Richards – Tax Court of Canada finds that legal fees incurred in an oppression action were both on capital and income account
The main source of income of the taxpayer and her husband was distributions from a family trust of dividends from two family corporations. However, shortly after their separation, her husband refused to consent to the dividend distributions, leaving her with no source of income other than her RRSP. She commenced an action including a claim for spousal support and an oppression remedy. The oppression action was settled with her receiving a dividend of $1.5 million as a result of her transferring shares of one of the companies to her husband. (She also was successful in her action for support.)
This might have been sufficient for a finding that the legal expenses of the oppression action were fully deductible as being incurred in order to generate continued income. However, regarding the oppression action, the taxpayer “agreed on cross-examination that the main relief she sought was the redemption of her shares.” McPhee J allowed the deduction of only about 25% of the legal expenses, stating:
Legal expenses incurred for the purpose of preserving capital assets are not deductible [citing Keating].
… [T]he fees incurred pursuing the Oppression litigation had as its dominant purpose, the intention to protect the Appellant’s interest in her shares in the corporations. …
[T]here is no question that professional fees were incurred seeking both the support and/or the payment of dividends by the corporations and the redemption of the Appellant’s shares. … Therefore, I have apportioned the fees in issue.
Neal Armstrong. Summary of Richards v. The Queen, 2019 TCC 289 under s. 18(1)(a) – legal fees.