collisions were an “ordinary risk of the marine operations part of the appellant’s business and really incidental to it” (p. 539). Likewise, in TNT Canada Inc. v. The Queen, [1988] 2 C.T.C. 91 (F.C.T.D.), and Day & Ross Ltd. v. The Queen, 1976 CanLII 2413 (FC), [1977] 1 F.C. 780 (T.D.), fines relating to trucking regulations were held to be deductible according to a two-part test. The first part of the test asks whether the payment of the fines was an outlay for the purpose of producing income, pursuant to s. 18(1)(a). The second part of the test asks whether public policy considerations preclude deductibility.
32Lamarre J.T.C.C. concluded that the over-quota levy at issue “resulted from the day-to-day operation of egg production business and was incurred as a risky but necessary expense” (p. 2306). In her view, over-quota egg production was no more an outrageous violation of public policy than the statutory infractions at issue in Day & Ross, supra, and TNT, supra. The fact that the outlay did not result in income but rather caused a loss in the year it was assessed did not prevent it from being deductible, as it is the purpose of the expenditure that must be assessed: Royal Trust Co. v. M.N.R., 1957 CanLII 302 (CA EXC), 57 D.T.C. 1055 (Ex. Ct.).
33Lamarre J.T.C.C. also dismissed the argument that the over-quota levy was in fact an outlay on account of capital, the deduction of which would be prohibited by s. 18(1)(b) of the Act. It did not bring into existence an advantage of enduring benefit or provide an enduring advantage for the trade. It was a recurrent expense likely to happen occasionally in the egg production business. Nor was the over-quota levy an expenditure to preserve a capital asset, i.e., the quota. There is only a possibility that a registered producer might lose its licence if the levy was not paid and in fact only once in the past was a producer’s quota suspended by the Board.
34Lamarre J.T.C.C. allowed the appeal with costs.
B. Federal Court of Appeal, 1997 CanLII 5739 (FCA), [1998] 1 C.T.C. 131
35Desjardins J.A., for the court, held that regardless of whether the levy is characterized as a penalty or not, it is imposed in order to carry out the purpose of the Scheme, which is the orderly production of eggs in British Columbia. Further, Desjardins J.A. noted that the Federal Court of Appeal had previously held that business is to be carried on without any infraction of the law: Amway of Canada Ltd. v. M.N.R. (1996), 193 N.R. 381. In the instant case, the appellant could have carried on his business in such a way as to avoid the over-quota production it intentionally pursued.
36Desjardins J.A. also held that there is a strong public policy argument precluding the appellant from claiming the levy as a business expense. She stated, at p. 132:
It is clearly inconsistent with the purpose of such a marketing scheme if producers are able to take action similar to that of the respondent and successfully claim as business expenses levies encountered in excess of permissible allotments.
37Desjardins J.A. allowed the appeal with costs, set aside the Tax Court’s decision, and dismissed the appellant’s appeal of the Minister’s assessments for the taxation years 1985, 1988 and 1989.
V. Issues
38 1. What is the proper approach to the deduction of fines, penalties and statutory levies from income under the Act?
- If statutory levies are deductible under s. 18(1)(a) of the Act, is the levy here more properly characterized as a capital outlay or loss, the deduction of which is prohibited by s. 18(1)(b) of the Act?
VI. Analysis
A. Section 18(1)(a) of the Income Tax Act
(1) The Concept of Profit in Section 18(1)(a)
39 The central question in this appeal is whether an over-quota levy may be deducted as a business expense from a taxpayer’s business income. It has been argued that the levy was non-deductible because it was an “avoidable” fine or penalty. For the reasons I give below, the characterization of the levy as a “fine or penalty” is of no consequence, because in my view, the income tax system does not distinguish among levies, fines and penalties. If the expense is incurred for the purpose of earning business income, it is deductible. Section 9(1) of the Act provides that a taxpayer’s business income for the tax year is the profit from that business. It is well established that the concept of profit found in s. 9(1) authorizes the deduction of business expenses, as profit is inherently a net concept, and such deductions are allowed under s. 9(1) to the extent that they are consistent with “well accepted principles of business (or accounting) practice” or “well accepted principles of commercial trading”: Symes v. Canada, 1993 CanLII 55 (SCC), [1993] 4 S.C.R. 695, at p. 723. These expenses may nonetheless be prohibited by the limiting provisions found in s. 18(1), although many of these provisions are also consistent with well accepted principles of business practice. The present appeal concerns the language of s. 18(1)(a), which provides that, in computing taxable business income, no deduction may be made in respect of
an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property.
