23 February 1990 Income Tax Severed Letter 59000 - Legal Expenses

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.

• 5- 9000

19(1) C. Tremblay
613-957-2095

February 23, 1990

Re: Legal Expenses

This is in reply to your letter of October 30, 1989, wherein you requested our opinions with respect to the deductibility of legal fees which have been incurred by a company experiencing financial difficulties. You advise us that these legal fees would include amounts paid to the company's own solicitors and to the lender's solicitors with respect to attempting to arrange new financing or otherwise restructure the company to come within the terms of the original lender's financing covenants.

It is your view that these costs are general operating expenses of the company and if new financing is obtained, the legal fees are deductible pursuant to paragraph 20(1)(e) of the Act. If there is a reorganization of the corporate reorganization, the fees would be treated as eligible capital expenditures.

Our Comments

Legal expenses which taxpayers incur in connection with income earning activities are generally deductible to the extent they are reasonable while those relating to capital are generally not deductible. Interpretation Bulletin IT-99R3 discusses our general position on the deductibility of legal expenses. Whether the main purpose of the expenditure was to safeguard the operation of the company rather than to preserve the corporate shell is an important consideration. In our view, legal fees with respect to attempting to arrange new financing are not incurred in connection with income earning activities nor do they relate solely to the year.

Generally, legal expenses incurred in the course of borrowing money are deductible pursuant to paragraph 20(1)(e) of the Act. The Department's general position relating to deductions allowed under paragraph 20(1)(e) of the Act is found in Interpretation Bulletin IT-341R. An expense incurred at any time during the term of the outstanding borrowing (after the funds have been advanced) or in the course of repaying or renegotiating the existing debt is generally not considered to have been incurred in the course of borrowing money. It would depend on the particular facts of the case whether the legal fees incurred to renegotiate a loan could be considered to be expenses incurred in the course of borrowing money for the purpose of paragraph 20(1)(e) of the Act. In order to be deductible, the fees must arise in connection with an agreement pursuant to which funds were borrowed. In our view, the legal fees paid with respect to attempting to arrange new financing would, generally, fall within the definition of an eligible capital expenditure in paragraph 14(5)(b) of the Act.

We agree, however that if new financing is obtained, the legal fees would be deductible pursuant to paragraph 20(1)(e) of the Act and that any fees relating to reorganization of the corporate entity involving a share issue, amalgamation or other corporate reorganization would be treated as eligible capital expenditures.

The foregoing is an expression of opinion and as such is not binding on the Department.

We trust our comments will be of assistance.

Yours truly,

for Director
Business and General Division
Specialty Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

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