65302 British Columbia Ltd. v. Canada

65302 British Columbia Ltd. v. Canada
Collection
Supreme Court Judgments
Date
1999-11-25
Report
[1999] 3 SCR 804
Case number
26352
Judges
L'Heureux-Dubé, Claire; Gonthier, Charles Doherty; McLachlin, Beverley; Iacobucci, Frank; Major, John C.; Bastarache, Michel; Binnie, William Ian Corneil
On appeal from
Federal Court of Appeal
Subjects
Taxation
Notes
SCC Case Information: 26352
Decision Content
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
File No.: 26352.
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] 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, [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] 2 S.C.R. 1198; Royal Trust Co. v. M.N.R., 57 D.T.C. 1055; Symes v. Canada, [1993] 4 S.C.R. 695; Rizzo & Rizzo Shoes Ltd. (Re), [1998] 1 S.C.R. 27; Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536; Canada v. Antosko, [1994] 2 S.C.R. 312; M.N.R. v. Eldridge, [1964] C.T.C. 545; Espie Printing Co. v. Minister of National Revenue, [1960] Ex. C.R. 422; Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411; Canderel Ltd. v. Canada, [1998] 1 S.C.R. 147.
By Bastarache J.
Referred to: Symes v. Canada, [1993] 4 S.C.R. 695; Rizzo & Rizzo Shoes Ltd. (Re), [1998] 1 S.C.R. 27; Alberta (Treasury Branches) v. M.N.R., [1996] 1 S.C.R. 963; Friesen v. Canada, [1995] 3 S.C.R. 103; Stubart Investments Ltd. v. The Queen, [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] 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] 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
Bastarache J. --
I. Introduction
1 This 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
2 The 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] 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; . . . .
3 Symes, 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.
4 Accordingly, 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
5 It 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] 1 S.C.R. 27, at para. 21; Alberta (Treasury Branches) v. M.N.R., [1996] 1 S.C.R. 963, at paras. 14-15; Friesen v. Canada, [1995] 3 S.C.R. 103, at para. 10; Symes, supra, at p. 744; Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, at p. 578.
6 When 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.
7 The 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.
8 To 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.
9 This 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.
10 I 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.
11 The 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.]
12 In 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.
13 In 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.
14 The 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).
15 The 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.
16 In 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.
17 I 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] 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
18 The 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;
19 In 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.
20 The 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] 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.
21 Thus, 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
22 I 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
Iacobucci J. --
I. Introduction
23 At 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
24 The 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.
25 Pursuant 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.
26 The 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.
27 When 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.
28 The 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
29 Natural Products Marketing (BC) Act, R.S.B.C. 1979, c. 296
12. (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.
. . .
13. (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;
. . .
20. (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 .)
9. (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.
. . .
18. (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;
. . .
67. 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] 2 C.T.C. 2294
30 Lamarre 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] 2 S.C.R. 1198, the Supreme Court of Canada mentioned that the purpose of the levies was to fund the b