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: Will the CRA reconsider its position on the deductibility of costs incurred to respond to queries from the CRA, prepare tax returns or make a voluntary disclosure?
Position: No change in position except that some costs may be deductible under paragraph 20(1)(cc)
Reasons: Where a taxpayer earns income from a business, the cost of making a voluntary disclosure relating to that business may be deductible as a cost of representation pursuant to paragraph 20(1)(cc).
May 22, 2014
Ponoka Liaison Meeting
In CRA document 2012-0437831E5, CRA indicated costs incurred with respect to a voluntary disclosure were not deductible, as they were neither incurred to earn income from business or property, nor in relation to an objection or appeal. In the Tracey Ridout decision (2013 TCC 260), the Tax Court upheld CRA's denial of fees incurred in filing a claim for the taxpayer's disabled child, commenting that Paragraph 60(o) applies only to fees related to an objection or appeal. It would seem that taxpayers wishing to ensure their costs, particularly costs unrelated to income from business or property, are deductible would be well advised to arrange their affairs to link such costs to an objection or appeal. For example, it seems that Ms. Ridout may have had greater success obtaining a deduction if she had filed an Objection, at least in respect of the tax year(s) still open for objection, rather than requesting adjustments under the usual T1 Adjustment (and taxpayer relief) process.
(a) Has CRA's policy on the costs of responding to CRA information requests set out in IT 99R5 been reviewed since the 2011 Round Table, or does CRA consider such costs relate to a potential objection which could arise from the review of such claims, and therefore fall under paragraph 60(o)?
(b) Clearly many costs incurred in respect of adjusting, or completing, income tax returns are not considered deductible by CRA or the courts. Can the CRA advise as to their basis for differentiating costs incurred in tax filings between deductible and non-deductible costs? It seems unreasonable that one taxpayer might engage an advisor to review possible claims and file his return correctly from the outset, resulting in non-deductible fees, where another might file a return with, say, only his T4 slip, then file an objection to advance his other deduction and credit claims, with a similar fee cost, but full deductibility because an Objection is filed. However, this appears to be the state of the law.
(c) While CRA administrative policies may permit the deduction of some costs which do not lead to an Objection or Appeal, the taxpayer has no assurance that CRA will apply their policy in any given case. Indeed, the Ridout decision noted that similar claims had been allowed by CRA, but CRA had since adopted a policy that they should always be disallowed. As well, administrative policies can be changed at CRA's discretion. If requested by taxpayers would the CRA support a recommendation to expand the deductibility of costs related to properly filing income tax returns without resorting to the Objection or Appeals process, to legislate their administrative practices and provide greater certainty for taxpayers?
(a) Paragraph 60(o) allows taxpayers to deduct reasonable fees and expenses incurred and paid for advice or assistance in respect of an objection or appeal even if the expenses are not otherwise deductible (for example, section 9 or paragraph 8(1)(f)). As explained in the last sentence of paragraph 7 of Interpretation Bulletin IT-99R5, "Legal and Accounting Fees [Consolidated]", on an administrative basis, the CRA will allow taxpayers deduct reasonable expenses incurred to respond to inquiries from the CRA, whether or not a formal notice of objection or appeal is subsequently filed.
We have reviewed the administrative position and we are not prepared to extend it beyond what has already been granted.
As you noted above, CRA document 2012-0437831E5 explains that the CRA does not consider the costs incurred to make a voluntary disclosure to be deductible under paragraph 60(o) nor would they generally be incurred to earn income from a business or property. However, where a taxpayer earns income from a business, the cost of making a voluntary disclosure relating to that business may be deductible as a cost of representation pursuant to paragraph 20(1)(cc).
(b) The CRA expects taxpayers to be able to show that the amount claimed is deductible under the Act or fits within the administrative position described in the interpretation bulletin.
(c) The Department of Finance is responsible for federal tax policy and legislation. This is a question of tax policy and should be addressed directly to the Department of Finance.
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