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: Are the legal fees incurred by the taxpayer deductible for tax purposes?
Position: The legal fees are capital expenditures incurred to preserve or protect an asset of enduring benefit.
Reasons: The taxpayer currently has no source of business income.
2005-011971
XXXXXXXXXX Luisa A. Majerus, CA
(613) 832-3488
May 30, 2005
Dear XXXXXXXXXX:
Re: Deductibility of Legal Fees
This is in response to your letter dated March 3, 2005, requesting confirmation on the deductibility of legal fees incurred by the taxpayer. We acknowledge receipt of the additional information in your letter dated April 13, 2005.
The taxpayer is a proprietor in the business of hauling cattle. In 2003, the taxpayer was involved in a vehicle accident in which the truck and trailer he owned and used in the business were destroyed. The taxpayer is currently in the process of defending against charges laid which may result in the loss of his driver's licence. The taxpayer was originally charged with criminal negligence causing death or bodily harm but the charges were later reduced to dangerous driving causing death and bodily harm.
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 offer the following general comments.
Section 18 of the Income Tax Act (the "Act") sets out the general limitations for deductions in computing the income of taxpayer from a business. Paragraph 18(1)(a) of the Act provides that no deduction shall be made in respect of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business. Furthermore, paragraph 18(1)(b) of the Act denies a deduction for an outlay, loss or replacement of capital or a payment on account of capital.
Paragraph 1 of Interpretation Bulletin IT-99R5, "Legal and Accounting Fees" ("IT-99R5") provides that legal and accounting fees are deductible only to the extent that they are incurred for the purpose of gaining or producing income from a business or property and are not outlays of a capital nature. Generally, legal and accounting fees are allowable deductions where they are incurred in connection with normal business activities, transactions or contracts incidental or necessary to the earning of income from a business or property. A copy of IT-99R5 can be found on our website at www.cra-arc.gc.ca.
It is our view that the legal costs to defend the taxpayer are likely being incurred for the purpose of gaining or producing income from a business. Such costs would, however, be of a capital nature. Therefore, based on the limited facts provided, the legal costs are probably an "eligible capital expenditure" as defined by subsection 14(5) of the Act.
We trust this information meets your needs at the current time.
Yours truly,
John Oulton, CA
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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