The majority of this Court in Symes, supra, at p. 736, stated:
. . . no test has been proposed which improves upon or which substantially modifies a test derived directly from the language of s. 18(1)(a). The analytical trail leads back to its source, and I simply ask the following: did the appellant incur [the impugned] expenses for the purpose of gaining or producing income from a business?
To rephrase this language in the context of the present appeal, the question to ask is: did the appellant incur the over-quota levy for the purpose of gaining or producing income from its business?
40 On its face, I would answer this question in the affirmative. I agree with Lamarre J.T.C.C., in the Tax Court, that the levy was incurred as part of the appellant’s day-to-day operations. The decision to produce over-quota was a business decision made in order to realize income. The appellant deliberately produced over-quota in order to maintain its major customer, who was then expanding in the area, until it could purchase additional quota at what it thought was an affordable price.
41 However, the respondent urges this Court to follow Lord Sterndale’s distinction between “a loss connected with the business” and “a fine imposed upon the company personally”: Commissioners of Inland Revenue v. Alexander von Glehn & Co., [1920] 2 K.B. 553 (C.A.). The argument is that the nature of the sanction is such that it is more properly viewed as attaching to the business entity itself rather than to the business of the entity. Alexander von Glehn has been followed in other common law jurisdictions: see Robinson v. Commissioner of Inland Revenue, [1965] N.Z.L.R. 246 (S.C.); Herald and Weekly Times v. Federal Commissioner of Taxation (1932), 2 A.T.D. 169 (H.C. Austl.); Mayne Nickless Ltd v. Federal Commissioner of Taxation (1984), 71 F.L.R. 168 (Vic. Sup. Ct.).
42 I do not find these cases helpful to the present appeal given the differences in the applicable taxation statutes. According to Lord Sterndale in Alexander von Glehn, supra, three rules of the Income Tax Act, 1842, governed the deductibility of the fine at issue in that case. The third rule that he cited provided (at p. 563):
In estimating the balance of the profits or gains to be charged . . . no sum shall be set against or deducted from . . . such profits or gains, for any disbursements or expenses whatever, not being money wholly and exclusively laid out or expended for the purposes of such trade, manufacture, adventure, or concern, or of such profession, employment, or vocation. [Emphasis added.]
All three members of the Court of Appeal agreed that the penalty at issue was not wholly and exclusively laid out or expended for the purposes of trade or, what amounts to the same thing, that the penalties were not expenditures necessary to earn the profits (at pp. 565-66, 569 and 573).
43 I note that the New Zealand and Australian cases cited by the respondent dealt with similarly worded taxation statutes to that at issue in Alexander von Glehn. Canada’s Income War Tax Act, R.S.C. 1927, c. 97, s. 6(a), also prohibited the deduction of expenses not “wholly, exclusively and necessarily laid out or expended for the purpose of earning the income”. However, in 1948 this section was replaced with the precursor to our current s. 18(1)(a) of the Act, dropping the language of “wholly, exclusively and necessarily laid out or expended”. As this Court affirmed in Symes, at p. 732,
the current wording of s. 18(1)(a) is sufficient justification for the view that Parliament acted to amend its predecessor section in such a way as to broaden the scope for business expense deductibility.
In my view, following case law interpreting statutes that employed similarly restrictive language as our Income War Tax Act would be to ignore the clear intention exhibited by Parliament since 1948 to broaden the scope of deductible business expenses. Indeed, in Mayne Nickless, supra, the Supreme Court of Victoria declined to consider Canadian case law, stating at p. 183 that it was not of any great assistance given the different legislation involved.
