Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether legal fees paid to remove a lien from a property in order to facilitate its sale are deductible?
Position: The legal fees may be added to the adjusted cost base of the property in calculating the capital gain or capital loss from the sale.
Reasons: As indicated in paragraph 14 of Interpretation Bulletin IT-99R5, "Legal and Accounting Fees", legal fees incurred for the purpose of making the disposition of a property may be added to the adjusted cost base of the property in calculating the capital gain or capital loss, as the case may be.
2008-029044
XXXXXXXXXX Charles Rafuse
613-247-9237
January 6, 2009
Dear XXXXXXXXXX :
Re: Legal Fees
This is in reply to your letter of August 20, 2008, concerning whether legal fees that you incurred are deductible under the Income Tax Act (the "Act").
You have indicated that you had operated a XXXXXXXXXX since XXXXXXXXXX and a couple of years ago you put the property up for sale. An offer to purchase was received from a buyer (Ms. X) who provided a $XXXXXXXXXX security but she was unable to complete the purchase so your lawyer deducted his legal fees from the deposit and forwarded the remainder to you. About a year later, you listed the property for sale again and had received a purchase offer, however, Ms. X became aware of the sale and had a lien placed against the property. You hired a lawyer (Mr. B) to deal with the lien and his advice was to offer a settlement to Ms. X. As you did not consider this to be appropriate you terminated his services and hired a second lawyer (Mr. C). Mr. C handled the sale of your property which was accomplished by you paying $XXXXXXXXXX to Ms. X to have her remove her lien.
The legal fees owing to Mr. B were determined in Court to be $XXXXXXXXXX which you paid along with $XXXXXXXXXX in lieu of accrued interest. You have asked whether you can deduct the $XXXXXXXXXX of legal fees paid to Mr. B.
Our Comments
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments. Generally, where a taxpayer disposes of capital property, the capital gain is equal to the excess of the proceeds of disposition (i.e., the selling price) over the total of the adjusted cost base (i.e., the tax cost of the property) and any outlays or expenses to the extent they were incurred for the purpose of making the disposition. As indicated in paragraph 14 of Interpretation Bulletin IT-99R5, Legal and Accounting Fees, which can be found on the CRA website at www.cra-arc.gc.ca., legal fees incurred for the purpose of making the disposition of a property may be added to the adjusted cost base of the property in calculating the capital gain or capital loss, as the case may be.
Paragraph 8 of IT-334R2, Miscellaneous Receipts, discusses the tax treatment of a forfeited deposit by a vendor and states that "a taxpayer entitled to retain a deposit upon the cancellation of a contract may realize a capital gain on the forfeiture where the taxpayer's rights under the contract are capital in nature." In addition, paragraph 8 of IT-467R2, Damages, Settlements and Similar Payments, discusses damages paid on the account of capital and states that "If damages are incurred in connection with the disposition of a capital property, the cost of the damages is taken into account under subsection 40(1) for the purposes of calculating any gain or loss on that disposition." The term "damages" is defined in paragraph 2 of IT-467R2, which states that "A payment in settlement of a damages claim to avoid or terminate litigation will be considered "damages" for the purposes of this bulletin, even where there was no admission of any wrongdoing."
Based on the above and the information contained in your letter, it is our opinion that the legal fees of $XXXXXXXXXX that you paid to Mr. B may be added to the adjusted cost base of your property in calculating the capital gain or capital loss from the sale. In addition, the forfeited deposit net of legal fees that you received from Ms. X should be reported as a capital gain. Finally, the $XXXXXXXXXX you paid to Ms. X to remove her lien against your property is considered a cost incurred in making the disposition and should be added to the adjusted cost base of your property for the purpose of determining the capital gain from your property disposition.
We trust this information is helpful.
Yours truly,
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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