24 March 2009 External T.I. 2008-0302451E5 - Deductibility of Legal Fees

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 incurred by an individual deductible for income tax purposes?

Position: It is possible that at least some of the legal fees will be deductible.

Reasons: Question of fact as to whether the conditions of paragraphs 8(1)(b) or 60(o.1) of the Act have been met.

XXXXXXXXXX 								2008-030245
									Michael Cooke, CA
March 24, 2009

Dear XXXXXXXXXX :

Re: Deductibility of Legal Fees

We are writing in response to your letter of November 3, 2008, wherein you requested our views on the deductibility of certain legal fees that were incurred by you in the two circumstances described in your letter.

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. This Circular and other publications referred to in this letter are available on our website at http:///www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office, a list of which is available on the "Contact Us" page of our website.

The determination of the income tax treatment of the legal expenses described in your letter involves questions of fact that can only be determined after reviewing all of the relevant facts and documentation, which in these circumstances, should be considered by the relevant Tax Services Office. However, based on the information available to us, we are prepared to offer the following comments, which may be of assistance.

In the computation of income from an office or employment for a taxation year paragraph 8(1)(b) of the Income Tax Act (the "Act") allows a taxpayer to deduct legal expenses that were incurred 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 income from an office or employment. It is not necessary for the taxpayer's legal action to be successful in order for an amount to be deductible under this provision. We note that in the event that such a deduction results in a loss from employment, that loss can offset other sources of income in that year. Where there are no other sources of income in that year, the loss from employment will result in a non-capital loss that can be carried back 3 years and forward 20 years pursuant to paragraph 111(1)(a) of the Act, and used to offset employment and other sources of income in those years.

Alternatively, and subject to certain limitations, paragraph 60(o.1) of the Act allows a taxpayer to deduct legal expenses that were paid by the taxpayer in the year (or in the 7 preceding years) to collect or establish a right to a retiring allowance. A retiring allowance is defined in subsection 248(1) of the Act to mean an amount (other than a superannuation or pension benefit, an amount received as a consequence of the death of an employee or a benefit described in subparagraph 6(1)(a)(iv)) received

• on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer's long service, or
• in respect of a loss of office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal.

Although a retiring allowance can be paid in instalments over a reasonable period of time there are some situations in which such periodic payments are more properly considered as "salary continuance payments". While such a determination would require a review of all of the relevant facts, salary continuance payments generally exist when the employer treats the payments as income from employment for the purposes of computing employment insurance premiums and benefits, Canada Pension Plan pension accruals, or eligible years of service under a registered pension plan. In those situations, instead of being considered a retiring allowance, such amounts would be treated as income from employment under either subsection 5(1) of the Act alone or together with paragraph 6(3)(b) of the Act.

While it remains a question of fact as to whether the payment you received would be considered as a retiring allowance or employment income, the legal fees that you incurred in connection with establishing a right to receive this payment would appear to be deductible either under paragraph 8(1)(b) of the Act, or paragraph 60(o.1) of the Act, as described above.

For more information on the deductibility of legal expenses under paragraphs 8(1)(b) and 60(o.1) of the Act please refer to paragraphs 22 to 27 of Interpretation Bulletin IT-99R5, Legal and Accounting Fees. In addition, for more information on what constitutes a retiring allowance please refer to Interpretation Bulletin IT-337R4, Retiring Allowances. We understand that you have also incurred legal fees in connection with a separate defamation lawsuit against a third party. This expense would not be deductible under paragraph 8(1)(b) of the Act or paragraph 60(o.1) of the Act since the fees were not incurred to establish a right to any amount owed to you by your employer either as employment income or as a retiring allowance. There is no other provision of the Act that would permit a deduction of the legal fees in this circumstance.

We trust our comments will be of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch