Non-disclosure payments (also known as hush money) are paid to prevent the dissemination of specific information. Despite the negative connotation, non-disclosure payments are neither illegal nor rare; they are a common contract feature. But are non-disclosure payments deductible for tax purposes and, if so, under what circumstances?
For a payment that is on current account and that is potentially for the purpose of earning business and property income, the main factors governing its deductibility are the limitations in paragraph 18(1)(a) and subsection 67.5(1) of the Income Tax Act1.
Paragraph 18(1)(a) limits the deductibility of expenses to those that were “made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property.” In Eldridge ([1964] CTC 545), a case considering the deductibility of under-the-table payments made by an illicit business, the Exchequer Court of Canada allowed those expenses that the taxpayer could prove. In United Color and Chemicals ([1992] 1 CTC 2321), the Tax Court of Canada confirmed that kickbacks are tax-deductible if they were paid to produce income from a business or property. Therefore, if a taxpayer can prove the existence of the non-disclosure payments and that they were made to produce income from a business or property, the deduction of such payments is not restricted by paragraph 18(1)(a).
Subsection 67.5(1) denies the deduction of payments made to certain government and law enforcement officials (for example, bribes). Despite subsection 67.5(1) being in force since 1990, there are no judicial decisions that rely on it to deny a deduction claimed by a taxpayer. This may result from the inherent difficulty in isolating deductions for bribes, kickbacks, or non-disclosure payments to government and law enforcement officials from other, legitimate business expenses.
Subsection 67.5(1) was introduced in response to the CRA’s infamous Information Circular IC 76-4R2, published on January 31, 1986. The CRA’s published position was that a bribe was deductible if (1) the recipient was identified, (2) the bribe was paid to earn income, and (3) its quantum was reasonable. The circular also stated that if the recipient of the bribe was not identified, the person who authorized the payment could be deemed to have received the payment under subsection 15(1), subsection 56(2), or paragraph 6(1)(a).
In 1989, a member of Parliament questioned the minister of national revenue on the CRA’s published position that under-the-table payments, kickbacks, and bribes are deductible (House of Commons, Debates, April 18, 1989, at 641). The circular was withdrawn the next day, and within one year Parliament enacted section 67.5. Despite its withdrawal, the CRA’s prior published position provides insight into the tax treatment of a non-disclosure payment.
In summary, a non-disclosure payment that is on current account is deductible if:
- the quantum of the payment is reasonable in the circumstances (section 67);
- the payment is not for personal purposes (paragraph 18(1)(h));
- the existence of the payment can be proven (in practical terms, this also means that the recipient of the payment must be identified);
- the payment can be proven to have been made for the purpose of producing income from a business or property; and
- the payment was not made for the purpose of doing anything that is an offence under section 3 of the Corruption of Foreign Public Officials Act or section 119, 120, 121, 123, 124, 125, 393, 426, or 465 of the Criminal Code.
This article was originally published in Canadian Tax Focus, issue 14:3 in 2024.
- All statutory references are to the Income Tax Act (Canada). ↩︎