28 July 2015 External T.I. 2015-0585431E5 F - Frais juridiques -- translation

28 July 2015 T.I. 2015-0585431E5 F – Legal Fees-translation

Principal Issues: Are legal fees incurred against a hidden defect lawsuit following the disposition of an income-producing property deductible? If yes, what happens if they are incurred many years after the disposition of the property and there is no more property income?

Position: The fees reduce the proceed of disposition for the taxable capital gain or allowable capital loss calculation. Fees incurred during subsequent years are capital losses from the disposition of properties for the years in which they are incurred.

Reasons: The Act.

XXXXXXXXXX 2015-058543
J. Lacharité, CPA, CGA

July 28, 2015

Dear Sir,

Subject: Legal Fees

This is in response to your email of May 5, 2015 in which you requested our views on the tax treatment of legal fees incurred by a taxpayer. Unless otherwise stated, all statutory references herein are references to the provisions of the Income Tax Act (the "Act").

You described the case of a taxpayer who had incurred legal expenses respecting a hidden defect in a disposed-of rental property. You wish to first know if these expenses are deductible against the rental income. You also wish to know the tax treatment of these expenses if incurred several years after the sale of the building while no rental income was being generated.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

Paragraph 42(1)(b) applies to any outlay or expense paid or payable by the vendor under a warranty, covenant or other conditional or contingent obligation given or incurred by the vendor in respect of the subject property disposed of by the vendor, for the purposes of calculating the taxable capital gain or allowable capital loss. In our view, the legal fees incurred by a taxpayer in defending a hidden defects lawsuit on a rental property that was disposed of are expenditures to which paragraph 42(1)(b) applies.

In the case where the expense is paid or payable no later than the specified date, it is deemed by subparagraph 42(1)(b)(i) to reduce the consideration for the disposition and thus diminishes the proceeds of disposition of the subject property for the taxation year or fiscal period in which the disposition occurred. Subsection 42(2) defines "specified date" as the vendor’s filing-due date for the vendor’s taxation year in which the vendor disposed of the subject property, except in the case where the vendor is a partnership, in which case the "specified date" instead is the last day of the vendor’s fiscal period in which the vendor disposed of the subject property.

In the case where the expense is paid or payable only after the period specified in subparagraph 42(1)(b)(i), subparagraph (ii) deems the expense to be a capital loss of the vendor from the disposition of a property. This result is deemed to occur at the earlier of the time when the outlay or expense is paid or becomes payable.

We trust that these comments will be of assistance.

François Bordeleau, LL.B.
Manager
Business and Employment Income Division
Income Tax Rulings Directorate