Fear of being embarrassed by the Americans finally caused the Liberal government to close a tax loophole that allowed lawbreaking companies to deduct fines on their income tax, NDP MP Pat Martin said Thursday. Finance Minister Ralph Goodale included the tax change as part of Tuesday's federal budget, five years after a Supreme Court ruling opened the loophole in the Income Tax Act. Finance Department spokeswoman Andree Houde said the decision to change the law was made after careful analysis of the principles at stake. "We determined that clarity had to be added as to whether fines and penalties would be deductible," she said. "It was believed the deductibility of fines and penalties mitigates the public policy objectives of those fines and penalties." But Martin said he believes the final pressure to change the law came from the International Joint Commission, a Canada-U.S. body that monitors water quality in the Great Lakes, and that has recently raised concerns about Canadian companies spilling chemicals into the St. Clair River, which connects the southern tip of Lake Huron to Lake St. Clair. In an e-mail to Martin last week, the commission's American co-chairman Dennis Schornack wrote: "We are conducting a preliminary investigation of the chemical spills into the St. Clair River and have heard that environmental fines levied against companies like Dow Sarnia and Imperial Oil are tax deductible in Ontario." Martin said he believes fear of criticism in the report was the final factor that led the Liberals to change the law. "It would be very embarrassing if the Americans were saying to Canadians: For God's sake, you can't give tax deductions for environmental fines," he said. Schornack could not be reached for comment Thursday. The IJC's Canadian co-chairman, former Liberal cabinet minister Herb Gray, said he has been concerned about the tax loophole, but did not attribute the government's decision to any pressure. "As far as official statements of the IJC, this hasn't been set out in reports, but certainly in meetings with government officials we've mentioned it," he said. "In fairness to successive governments, the Income Tax Act never specifically said you could deduct fines. It's just the way the courts interpreted the language." The loophole in the Income Tax Act dates from a November 1999 Supreme Court ruling. In that case, a B.C. poultry farmer named Lou Veekens deliberately exceeded his egg quota, paid the levy imposed by the B.C. Egg Marketing Board, and then deducted the levy on his income tax. Revenue Canada tried to disallow the deduction, but after an 11-year court battle, the Supreme Court ruled in Veekens's favour. The court ruled that the legality or illegality of an act has nothing to do with its tax deductibility, as long as the act is committed for the purpose of earning income. Martin said he pressed the Liberal government for years to change the law, asking questions in the House of Commons and even attempting to introduce a private member's bill in the Commons. But the government always refused, until this week's budget.
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