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 deduction for legal fees in excess of income may be carried forward to future years.
Position: Question of fact. General comments given.
Reasons: Depends whether legal fees are incurred to collect or establish right to salary or wages, or a retirement allowance.
2006-017940
XXXXXXXXXX Darlene Green
(613) 957-2082
June 16, 2006
Dear XXXXXXXXXX:
Re: Legal Fees
This is in response to your correspondence of March 31, 2006, and further to our telephone conversation of May 9 (Green /XXXXXXXXXX ) wherein you described a situation where the legal fees you incurred in pursuit of income from a former employer were greater than income you received in 2005. You also indicated that you anticipate the successful resolution of your legal action in 2006 resulting in income for that year in excess of your remaining legal expenses. You asked whether legal fees not deducted in 2005 can be carried forward to 2006.
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 are prepared to offer the following general comments.
Paragraph 8(1)(b) of the Income Tax Act (the "Act"), and proposed amendments thereto applicable to amounts paid in the 2001 and subsequent taxation years, permits a deduction in computing income from an office or employment for amounts paid by the taxpayer 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 to be included in computing the taxpayer's employment income. It is not necessary for the legal action to be successful, however, the amount sought must be for salary or wages "owed". Where such a deduction results in a loss from employment, that loss can offset other sources of income in the year. Where there are no other sources of income in the year, the loss from employment will result in a non-capital loss that can be carried back 3 years and forward 10 years pursuant to paragraph 111(1)(a) of the Act, and used to offset employment and other sources of income in those years. It should also be noted that the 2006 Budget proposes to extend the carry-forward period for non-capital losses to 20 years and is proposed to apply to losses incurred in taxation years that end after 2005.
Additionally, paragraph 60(o.1) of the Act allows a deduction in computing an individual's income for a taxation year for legal expenses paid to collect or establish a right to a retiring allowance (including a right to damages for wrongful dismissal). The amount of the deduction in the year is limited to the total of any reimbursement of legal expenses included in income in the year or a preceding taxation year and the amount of the retiring allowance received and included in income in the year or a preceding taxation year, less any portion thereof that has been transferred to an RPP or an RRSP and deducted under paragraph 60(j.1). Any non-deductible portion of eligible legal expenses may be carried forward and deducted in any of the seven subsequent taxation years, to the extent the taxpayer continues to receive payments of the retiring allowance from the same former employer.
For more information please refer to Interpretation Bulletins IT-99R5 - Legal and Accounting Fees, and IT-337R4 - Retiring Allowances, which are available on the Canada Revenue Agency website at http://www.cra.gc.ca, or may be obtained by contacting a local tax services office.
We trust that our comments will be of assistance to you.
Yours truly,
Randy Hewlett
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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