1 June 2005 External T.I. 2005-0113991E5 - Legal Expenses of Employee

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 legal fees relating to inappropriate termination notice and negotiating a settlement are deductible under paragraph 8(1)(b) or paragraph 60(o.1).

Position: No

Reasons: Employment was always maintained and salary was fully paid by the employer. No legal expenses were incurred to "collect or establish a right to salary or wages owed" as required by paragraph 8(1)(b).

Retiring allowances are not salaries or wages, as defined under subsection 248(1), and therefore legal fees paid for the purpose of obtaining these payments cannot be deducted under paragraph 8(1)(b).

Legal Fees incurred to try to obtain a retiring allowance may in some instances be deducted under paragraph 60(o.1), however, only to the extent the retiring allowance has been included in taxable income. No such retiring allowance was received or reported in income.

2005-011399
XXXXXXXXXX Rob Ferrari
613) 957-2138
June 1, 2005

Dear XXXXXXXXXX:

Re: Legal Fees Related to Employment
Technical Opinion Request

This letter is in response to your correspondence to us that was received on January 31, 2005. You requested our views on the deductibility of certain legal expenses paid by you in 2004 and 2005 related to your employment.

In the situation described, your employer advised you that your employment would be terminated as of June 30, 2004. You retained a lawyer and incurred legal fees in order negotiate a suitable termination settlement. During the several months of negotiations, you kept working in your same job and were paid the full amount of your salary from your employer. In December 2004, a settlement was reached with your employer. You were able to retain your employment, however, certain employment benefits previously available would no longer be provided. Other than your rights to continue earning a salary, no additional financial compensation benefits, damages, etc., were received by you as a result of this settlement.

Our Comments

The situation presented is an actual fact situation involving completed transactions. 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 offer the following general comments, which are consistent with decisions adopted by the courts on such topics.

Subsection 8(2) of the Income Tax Act (the "Act") provides that no deduction may be made in computing an individual's income from an office or employment, except as permitted under section 8 of the Act. Paragraph 8(1)(b) of the Act permits an employee to deduct, in the computation of income from an office or employment for a taxation year, amounts paid by them in the year as or on account of "legal expenses incurred by the taxpayer to collect or to establish a right to, an amount owed to the taxpayer that, if received by the taxpayer, would be required by this subdivision to be included in computing the taxpayer's income."

In your case, as we understand it, a deduction for legal fees is not permissible under paragraph 8(1)(b) of the Act. There was no salary or wages (or any similar amounts) owed to you since you remained employed and received your full salary throughout the relevant time periods. Consequently, the legal fees were not paid by you to collect, or to establish a right to, an amount owed to you, such as salary or wages, as required by paragraph 8(1)(b) of the Act.

Alternatively, paragraph 60(o.1) of the Act generally allows a deduction in computing a taxpayer's income for a taxation year for legal expenses (with some exceptions) paid by the taxpayer to collect or establish certain rights to employment pension benefits or to a retiring allowance. However, paragraph 60(o.1) of the Act limits the current year deduction of legal expenses to the amount of the relevant employment pension benefits or retiring allowance received and included in the taxpayer's income.

We note that while retiring allowances can include amounts received in respect of a loss of office or employment, for these purposes, salary and wages are not considered retiring allowances. Consequently, since we are not aware that you received any retiring allowance or employment pension benefits in 2004 or 2005 that were related to the legal expense incurred, it is our opinion you would not be entitled to deduct the legal expenses in question in computing your income for those years.

We hope the above will be of assistance to you in understanding our position on this matter.

Yours truly,

Allan Nelson, CMA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch