CRA sort-of clarifies when tax dispute resolution fees become deductible

S. 60(o) provides a deduction for professional fees incurred in "preparing," instituting or prosecuting an objection or appeal "in relation to" an income tax assessment. CRA states that generally "a taxpayer can deduct professional fees from the moment when he or she is informed by the CRA that his or her income or tax for a taxation year will be revised," which suggests that CRA does not consider that costs dealing with a 30-day letter would generally be deductible under s. 60(o).

As for the deductibility under general (ss. 9 and 18(1)(a)) principles of professional fees incurred in connection with a voluntary disclosure, CRA states that "professional fees incurred in this context are not intended to produce income, because the VD instead permits a taxpayer to correct omissions made in the context of dealings with the CRA. Consequently, the deduction of the professional fees incurred in this context is restricted by paragraph 18(1)(a). However… expenses of preparing the tax returns, could be deductible."

This is questionable. The taxpayer in the Egg Marketing case (65302) did not pay its fine for an income-producing purpose, but the fine nonetheless was deductible because the conduct which triggered the fine was business-oriented. Similarly, the belated reporting of business income arises as a result of the process of having generated that income in the first place.

Neal Armstrong. Summaries of 17 October 2014 T.I. 2014-0532121E5 F under s. 60(o) and s. 18(1)(a) – legal fees.