CRA now accepts that legal expenses incurred to recover salary are deductible even if no right to the salary is established

S. 8(1)(b) permits a deduction from employment income for legal expenses paid in the year and incurred to collect (or to establish a right to collect) an amount owed to the taxpayer that, if received by the taxpayer, would be required to be included in the taxpayer’s employment income.

Although IT-99R5 states that if a taxpayer is unsuccessful in court and fails to establish that an amount is owed, then no deduction is allowed, CRA now accepts that these “comments are no longer accurate based on … Loo …[which] ruled that a taxpayer’s legal action need not be successful in order to deduct an amount under paragraph 8(1)(b).”

Legal expenses paid by an individual to reinstate the individual’s former employment position are not deductible under s. 8(1)(b) when employment is reinstated without retroactive pay:

While the legal expenses paid may have facilitated the reinstatement of the individual’s employment, the legal expenses were not incurred to collect (or establish a right to collect) an amount that was owed and required to be included in employment income … .

Neal Armstrong. Summary of 11 April 2018 External T.I. 2017-0699751E5 under s. 8(1)(b).