44 The respondent also asks this Court to follow the Federal Court of Appeal’s decision in Amway, supra. The central issue in Amway was also the deductibility of fines and penalties pursuant to s. 18(1)(a) of the Act. Strayer J.A. held, for the court, that “one legitimate test of whether fines should be deductible as a business expense is that of avoidability of the offences” (p. 389). In support of this proposition, Strayer J.A. cited Alexander von Glehn, supra, Imperial Oil, supra, Day & Ross, supra, and TNT, supra.
45 I have already mentioned why I do not find Alexander von Glehn, helpful in the context of our current Act. For similar reasons, I would decline to follow Imperial Oil. In that case, Thorson P. held that the damages and costs associated with a negligence action against the taxpayer were properly deducted as business expenses where “the nature of the operations is such that the risk of negligence on the part of the taxpayer’s servants in the course of their duties or employment is really incidental to such operations” (p. 546 (emphasis added)). However, Imperial Oil concerned the application of the Income War Tax Act which, as I have already outlined, required that an expense be “wholly, exclusively and necessarily” made for the purpose of earning income. Thorson P.’s statement, at p. 546, must therefore be understood in context:
Where income is earned from certain operations, as it was by the appellant from its marine operations, all the expenses wholly, exclusively and necessarily incidental to such operations must be deducted as the total cost thereof in order that the amount of the profits or gains from such operations that are to be assessed may be computed. Such cost includes not only all the ordinary operations costs but also all moneys paid in discharge of the liabilities normally incurred in the operations. When the nature of the operations is such that the risk of negligence on the part of the taxpayer’s servants in the course of their duties or employment is really incidental to such operations, as was the fact in the present case, with its consequential liability to pay damages and costs, then the amount of such damages and costs is properly included as one of the items of the total cost of such operations. It may, therefore, properly be described as a disbursement or expense that is wholly, exclusively and necessarily laid out as part of the process of earning the income from such operations. [Emphasis added.]
In the absence of similar language in the current Act, I find it difficult to endorse the requirement that expenses need be incidental, in the sense that they were unavoidable, in order to be deductible under s. 18(1)(a).
46 Day & Ross, supra, is a more recent case, but at best I find it ambiguous on the issue. While Dubé J. held (at pp. 794-95) that the fines at issue, levied for violations of provincial highway weight restriction laws, were in fact “necessary expense[s]” and “inevitable”, it is not clear whether these considerations went to establish that the fines fell within the wording of s. 12(1)(a) (now s. 18(1)(a)) of the Act or that the fines were not “outrageous transgressions of public policy”.
47 Indeed, in TNT, supra, Cullen J. purports to follow Day & Ross and yet appears not to follow the avoidability test. At issue in TNT were two types of fines. The first type was held to fall clearly within the ratio of Day & Ross, as they were unavoidable. With respect to the second type of fine, levied because a “foreign carrier [was] used in Canada and made more than one stop which conduct is prohibited by law” (p. 100), the Minister argued that the fines were avoidable and that the taxpayer was deliberately flouting the law. In response, Cullen J. stated, at p. 100:
Counsel also made this comment: “it may have been good economics and more expeditious but it was against public policy” (emphasis added). That comment buttresses my own view that these actions were taken to earn income and therefore were a legitimate expense under paragraph 18(1)(a) of the Act. The taxpayer has certainly met the “purpose test” vis-à-vis this penalty.
48 With respect, I differ from Strayer J.A.’s interpretation of TNT in Amway, supra, as I do not read Cullen J.’s statement as a finding that the second type of fine was an unavoidable expense. Rather, I interpret his statement to mean that so long as the fines were incurred in order to earn income, they fell within the meaning of s. 18(1)(a) of the Act. Cullen J. then held that the deduction of the fines should not be disallowed on the basis of public policy, since the amount of the second type of fine at issue was lumped together with the first type and could not easily be separated, and since the underlying offences were small in number (at p. 101).
