8 November 2010 External T.I. 2010-0361641E5 - Deductibility of Legal Fees

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: Are legal fees incurred by an individual to take action against the eventuality of having a loss of salary deductible for income tax purposes?

Position: It is a question of fact. In this case, the legal fees were not incurred to establish a right to any amount owed to the taxpayer by his employer.

Reasons: Paragraphs 8(1)(b).

XXXXXXXXXX
							2010-036164
							Lucie Allaire, LL.B.,
							   CGA, D. Fisc.
November 8, 2010

Dear XXXXXXXXXX :

Re: Deductibility of Legal Fees

We are writing in response to your letter of March 18, 2010, wherein you requested our views on whether the taxpayer can deduct legal fees paid in connection with disciplinary proceedings instituted by his employer.

Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act ("ITA").

The taxpayer is a XXXXXXXXXX and an employee of XXXXXXXXXX (the "employer") in XXXXXXXXXX . In the course of responding to complaints from XXXXXXXXXX , the taxpayer retained the services of counsel, who advised him how to respond to the allegations made by the employer. Hence, from the period of XXXXXXXXXX to XXXXXXXXXX , the taxpayer incurred legal fees.

Ultimately, the employer of the taxpayer decided to proceed with disciplinary action. By a decision rendered by XXXXXXXXXX on XXXXXXXXXX , the taxpayer was XXXXXXXXXX . As a result of this disciplinary action, the taxpayer maintains that his annual salary was reduced by over $XXXXXXXXXX .

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. This Circular and other publications referred to in this letter are available on our website at http:///www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office, a list of which is available on the "Contact Us" page of our website.

The determination of the income tax treatment of the legal fees described in your letter involves questions of fact that can only be determined after reviewing all of the relevant facts and documentation, which in these circumstances, should be considered by the relevant Tax Services Office. However, based on the information available to us, we are prepared to offer the following comments, which may be of assistance.

Subsection 8(2) provides that no deduction may be made in computing an individual's income from an office or employment, except as permitted under section 8.

In the computation of income from an office or employment for a taxation year, paragraph 8(1)(b) allows a taxpayer to deduct legal expenses that were incurred to collect or to establish a right to, an amount owed to the taxpayer that, if received by the taxpayer, would be required to be included in computing the taxpayer's income from an office or employment.

In the present situation, we are of the view that the legal fees incurred by the taxpayer cannot be deducted pursuant to paragraph 8(1)(b) as they were not incurred to collect an amount that was owed to the taxpayer nor were they incurred to establish a right to salary. When the taxpayer received the XXXXXXXXXX 's decision in XXXXXXXXXX , as the direct result of the disciplinary measures, he began to lose income. However, neither the taxpayer's representations to the XXXXXXXXXX nor the exchanges of correspondence with his XXXXXXXXXX was to collect salary or wages owing to him but rather were to protect his means of livelihood.

We trust our comments will be of assistance.

Yours truly,

François Bordeleau, LL.B.
Manager
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch