CRA rules that legal fees incurred for the purpose of receiving compensation for lost business profits give rise to non-creditable GST

CRA has ruled that legal services provided to a business in successfully suing for lost business profits did not qualify as giving rise to an input tax credit for the HST on the resulting legal fees. CRA reasoned that the resulting settlement was merely "compensatory," so that the legal services were not received for the purpose of making taxable supplies for consideration, as required by ETA s. 141.01(2).

This may illustrate that (at least in CRA’s view) ETA s. 141.01(2), in this respect, is narrower than ITA s. 18(1)(a). Under the surrogatum principle, compensation for lost business profits itself has the character of business income, so that legal fees incurred to generate such compensation should be deductible under ss. 18(1)(a) and 9.

Neal Armstrong.  Summary of 1 May 2015 Ruling 164658 under ETA s. 141.01(2).