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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
Whether Accounting and legal fees paid with respect of court's orders under Mental Competency Act are deductible?
Position:
No.
Reasons:
Fees are not related to a property or business, and there is no specific provision in the Act to allow their deduction.
XXXXXXXXXX 2003-001563
Fouad Daaboul
November 14, 2003
Dear XXXXXXXXXX:
Re: Legal and Accounting Fees Deductions - XXXXXXXXXX
This is in reply to your letter of April 22, 2003, wherein you requested our comments on the above-mentioned subject.
Situation
On XXXXXXXXXX, your son, XXXXXXXXXX, was involved in a motor vehicle accident in which he sustained brain injuries. On XXXXXXXXXX, your son received a settlement from the accident and on XXXXXXXXXX, a Judgement was made by the XXXXXXXXXX Court (General Division), a copy of which was submitted for our review, appointing yourself as Committee of the estate of XXXXXXXXXX.
You ask us for an opinion as to whether the legal and accounting fees relating to the trust are deductible for income tax purposes. Having reviewed Interpretation Bulletin IT-99R5, it is your contention that, since the above fees are related to the obligations of the Judgement, these fees should be eligible as deductions for income tax purposes.
You outlined in your request the following excerpt from the Judgement as related to the obligation of the Committee:
XXXXXXXXXX
You have incurred the following bonding, accounting and legal fees with respect to the above Court orders:
Description Paid Bonding Accounting Legal
XXXXXXXXXX
We understand from the current situation that you are a guardian who acts in the capacity of an agent appointed by the court to represent your son and to make decisions on his behalf and in his name, and as such, the income earned by the Estate of XXXXXXXXXX is income earned by your son and that is not reported by a trust, but rather by him in his personal income tax return for each taxation year. We also understand that, in this capacity, you are entrusted with the possession and the management of your son's properties, which consist of investments in low-risk securities that give rise to property income.
As noted in paragraph 1 of Interpretation bulletin IT-99R5, in order for an outlay or expense to be deductible in computing business or property income, it must be incurred for the purpose of gaining or producing income from a business or property in accordance with paragraph 18(1)(a) of the Income Tax Act (the "Act"). In addition, it must not be an outlay of a capital nature, except as expressly provided in the Act, in accordance with paragraph 18(1)(b) of the Act. As stated in paragraph 2 of Interpretation Bulletin IT-99R5, generally legal and accounting fees are allowable deductions where they are incurred in connection with normal activities, transactions or contracts incidental to or necessary to the earning of income from a business or property. It appears, based on the information provided, that the fees in the present situation were incurred to comply with the Court's orders. Accordingly, we are of the view that they were not incurred for the purpose of earning income from a business or property, and that they are not deductible for tax purposes. Furthermore, there is no specific provision in the Act under which the fees paid by a taxpayer with respect to a court's orders, such as under Mental Competency Act, are deductible in computing the taxpayer's income.
We hope that our comments are of assistance and we regret that we could not provide you with a more favourable opinion. If you wish to discuss this matter, please feel free to contact the author at (613) 957-2053
Yours truly,
Alain Godin
Section Manager
for Division Director
International and trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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