49 Even if these cases clearly established a test of avoidability, I would decline to endorse it. As Strayer J.A. indicated in Amway, supra, this test would only apply to fines and penalties and not the deductibility of other types of expenses (at p. 390). With respect, I do not see how the language of s. 18(1)(a) can support a requirement of avoidability, let alone one that only attaches to fines and penalties.
(2) Statutory Interpretation and Public Policy
50 This Court has on many occasions endorsed Driedger’s statement of the modern principle of statutory construction: “the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament”. See Rizzo & Rizzo Shoes Ltd. (Re), 1998 CanLII 837 (SCC), [1998] 1 S.C.R. 27, at para. 21. This rule is no different for tax statutes: Stubart Investments Ltd. v. The Queen, 1984 CanLII 20 (SCC), [1984] 1 S.C.R. 536, at p. 578.
51 However, this Court has also often been cautious in utilizing tools of statutory interpretation in order to stray from clear and unambiguous statutory language. In Canada v. Antosko, 1994 CanLII 88 (SCC), [1994] 2 S.C.R. 312, at pp. 326-27, this Court held:
While it is true that the courts must view discrete sections of the Income Tax Act in light of the other provisions of the Act and of the purpose of the legislation, and that they must analyze a given transaction in the context of economic and commercial reality, such techniques cannot alter the result where the words of the statute are clear and plain and where the legal and practical effect of the transaction is undisputed.
In discussing this case, P. W. Hogg and J. E. Magee, while correctly acknowledging that the context and purpose of a statutory provision must always be considered, comment that “[i]t would introduce intolerable uncertainty into the Income Tax Act if clear language in a detailed provision of the Act were to be qualified by unexpressed exceptions derived from a court’s view of the object and purpose of the provision”: Principles of Canadian Income Tax Law (2nd ed. 1997), at pp. 475-76. This is not an endorsement of a literalist approach to statutory interpretation, but a recognition that in applying the principles of interpretation to the Act, attention must be paid to the fact that the Act is one of the most detailed, complex, and comprehensive statutes in our legislative inventory and courts should be reluctant to embrace unexpressed notions of policy or principle in the guise of statutory interpretation.
52 The most compelling argument put to this Court in the present appeal is that Parliament could not have intended s. 18(1)(a) to permit the deduction of fines and penalties as such a result violates public policy. Therefore, even if fines and penalties are allowable expenses within the ordinary meaning of s. 18(1)(a), this meaning must be modified in order to conform to a broader appreciation of Parliament’s intent, and thereby avoid a repugnant disharmony or absurdity. In Amway, supra, the Federal Court of Appeal also took this approach, holding, at p. 390, that even if the fine or penalty in question is unavoidable, its deduction should be disallowed where “that fine or penalty is imposed by law for the purpose of punishing and deterring those who through intention or a lack of reasonable care violate the laws”. Similarly, Professor Neil Brooks argues that this consideration is legitimate for courts to invoke even in the absence of statutory language to that effect, because of “the broad interpretative principle that in discharging their function they [courts] should not construe one statute in such a way that the objectives of another statute are frustrated”: “The Principles Underlying the Deduction of Business Expenses” in B. G. Hansen, V. Krishna and J. A. Rendall, eds., Canadian Taxation (1981), 189, at p. 242.
53 The United States Supreme Court took this position in Tank Truck Rentals, Inc. v. Commissioner of Internal Revenue, 356 U.S. 30 (1958). At issue was whether fines imposed for the operation of trucks in violation of state maximum weight laws were “ordinary and necessary” business expenses under § 23(a)(1)(A) of the Internal Revenue Code of 1939. The court held at pp. 33-35 that:
A finding of “necessity” cannot be made . . . if allowance of the deduction would frustrate sharply defined national or state policies proscribing particular types of conduct, evidenced by some governmental declaration thereof. . . .
