back
to Updates Page
Petition
to the Auditor General asking that the
loophole allowing the deduction of fines and penalties
be closed
December 3, 2003
Auditor General
Office of the Auditor General of Canada and the Commissioner of
the Environment and Sustainable Development
Attention: PETITIONS
240 Sparks Street
Ottawa, Ontario
K1A 0G6 Canada
Dear Auditor General and
Commissioner of Environment and Sustainable Development
Re: The tax deductibility
of environmental (and other) fines and penalties
Please consider this a formal
petition pursuant to the provisions of s. 22 of the Auditor General
Act requiring the Commissioner to submit citizen petitions on
environmental matters to the appropriate federal Minister(s).
Background
Because of a Supreme Court
of Canada decision in 1999, businesses operating in Canada are
now able to deduct fines and penalties levied for violating environmental
laws (and indeed virtually all laws and regulations) from their
business income for tax purposes. The Court's decision was based
on the fact that the Income Tax Act does not explicitly state
that such fines cannot be deducted from business income. Law professor
David Duff of the University of Toronto describes the court's
decision as a "radical" rewriting of Canadian tax law.
Prior to this court decision, Revenue Canada had a policy that
did not allow such fines and penalties to be deducted. Subsequent
to the Court's decision, a new policy was issued acknowledging
that such fines and penalties can be deducted.
The tax deductibility of
fines and penalties causes a serious reduction in the effectiveness
of Canada's environmental laws in deterring violations. Knowing
that fines and penalties are deductible encourages businesses
to regard them as the mere cost of doing business. As fines and
penalties grow larger, the cost to Canadian taxpayers, both economically
and environmentally, continues to grow.
For example, several major
shipping companies were recently fined $125,000 each for violating
the pollution provisions of the Canada Shipping Act by spilling
oil into the ocean. However, the fact that these fines can subsequently
be counted as a tax-deductible business expense substantially
reduces their effectiveness. Similarly, CBC-TV's Disclosure program
recently aired a feature on this topic, indicating that Shell
and Nova Chemicals admitted deducting large fines from their business
income, fines that were incurred for chemical releases that harmed
both human health and the environment (in Ontario's Chemical Valley).
The transcript is attached (from the program that aired November
18, 2003).
A vital element of achieving
sustainability is ensuring that economic and environmental goals
and policies are consistent. To allow businesses to deduct fines
and penalties levied against them for environmental offences sends
the wrong signal to Canadian companies. As other industrialized
nations (including Canada's major trading partners) have already
recognized, environmental fines and penalties should not be deductible
from business income.
I note that the Honourable
Minister of Finance John Manley was asked about this issue during
Question Period earlier this year by Opposition M.P. Pat Martin
and responded that the courts had spoken on this matter. Here
is the excerpt:
Friday, February
7, 2003
Mr. Pat Martin (Winnipeg Centre, NDP): Mr. Speaker, tax season
is here again and the government has still done nothing to plug
the outrageous tax loophole where businesses can deduct fines
as a business expense. The minister said that most of the claims
were denied but he knows full well that they succeed on appeal
and that is why the Supreme Court said that Parliament must change
the act to deal with the issue. Why will the government not amend
the Income Tax Act to ensure that no one in the country will ever
again get a tax deduction for breaking the law?
Hon. John Manley (Deputy
Prime Minister and Minister of Finance, Lib.): Mr. Speaker, as
the hon. member acknowledges, this is a matter that has been dealt
with by the courts in a way that reflects the fact that there
may be circumstances that sometimes would result in the courts
deeming that an expenditure of this nature is properly deductible.
That is something that the courts have decided.
The Minister's response
is inaccurate and misleading. In fact, in its reasons for decision
in the 65302 British Columbia Ltd. case, the Supreme Court of
Canada explicitly invited Parliament to address this issue by
amending the Income Tax Act. The court wrote that "Parliament
may well be motivated to respond promptly and comprehensively
to prohibit clearly and directly the deduction of all fines and
penalties." Unfortunately, Parliament has not yet done so,
putting Canada at odds with nations like the United States, England,
and Australia where businesses are not allowed to use environmental
fines as a deduction to reduce their income for tax purposes.
I would like to draw your
attention to five important background documents:
1. a copy of my essay published
in the Globe and Mail on March 28, 2003 called "Thanks to
a tax loophole, corporate crime does pay," Attached, and
also available on-line at here.
2. an article by University
of Toronto law professor David Duff, “Deductibility of Fines
and Penalties under the Income Tax Act: Public Policy, Statutory
Interpretation and the Scheme of the Act in 656302 B.C. Ltd.”
(2001), 34 Canadian Business Law Journal 336-90. Attached.
3. the Supreme Court of
Canada's 1999 decision in the 65302 British Columbia Ltd. case.
65302 British Columbia Ltd. v. Canada [1999] 3 S.C.R. 804.
Available on-line at here.
4. the Canada Customs and
Revenue Agency Interpretation Bulletin on "Deductibility
of Fines and Penalties" NO.: IT-104R3, DATE: August 9, 2002
Available on-line here.
5. the transcript from CBC-TV's Disclosure program, which aired
on November 18, 2003 (attached).
Request
I would like the Minister
of Finance to respond to the following questions:
How much is this loophole
costing Canadian taxpayers each year?
When, if ever, since the
change in law in 1999 has a business been denied a deduction by
the Canada Customs and Revenue Agency for "egregious"
fines and penalties?
Will the Minister introduce
amendments to the Income Tax Act to prohibit businesses from deducting
all fines and penalties, including environmental fines and penalties,
from their income for tax purposes?
If so, when?
If not, why not?
If not, why is Canada taking
a different position than its major trading partners (the U.S.,
the U.K., and Australia) on this issue?
I would also like the Minister
of Environment, Minister of Natural Resources, Minister of Transport,
and the Minister of Revenue to express their positions on this
issue in light of both the revenue loss to the federal government
and the diminished deterrent effect of fines and penalties.
My position is that the
federal government should move swiftly to close this indefensible
loophole by amending the Income Tax Act to prohibit the deduction
of any fines and penalties from business income, for the compelling
public policy reasons identified earlier.
Conclusion
Thank you for your time
in considering this petition. I look forward to receiving the
government's response.
Respectfully,
David R. Boyd
Senior Associate
POLIS Project on Ecological Governance
Eco-Research Chair of Environmental Law and Policy
University of Victoria
Adjunct Professor
School of Resource and Environmental Management
Simon Fraser University
back
to Updates Page
