2 June 2000 External T.I. 2000-0020065 - WITHHOLDING TAX ON 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: Withholding requirements on the reimbursement of legal fees to establish a right to salary or wages.

Position: Appropriate withholdings required for reimbursement of legal fees included in income by virtue of 6(1)(j). However administrative policy to waive the withholding requirements if the reimbursement is deductible under 8(1)(b). There are no withholding requirements with respect to reimbursements of legal fees described in paragraph 56(1)(l.1).

Reasons: Amounts included under paragraph 6(1)(j) are payments described in subsection 153(1) and therefore subject to withholdings. Paragraph 56(1)(l.1) is not a payment described in subsection 153(1) nor is it included in the definition of "remuneration".

XXXXXXXXXX 							2000-002006
								David Shugar
June 2, 2000

Dear XXXXXXXXXX:

Re: Reimbursement of legal fees

We are responding to your letter of April 14, 2000, concerning the reimbursement of legal fees. You have asked that we clarify the Canada Customs and Revenue Agency's (the "CCRA") position as to whether withholding of tax is required on a payment by an employer to an employee as a reimbursement of legal expenses incurred by the employee to establish a right to salary or wages owed by the employer.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the CCRA.

Reimbursements or awards for legal fees in connection with the collection or establishing a right to income from employment:

Reimbursements or awards for legal fees in connection with the collection or establishing a right to income from employment are included in income from an office or employment by virtue of paragraph 6(1)(j) of the Income Tax Act (the "Act").

Paragraph 8(1)(b) of the Act provides for the deductibility of eligible legal expenses paid to collect or establish a right to salary or wages owed to the taxpayer by the employer or former employer.

Amounts included in income under paragraph 6(1)(j) of the Act would be payments described in subsection 153(1) of the Act. As such, the employer would be technically required to make the appropriate withholdings and prepare the appropriate information slip in respect of any such payments. However, to the extent that the legal fees incurred in obtaining a settlement are otherwise deductible under paragraph 8(1)(b) of the Act, and the reimbursement of those legal fees has not been taken into account in determining the amount of deduction under that paragraph, the CCRA is generally prepared to waive the withholding requirement in respect of such reimbursements provided that the appropriate information slip is prepared, generally a T4.

Reimbursements or awards for legal fees in connection with the collection or establishing a right to a retiring allowance:

Paragraph 56(1)(l.1) of the Act requires a taxpayer to include in computing income amounts received as an award or reimbursement of legal expenses paid to collect or establish a right to a retiring allowance.

Paragraph 60(o.1) of the Act provides for the deductibility of eligible legal expenses paid after 1985 to collect or establish a right to a retiring allowance or pension benefits. Eligible legal expenses may be deducted in a taxation year to the extent they do not exceed the retiring allowances or pension benefits to which such expenses relate. The non-deductible portion of such expenses may be carried forward and deducted in any of the seven subsequent years, to the extent further related income arises.

The income against which eligible expenses may be deducted may, however, be reduced by virtue of a transfer to a registered retirement savings plan or registered pension plan under paragraph 60(j) or (j.1) of the Act.

The CCRA's position is that the reimbursement of legal fees described in paragraph 56(1)(l.1) of the Act is not a payment described in subsection 153(1) of the Act nor it is an amount included in the definition of "remuneration" as found in subsection 100(1) of the Regulations. Accordingly, there is no statutory requirement for an employer to withhold tax in respect of such amounts or to report such amounts on an information slip.

Reimbursement of legal fees are usually received by the taxpayer; however, the tax treatment would generally be the same where the former employer is directed by legal documents to make a payment directly to the taxpayer's legal counsel, on the taxpayer's behalf. In such a case, where an amount is included in income under paragraph 56(1)(l.1), a deduction under paragraph 60(o.1) would be available.

We trust our comments will be of assistance to you.

Yours truly,

Roberta Albert, C.A.

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