. . . It is clear that assessment of the fines was punitive action and not a mere toll for use of the highways: the fines occurred only in the exceptional instance when the overweight run was detected by the police. Petitioner’s failure to comply with the state laws obviously was based on a balancing of the cost of compliance against the chance of detection. Such a course cannot be sanctioned, for judicial deference to state action requires, whenever possible, that a State not be thwarted in its policy. We will not presume that the Congress, in allowing deductions for income tax purposes, intended to encourage a business enterprise to violate the declared policy of a State. To allow the deduction sought here would but encourage continued violations of state law by increasing the odds in favor of noncompliance. This could only tend to destroy the effectiveness of the State’s maximum weight laws.
However, the court recognized that this presumption against congressional intent to encourage the violation of declared public policy had to be balanced against the congressional intent to tax only net income. The test for non-deductibility therefore turns on “the severity and immediacy of the frustration resulting from allowance of the deduction” (p. 35). I note that in 1969 Congress amended § 162 of the Internal Revenue Code to disallow, inter alia, the deduction of “any fine or similar penalty paid to a government for the violation of any law”.
54 Invoking public policy concerns raises the question, as put by R. Krever, of whose public policy should be furthered by courts in disallowing the deduction of fines and penalties (“The Deductibility of Fines: Considerations From Law and Policy Perspectives” (1984), 13 Austl. Tax Rev. 168, at p. 185). As he notes, “[a] taxpayer may incur a fine in one jurisdiction as a result of activities producing assessable income that are undertaken on a nation-wide basis and allowed in all other States” (p. 185). Further, Krever points out on the same page:
A more difficult problem arises with fines incurred in foreign jurisdictions where the illegal activity was carried out to earn assessable income that is taxed in Australia. Does comity require our courts to give effect to the public policy of other jurisdictions? If so, would this policy extend to situations where the fine was levied for actions not considered illegal in Australia or considered to be contrary to our public policy?
55 To my mind, this difficulty, is highlighted by the United States Supreme Court’s decision in Commissioner of Internal Revenue v. Sullivan, 356 U.S. 27 (1958), decided at the same time as Tank Truck, supra. The issue in that case was the amount paid for wages and rent in the course of operating illegal bookmaking establishments. Under Illinois law, the payment of rent and wages under such circumstances was illegal and so the case would appear to be similar in principle to Tank Truck. However, the court allowed the deduction of rent and wages, stating, inter alia, at pp. 28-29:
At times the policy to disallow expenses in connection with certain condemned activities is clear. . . . Any inference of disapproval of these expenses as deductions is absent here. The Regulations, indeed, point the other way, for they make the federal excise tax on wagers deductible as an ordinary and necessary business expense. This seems to us to be recognition of a gambling enterprise as a business for federal tax purposes. The policy that allows as a deduction the tax paid to conduct the business seems sufficiently hospitable to allow the normal deductions of the rent and wages necessary to operate it.
Therefore, federal policy was held to be sufficiently amenable to the deduction despite the possible frustration of state policy.
56 In this connection, I note that in calculating income, it is well established that the deduction of expenses incurred to earn income generated from illegal acts is allowed. For example, not only is the income of a person living from the avails of prostitution liable to tax, but the expenses incurred to earn this income are also deductible: M.N.R. v. Eldridge, 1964 CanLII 1110 (CA EXC), [1964] C.T.C. 545 (Ex. Ct.). See also Espie Printing Co. v. Minister of National Revenue, 1960 CanLII 762 (CA EXC), [1960] Ex. C.R. 422. Allowing a taxpayer to deduct expenses for a crime would appear to frustrate the Criminal Code, R.S.C., 1985, c. C-46; however, tax authorities are not concerned with the legal nature of an activity. Thus, in my opinion, the same principles should apply to the deduction of fines incurred for the purpose of gaining income because prohibiting the deductibility of fines and penalties is inconsistent with the practice of allowing the deduction of expenses incurred to earn illegal income.
