22 June 2012 External T.I. 2011-0416701E5 - 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: Whether legal fees incurred with respect to structural defects with a taxpayer's principal residence are deductible as a business expense.

Position: No.

Reasons: The legal fees are not expenses incurred to earn income from a business or property pursuant to paragraph 18(1)(a) of the ITA. Legal fees were personal expenses under paragraph 18(1)(h) of the ITA.

XXXXXXXXXX
														2011-041670
														K. G. Weir

June 22, 2012

Dear XXXXXXXXXX:

Re: Legal Expenses

We are writing in response to your letter dated June 22, 2011, wherein you enquired if you could deduct a portion of the legal fees incurred with respect to your principal residence as a business expense related to your home office. Based on the information provided, the legal fees were incurred in pursuing legal advice with respect to structural safety issues related to the principal residence.

Our Comments

As noted in Interpretation Bulletin IT-99R5 (Consolidated), Legal and Accounting Fees, absent a specific provision in the Income Tax Act (ITA), legal fees are generally only deductible in computing income when certain tests are met. These tests are as follows:

• the outlay or expense must have been made for the purpose of gaining or producing income from a business or property pursuant to paragraph 18(1)(a) of the ITA;
• the outlay or expense must not be on account of capital pursuant to paragraph 18(1)(b) of the ITA;
• the outlay or expense must be reasonable in the circumstances pursuant to section 67 of the ITA; and
• the outlay or expense must not be a personal expense pursuant to paragraph 18(1)(h) of the ITA.

Subsection 248(1) of the ITA defines “personal or living expenses” to include:

“the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or common-law partnership or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit”

There must be a business purpose in order for expenses to be deductible as noted in the Supreme Court of Canada decision Symes v. Her Majesty, (94 DTC 6001), where Iacobucci, J. stated the following at page 738:

“… Would the need exist apart from the business? If a need exists even in the absence of a business activity, and irrespective of whether the need was or might have been satisfied by an expenditure to a third party or by the opportunity cost of personal labour, then an expense to meet the need would traditionally be viewed as a personal expense.”

It is our view that despite the fact that you have a home office, the legal expenses were incurred primarily for your personal use of the property as your principal residence. In other words, the legal fees were not incurred to earn business income and would have been incurred irrespective of the existence of your business.

Therefore, these expenses are personal in nature and are not deductible from income from a business or property pursuant to paragraph 18(1)(h) of the ITA. In addition, the expenses appear to be on account of capital and would not be deductible pursuant to paragraph 18(1)(b) of the ITA.

We trust our comments will be of assistance.

Yours truly,

Nerill Thomas-Wilkinson
Manager
for Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch