17 February 2000 External T.I. 1999-0012875 - LEGAL FEES

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Subparagraph 60(o)(ii) of the Income Tax Act (the "Act") allows a taxpayer to deduct fees or expenses incurred in preparing, instituting or prosecuting an appeal in respect of a decision of the Canada Employment Insurance Commission (the "Commission"). Under section 90 of the Employment Insurance Act (the "EI Act"), certain issues, including the issue of insurability, can be referred to the CCRA for a ruling by an employee, an employer, or the Canada Employment Insurance Commission (the "Commission"). Under the EI Act (e.g., section 91 of the EI Act) the ruling can be appealed. In connection with an appeal in respect of a ruling, comments on page 16 (Line 9809 - legal and Accounting fees) of the Farming Income guide state that "If you paid accounting and legal fees to file an appeal against an assessment or decision under the Act, ... the EI Act ..., do not deduct them here. Deduct these fees on line 232 of your income tax return." Do these comments mean that a taxpayer can administratively deduct legal fees in respect of the appeal on the basis that the ruling is a decision?

Position: No. However, it is our general position that the employer could deduct the legal expenses under paragraph 18(1)(a) of the Act.

Reasons: The ruling issued under the EI Act is not considered to be a decision of the Commission under the EI Act. A decision of the Commission is referred to in other provisions of the EI Act. In the case of paragraph 18(1)(a) of the Act in respect of the employer, paragraph 2 of IT-99R5 indicates that legal fees incurred in connection with normal activities necessary to the earning of income from a business are generally deductible under paragraph 18(1)(a) of the Act.

XXXXXXXXXX 1999-001287
M. Eisner
Attention: XXXXXXXXXX

February 17, 2000

Dear Sir:

Re: Deductibility of Legal Fees

This is in reply to your letter of November 24, 1999, concerning the above-noted subject.

You have asked about the deductibility of legal fees under subparagraph 60(o)(ii) of the Income Tax Act (the "Act") in respect of an appeal to the Canada Customs and Revenue Agency ("CCRA") under the Employment Insurance Act (the "EI Act") as a result of an unfavourable decision (i.e., a ruling) issued by the CCRA. You are concerned that, under subparagraph 60(o)(ii) of the Act, the legal fees are not deductible by an employer or an employee when they are incurred in respect of an appeal as a result of an unfavourable decision by the CCRA. However, you have referred to the comments on page 16 (Line 9809 - Legal and Accounting fees) of the Farming Income guide (the "Guide") which states the following:

"If you paid accounting and legal fees to file an appeal against an assessment or decision under the Act, ... the EI Act, or ..., do not deduct them here. Deduct these fees on line 232 of your income tax return."

You have asked us whether the legal fees are allowable on the basis that they relate to a decision under the EI Act.

Our Comments

Subparagraphs 60(o)(i) and (ii) of the Act respectively permit a taxpayer to deduct in respect of fees or expenses incurred in preparing, instituting or prosecuting an objection to, or an appeal in relation to, (1) an assessment of tax, interest or penalties under the Act, or (2) a decision of the Canada Employment and Insurance Commission. While the comments in the Guide combine the comments in (1) and (2) above, they do not administratively permit the deduction of legal fees in respect of the circumstances you have set out.

However, in our view, you should consider whether an employer could deduct the legal fees pursuant to the provisions of paragraph 18(1)(a) of the Act. On the basis that the legal fees in question are incurred in connection with normal activities necessary to the earning of income from a business (see paragraphs 1 and 2 of IT-99R5 "Legal and Accounting Fees"), it is our general view that they would likely be deductible under paragraph 18(1)(a) of the Act.

We trust that our comments are of assistance to you.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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