57 This brings us to the crux of the issue. While fully alive to the need in general to harmonize the interpretation of different statutes, the question here arises in the specific context of a tax collection system based on self-assessment. Parliament designed the system and it is open to Parliament, as part of that design, to choose for itself to resolve any apparent conflicts between policies underlying tax provisions and other enactments. Parliament has indicated its intention to perform this role, not only in the design of the self-assessment system, which requires individuals without legal training to work through a complex series of provisions to calculate net income, for which maximum explicit guidance is necessary, but more specifically in its identification in the Act itself of certain outlays which the taxpayer is not permitted to deduct, as discussed below. Having recognized the problem of potentially conflicting legislative policies, Parliament has provided the solution, which is that in the absence of Parliamentary direction in the Income Tax Act itself, outlays and expenses are deductible if made for the purpose of gaining or producing income.
58 The argument is also put to this Court that Parliament did not intend to dilute the deterrent effect of a fine or penalty. If this Court is to accept this argument, then it would have to determine whether any particular fine or penalty was in fact meant to be deterrent in nature. If a fine was instead meant to be compensatory then there is no public policy frustrated by allowing its deduction: see Brooks, supra, at pp. 244-45. Furthermore, this argument requires a court to establish that the deduction of the fine or penalty would decrease its intended effect. As Professor Vern Krishna has noted, although concluding that certain fines and penalties should not be deductible, the dilution argument may be
turned around to ask whether the denial of a deduction may have the ultimate effect of increasing a civil or criminal penalty, which may or may not have been intended by the legislative policy behind the statute violated. Thus, it is conceivable that indiscriminate judicial application of a public policy limitation to all situations may cause the legislative policy behind an enactment to be varied in an unintended manner.
(“Public Policy Limitations on the Deductibility of Fines and Penalties: Judicial Inertia” (1978), 16 Osgoode Hall L.J. 19, at pp. 32-33.)
59 These difficulties outlined above demonstrate that the public policy arguments ask courts to make difficult determinations with questionable authority. Moreover, they place a high burden on the taxpayer who is to engage in this analysis in filling out his or her income tax return and would appear to undermine the objective of self-assessment underlying our tax system: see Hogg and Magee, supra, at p. 243. In addition, it is my opinion that the fundamental principles and provisions of the Act in the final analysis dictate that the rule be deductibility.
60 Tax neutrality and equity are key objectives of our tax system. Tax neutrality is violated by tax concessions, since the purpose of such concessions is to influence people’s behaviour through the tax system by providing incentives for engaging in certain types of behaviour. For example, a deduction for an RRSP or a charitable contribution is a tax concession. This is to be distinguished from deductions allowed for the purpose of gaining an accurate picture of a taxpayer’s net income. One of the underlying premises of our tax system is that the state taxes only net, rather than gross, income because it is net income that measures a taxpayer’s ability to pay. As has been pointed out, this results in business-related fines being deductible: see Hogg and Magee, supra, at p. 243. Moreover, Hogg and Magee, at p. 40, “in a system that is generally related to ability to pay, the provisions that violate neutrality (tax concessions) tend also to violate equity by abandoning the criterion of ability to pay in favour of other policy objectives”.
61 Business expenses allowed under s. 18(1)(a) are deductible because of the concern to tax only net income, not in order to provide tax concessions to businesses. Such deductions are therefore consistent with the principles of tax neutrality and equity. The argument to disallow fines and penalties is thus an argument that the court should violate these principles in the name of public policy.
62 While various policy objectives are pursued through our tax system, and do violate the principles of neutrality and equity, it is my view that such public policy determinations are better left to Parliament. Particularly apposite is this Court’s statement in Royal Bank of Canada v. Sparrow Electric Corp., 1997 CanLII 377 (SCC), [1997] 1 S.C.R. 411, at para. 112, that “a legislative mandate is apt to be clearer than a rule whose precise bounds will become fixed only as a result of expensive and lengthy litigation”. This statement was approved of by the Court in Canderel Ltd. v. Canada, 1998 CanLII 846 (SCC), [1998] 1 S.C.R. 147, at para. 41, adding that “[t]he law of income tax is sufficiently complicated without unhelpful judicial incursions into the realm of lawmaking. As a matter of policy, and out of respect for the proper role of the legislature, it is trite to say that the promulgation of new rules of tax law must be left to Parliament”.
