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 the legal expenses incurred in the administration of the taxpayer's personal bankruptcy or the securing of his discharge from the personal bankruptcy are deductible.
Position: No.
Reasons: The legal fees incurred under these circumstances are personal expenses which deduction is prohibited under paragraph 18(1)(h) of the Act.
XXXXXXXXXX 2004-007800
C. Lalonde
September 15, 2004
Dear XXXXXXXXXX:
Re: Deductibility of Legal Expenses under paragraph 60(o.1) of the Income Tax Act ("Act")
This is in reply to your letter of May 21, 2004 concerning the deductibility of legal expenses incurred by an individual in filing and administering a proposal under the Bankruptcy and Insolvency Act in a situation where the proposal is designed to allow:
1. the taxpayer to continue to collect his pension income (annuities);
2. the taxpayer and his trustee to designate the creditors as beneficiaries of certain life insurance policies of the taxpayer;
3. the taxpayer's creditors to fund payment of the ongoing premiums on the life insurance policies.
More specifically, you are asking whether the legal expenses related to the part of the proposal involving his pension income would be deductible under paragraph 60(o.1) of the Act. In your view, the deduction should be allowed as it relates to establishing the individual's pension rights on bankruptcy.
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. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we are prepared to provide the following general comments which may be of assistance.
Paragraph 60(o.1) of the Act allows a taxpayer, within certain limits, to deduct legal expenses paid to collect or establish a right to an amount of a benefit under a pension fund or plan. Eligible legal expenses may be deducted in a taxation year to the extent they do not exceed the 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 taxation years, to the extent further related income arises.
Whether any particular arrangement, including the scenario described above, involves a benefit under a pension fund or plan is a question of fact. Generally, we consider a plan to be a pension fund or plan where contributions have been made to the plan by or on behalf of an employer or former employer of an employee in consideration for services rendered by the employee and the contributions are used to provide an annuity or other periodical payment on or after the employee's retirement in consideration for his or her employment services.
In a situation involving a bankruptcy settlement where a taxpayer had a pre-existing right to pension benefits, the issue giving rise to the legal fees is not the recognition or establishment of the taxpayer's right to pension benefits or the collection from the payor (i.e., the pension fund administrator) of pension benefits. In our view, the legal expenses pertain instead to the administration of the taxpayer's bankruptcy, or the securing of the discharge from a personal bankruptcy, which is a personal expense. Paragraph 18(1)(h) of the Act prohibits the deduction of personal expenses.
You may find more information on the treatment of legal fees for income tax purposes in the current version of Interpretation Bulletin IT-99, entitled Legal and Accounting Fees on the CRA website at the following address: http://www.cra-arc.gc.ca/formspubs/menu-e.html.
We trust that these comments will be of assistance.
Yours truly,
Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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