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 legal fees paid directly to a lawyer by a former employer included in the former employee's income?
Position: In general they are but this may not always be the case.
Reasons: The agreement to pay the fees is usually between the employer and the employee and the payment to the lawyer is made at the direction of the employee. It would be unusual, but possible that a separate agreement is entered into between the employer and the lawyer.
XXXXXXXXXX 2005-013992
W. C. Harding
August 3, 2005
Dear XXXXXXXXXX:
Re: Payments of Legal Fees and Pension Buy-Backs
This is in reply to your correspondence of July 4, 2005, regarding the taxation of legal fees paid in relation to an employee's loss of employment and the payment of pension contributions in respect of prior year's service.
Written confirmation of the tax implications inherent in particular transactions can be provided by this Directorate 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, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, any inquiries should be addressed to the relevant tax services office. However, we are prepared to provide the following comments that may be of assistance to you. Please note that these comments are general in nature and are not binding on the Canada Revenue Agency ("CRA"). All publications referred to herein can be accessed on the CRA website at the following address: http://www.cra-arc.gc.ca/formspubs/menu-e.html.
Legal Fees
With respect to the payment of legal fees, you have asked if amounts paid by an employer in respect of legal fees incurred by an employee to establish a right to salary or severance, must be reported as income if the amounts paid are set out separately in the settlement documentation and are paid directly to a lawyer.
It is possible that the payment of the amount could be made under an agreement between an employer and a lawyer such that the amount paid will not be received or considered to be received by, or on behalf of, the employee. However, the payment of legal fees by an employer in these situations is generally made under an agreement between the employer and the employee and the payment is generally made to the lawyer at the direction of the employee. Accordingly, we would expect that the amounts paid in these situations would normally be taxable to the employee under section 6 of the Income Tax Act (the "Act") where the payment relates to salary entitlement or paragraph 56(1)(l.1) where the payment relates to a severance entitlement. Further, in these situations, the employee would generally be entitled to a deduction for legal fees under paragraph 8(1)(b) where they relate to employment income or paragraph 60(o.1) where they relate to a severance entitlement.
Pension Buy-Back
With respect to pension buy-backs, you have indicated that when an employee buys back prior year service under your registered pension plan, the employee pays both the employer's and the employee's portion of the required contributions. However, you then reimburse the employee for the employer's portion. You wish to know if the reimbursement is taxable when it is paid to the employee.
When the terms of a registered pension plan require an employee to pay both the employer's and the employee's portions of the required contributions, any subsequent reimbursement by the employer to the employee of the contributions would be included in the employee's income as income from employment. It should also be noted that the full amount of the contribution to the pension plan will generally be deductible by the employee.
We trust our comments will be of assistance to you.
Yours truly,
Roberta Albert, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch
??
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2005
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2005
Email this Content