63 This approach and conclusion are supported by the fact that Parliament has expressly disallowed the deduction of certain expenses on what appear to be public policy grounds. For example, s. 67.5 (added by S.C. 1994, c. 7, Sch. II, s. 46(1)) prohibits the deduction of any outlay or expense made
for the purpose of doing anything that is an offence under any of sections 119 to 121, 123 to 125, 393 and 426 of the Criminal Code or an offence under section 465 of that Act as it relates to an offence described in any of those sections.
In the absence of s. 67.5, bribes to public officials would be deductible (and taxable in the hands of the “bribee”). This is a situation where Parliament, specifically chose to prohibit a deduction which would otherwise have been allowed. In addition, taxpayers are prohibited from deducting payments of interest and penalties levied under the Act itself (s. 18(1)(t) (added by S.C. 1990, c. 39, s. 8)), statutory royalties (s. 18(1)(m)), and payments required under the Petroleum and Gas Revenue Tax Act (s. 18(1)(l.1)).
64 These provisions in the Act also reduce the force of the argument that allowing the deduction of fines and penalties permits the taxpayer to profit from his or her own wrongdoing. This line of reasoning is often traced to the statement of Lord Atkin in Beresford v. Royal Insurance Co., [1938] 2 All E.R. 602 (H.L.), at p. 607: “the absolute rule is that the courts will not recognise a benefit accruing to a criminal from his crime”. However, as several commentators note, Beresford involved a payment under an insurance policy where the insured had committed suicide, at a time when suicide was characterized as a heinous crime. See E. M. Krasa, “The Deductibility of Fines, Penalties, Damages, and Contract Termination Payments” (1990), 38 Can. Tax J. 1399, at p. 1417, and Krishna, supra, at pp. 31-32. There is therefore little authority to extend Lord Atkin’s statement more generally, especially when one considers the clear authority, as mentioned above, to the effect that expenses incurred in the pursuit of illegal activities are deductible expenses.
65 Moreover, given that Parliament has expressly turned its mind to the deduction of expenses associated with certain activities that are offences under the Criminal Code, outlined in s. 67.5 of the Act, I do not find a legitimate role for judicial amendment on the general question of deductibility of fines and penalties. Since the Act is not silent on the issue of restricting the deduction of some expenses incurred for the purpose of gaining income, this is a strong indication that Parliament did direct its attention to the question and that where it wished to limit the deduction of expenses or payments of fines and penalties, it did so expressly. I am also sceptical that the deduction of fines and penalties provides the taxpayer with a “benefit” or “profit” – indeed, their purpose is to calculate the taxpayer’s profit, which is then taxed.
(3) Conclusion Regarding Section 18(1)(a)
66 I therefore cannot agree with the argument that the deduction of fines and penalties should be disallowed as being contrary to public policy. First and foremost, on its face, fines and penalties are capable of falling within the broad and clear language of s. 18(1)(a). For courts to intervene in the name of public policy would only introduce uncertainty, as it would be unclear what public policy was to be followed, whether a particular fine or penalty was to be characterized as deterrent in nature, and whether the body imposing the fine intended it to be deductible. Moreover, allowing the deduction of fines and penalties is consistent with the tax policy goals of neutrality and equity. Although it may be said that the deduction of such fines and penalties “dilutes” the impact of the sanction, I do not view this effect as introducing a sufficient degree of disharmony so as to lead this Court to disregard the ordinary meaning of s. 18(1)(a) when that ordinary meaning is harmonious with the scheme and object of the Act. When Parliament has chosen to prohibit the deduction of otherwise allowable expenses on the grounds of public policy, then it has done so explicitly.
67 Although there are many points in my colleague Bastarache J.’s reasons with which I agree, there are others on which I would like to comment.
