19 March 2004 Internal T.I. 2003-0054201I7 - Legal Expenses - Commencement of a Business

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.

Principal Issues: Whether a taxpayer would be entitled to deduct legal expenses incurred while applying for the Quebec Bar.

Position: No.

Reasons: There has not been a commencement of a business and the expenses are likely personal and capital in nature.

		March 19, 2004

	Gerry Hortness	HEADQUARTERS
	Technical Advisor	Karen Power, CA
	Verification and Enforcement	(613) 957-8953
	Sudbury TSO
		2003-005420

Legal Expenses - Commencement of a Business

We are writing in reply to your email of December 18, 2003, regarding the above-noted subject matter. In particular you enquire whether a taxpayer would be entitled to deduct certain legal expenses incurred in the 2001 and 2002 taxation years. During 2001-2002 the taxpayer was employed fulltime by XXXXXXXXXX in Toronto. The taxpayer has argued that his legal expenses should be deductible in computing income from a business. In your view, there has been no commencement of a business.

Our Comments

As mentioned in paragraph 2 of Interpretation Bulletin IT-364, Commencement of Business Operations, it is not possible to be specific about the point in time when a contemplated business becomes an actual business. Generally speaking, it is the Canada Revenue Agency's view that a business commences whenever some significant activity is undertaken that is a regular part of the income-earning process in that type of business or is an essential preliminary to normal operations. In order that there be a finding that a business has commenced, it is necessary that there be a fairly specific concept of the type of activity to be carried on and a sufficient organizational structure assembled to undertake at least the essential preliminaries. This requirement is applicable whether the projected business is intended to be a continuing one or is to be a single transaction in the form of an adventure in the nature of trade. Where an activity consists merely of a review of various business possibilities in the expectation or hope that information will be obtained to justify going into a business of some kind, such an activity does not represent the commencement of a business. A business would be reviewed as being merely contemplated for the future if no serious or reasonably continuous efforts are being made to begin normal business operations.

Based on the limited information you have provided, we would agree with your conclusion that there was no commencement of a business during the 2001 and 2002 taxation years and consequently the legal expenses would not be deductible. In our view, the process of applying for admittance to the Quebec Bar would not in and of itself indicate the commencement of a business. It is also our view that the legal expenses may be considered personal expenses of a capital nature, and it is therefore questionable whether such costs would be considered eligible capital expenditures even if it can be found that a business did in fact commence.

We trust our comments will be of assistance.

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch