Kurnik – Tax Court of Canada finds that legal costs of defending against of countersuit by the employer could be deducted under s. 8(1)(b)

After the former CFO of a company (Mr. Kurnik) sued the successor of his employer (“RJM56”) for reneging on its agreement to pay him a $1.5 million closing bonus on the sale of the company to a venture capitalist, RJM56 then responded by suing Mr. Kurnik in his personal capacity and as trustee of a family trust for the recovery of bonuses paid to him during his employment and distributed to him and beneficiaries of the trust. All such litigation was ultimately settled with Mr. Kurnik receiving a release and a cheque for the full $1.5 million - out of which Mr. Kurnik paid $364,442 in legal fees, including $55,552 in legal fees of trust counsel.

CRA allowed the deduction of the full amount under s. 8(1)(b) (which permitted the deduction of legal fees incurred “to establish a right to” an amount of employment income) other than the $55,552. In allowing the deduction of the latter amount as well, Bocock J stated:

[T]here is no question that the initial lawsuit spawned the subsequent one. … The primary issue within that second lawsuit is the entitlement and quantum of remuneration payable by the employer to the employee. This falls squarely within the wording of paragraph 8(1)(b) … .

Neal Armstrong. Summary of Kurnik v. The Queen, 2019 TCC 206 under s. 8(1)(b).