68 My colleague proposes a test in which the distinction between deductible and non-deductible levies must be determined on a case-by-case basis. In my view, such an approach would be quite onerous for the taxpayer who would be forced to undertake the difficult task of determining the object or purpose of the statute under which the payment was demanded whenever he or she filled out a tax return. Indeed, he or she would have to ascertain whether the specific purpose of the section was meant to be deterrence, punishment or compensation. Moreover, difficulties and uncertainties would undoubtedly arise where the purpose of the statutory provision is mixed. While a taxpayer must inevitably make various determinations in filing a return in order to report all relevant income and expenses and estimate the amount of tax payable, the statutory interpretation inquiry into the purpose of a statute is one which even courts often find particularly challenging. Consequently, it is inevitable that disputes will often require courts to determine whether a particular levy can be deducted from his or her income. Undoubtedly, this would introduce a significant element of uncertainty into our self-reporting tax system. On the other hand, Parliament could expressly prohibit the deduction of fines and penalties in a way compatible with the objectives of self-assessment and ease of administration.
69 Finally, at para. 17, my colleague states that penal fines are not, in the legal sense, incurred for the purpose of gaining income. It is true that s. 18(1)(a) expressly authorizes the deduction of expenses incurred for the purpose of gaining or producing income from that business. But it is equally true that if the taxpayer cannot establish that the fine was in fact incurred for the purpose of gaining or producing income, then the fine or penalty cannot be deducted and the analysis stops here. It is conceivable that a breach could be so egregious or repulsive that the fine subsequently imposed could not be justified as being incurred for the purpose of producing income. However, such a situation would likely be rare and requires no further consideration in the context of this case, especially given that Parliament itself may choose to delineate such fines and penalties, as it has with fines imposed by the Income Tax Act. To repeat, Parliament may well be motivated to respond promptly and comprehensively to prohibit clearly and directly the deduction of all such fines and penalties, if Parliament so chooses.
B. Section 18(1)(b) of the Income Tax Act
70 The respondent also submits that the over-quota levy was in fact an outlay of capital prohibited by s. 18(1)(b) of the Act because its payment allowed the taxpayer to retain its quota. With respect, I do not find much merit to this argument. Under s. 17(g) of the British Columbia Egg Marketing Board Standing Order, the Board has the discretion to cancel or suspend a producer’s licence and quota when any provision of a standing order has been violated. Therefore the taxpayer would face the same threat of the loss of its quota if it failed to pay the within-quota levy imposed for each layer kept by a producer. At trial the respondent conceded that this within-quota levy is deductible as a current expense. Given this, I do not see how the characterization of the over-quota levy as a capital outlay can rely upon the consequences of not paying the levy.
71 Even without the respondent’s concession regarding the within-quota levy, I would not characterize the over-quota levy as a capital outlay. As this Court stated in Canderel, supra, at para. 45:
Rather than trying to discern into which pigeonhole a particular income expenditure falls, the taxpayer’s focus should be on attempting to portray his or her income in the manner which best reflects his or her true financial position for the year, that is, which gives an “accurate picture” of profit.
The fine at issue in the present appeal is assessed on a per-day basis and is meant to remove the profit of over-quota production from the producer. These considerations all point to characterizing the levy as a current expense. The fact that there was a risk that the quota could be revoked upon failure to pay the fine is no more relevant to this analysis than the fact that if a factory’s electricity bill is not paid, there is a risk that the utility company will eventually cut off the power to the factory, thereby putting the existence of the business in jeopardy. To declare the cost of electricity as a capital outlay on this basis would not provide an accurate picture of the taxpayer’s income for the year.
72 For these reasons, the appellant’s expenditures for the over-quota levy are best characterized as a current expense, the deduction of which is permitted by ss. 9(1) and 18(1)(a) of the Act.
VII. Disposition
73 The over-quota levy is an allowable deduction pursuant to s. 18(1)(a) of the Act. I would therefore allow the appeal, with costs in this Court and the court below, set aside the judgment of the Federal Court of Appeal, and restore the order of Lamarre J.T.C.C.
Appeal allowed with costs.
Solicitors for the appellant: Thorsteinssons Tax Lawyers, Vancouver.
Solicitor for the respondent: The Department of Justice, Ottawa.
