4 November 2003 External T.I. 2003-0035475 - EMPLOYER PAID 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 CCRA.

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

Principal Issues: Taxable status of various costs, including legal fees, paid by an employer on behalf of an individual who is employed as a pharmacist and required to appear before a disciplinary committee of the provincial pharmacist order.

Position: Question of fact.

Reasons: Depends on whether the costs incurred relate to an action of the employee carried out during the normal course of performing the duties of employment, and whether the benefit was received in the individual's capacity as an employee or shareholder.

Randy Hewlett, B.Comm.

XXXXXXXXXX 613-957-8973
2003-003547
November 4, 2003

Dear XXXXXXXXXX:

Re: Employer-Paid Legal Fees

We are writing in response to your letter of August 21, 2003, wherein you requested our opinion on the above noted issue, as it pertains to an individual who is employed as a pharmacist.

You are concerned where a pharmacist is required to appear before a disciplinary committee of the provincial pharmacist order for unintentional errors committed while carrying out the duties of employment. You question the taxable status of expenses, including legal fees, incurred by the pharmacist in relation to an appearance before the disciplinary committee and paid or reimbursed by the employer. You also inquired whether the employer's payment of these expenses could result in a taxable benefit to the employee and be deductible by the employer. Finally, you also asked us to comment on whether our opinion would differ if the pharmacist were the owner of the drug store.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments. As such, it should be noted that a definitive determination can only be made in the context of a complete understanding of all the facts.

The income tax treatment of the legal expenses of an employee that are paid by the employer, is discussed in Interpretation Bulletin IT-99R5, Legal and Accounting Fees (Consolidated). In general terms, where personal legal expenses of an employee are paid or reimbursed by the employer, the amount paid is a taxable benefit to the employee. To the extent that the amount does not exceed a reasonable amount, it will normally be deductible by the employer as a business expense on account of the employee's salary and benefits.

When the legal costs are paid or reimbursed by the employer and relate to an action of the employee carried out during the normal course of performing the duties of employment, a taxable benefit does not normally result. However, where the legal expenses relate to an action of the employee that is outside the scope of what may reasonably be expected of the employee during the normal course of performing the duties of employment, the payment could result in a taxable benefit pursuant to paragraph 6(1)(a) of the Income Tax Act (the "Act"). Generally, provided the amount is reasonable in the circumstances, it will be deductible by the employer as a business expense.

Where the individual is both an employee and shareholder of a corporation, the status of an otherwise taxable benefit, depends on whether the individual received it in the capacity as an employee or shareholder. While this determination is always a question of fact, when an individual who is the controlling shareholder of a corporation receives a benefit that is not generally available to all employees, there is a presumption that the individual received it in the capacity as a shareholder. In such a case, the amount must be included in the shareholder's income pursuant to subsection 15(1) of the Act. If this is the case, the amount is not deductible by the corporation in computing its income from the business by virtue of paragraph 18(1)(a) of the Act.

We trust our comments will be of assistance to you.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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