17 October 1988 Income Tax Severed Letter 7-3271 - [Deductibility of Legal Expenses 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.

Oct 17 1988

HEAD OFFICE Speciality Rulings Directorate R.B. Day Tel: (613) 957-2136

SUBJECT: Deductibility of Legal Expenses Fees XXXX

We are writing in reply to your memorandum of September 19, 1988, wherein you requested our views as to whether or not legal expenses paid by these two taxpayers would be deductible in computing income under paragraph 8(1)(b) of the Act.

As we understand it, the above noted taxpayers filed a complaint with the Ontario Labour Relations Board ("OLRB"), under the Labour Relations Act, with respect to unfair hiring practices of XXXX.

The OLRB hearings, which commenced in XXXX terminated in December XXXX resulted in a finding in favour of the taxpayers. As a result, both taxpayer's received amounts, in 1986, from the XXXX (in compliance with the decision of the OLRB) to compensate them for wages and benefits lost as a result of the XXXX unfair hiring practices.

XXXX

Comments & Observations

Paragraph 8(1)(b) states, in part, that

"(1) In computing a taxpayer's income for a taxation year from an office or employment, there may be deducted...

(b) amounts paid by the taxpayer in the year as or on account of legal expenses incurred by him in collecting salary or wages owed to him by an employer or former employer."

XXXX

From the information submitted with your memorandum, we noted that members of the Union placed their names with the Union office and all business concerns requiring labourers placed their requests for personnnel through the Union office.

In the taxpayers' situation, the Union was required to compensate them for lost wages and benefits they would have received from these various business concerns, had the Union not engaged in unfair hiring practices. Since at no time during the XXXX calendar year was either taxpayer employed directly by the Union, no amount for legal fees paid by them in that year, would be deductible in computing income under paragraph 8(1)(b) because no salary or wages were owed to them by the Union.

The above comments are consistent with the guidelines set out in paragraph 14 of IT 99R3.

There is, however, one aspect of this case that concerns us and that is whether the amounts received by the taxpayers from the Union in 1986, should be considered to be non-taxable damage awards rather than income.

In this case both taxpayers laid a complaint against the Union for unethical hiring practices and, although the amounts paid by the Union to them was computed with reference to an estimate of lost wages and benefits, there was no employer-employee relationship between the Union and the taxpayers. It is our view, therefore, that the amounts cannot be characterized as employment income or an employee benefit and cannot, therefore, be included in the taxpayers' income under either section 5 or 6 of the Act.

We have, in the past, considered awards for damages received under certain specific provisions in provincial human rights legislation to be non-taxable. Although this case is not directly on point with such previous cases, we believe there is sufficient similarity between the OLRB award and human rights compensatory damages, to consider the amounts received as being non-taxable damages. Some support for this position can be found in paragraph 3 of IT 365R.

On the understanding that these taxpayers have in fact included the amounts received from the Union in their XXXX income, and in view of the above comments, it is our opinion that consideration should be given to deleting the amounts received by the taxpayers from their XXXX income. The problem involving the non-deductible nature of the legal fees would thus be resolved.

Footnote

In the Audit Review memorandum of June 1, 1988 and the June 17, 1988, letter to Mr. D'Alessandro, reference is made to the fact that a formal ruling could be sought by the taxpayer pursuant to IC 70-6R. From these comments it would appear that there may be some misunderstanding regarding this circular and the circumstances under which a taxpayer may apply for a binding "Advance Income Tax Ruling".

Paragraph 3 of the circular defines an advance ruling as follows:

"3. An advance ruling is a statement given by the Department to a taxpayer informing him or her how it will interpret specific provisions of the law in respect of a definite transaction or transactions which he or she is contemplating."

Paragraph 6, under the leading "Coverage of Advance Rulings" states, in part, that

"6. As stated above, rulings will be given only in respect of proposed transactions. Advance rulings on proposed transactions will enable taxpayers to decide on a particular course of action and will be issued only in respect of proposed transactions which are seriously contemplated and are not of a hypothetical nature ...

Since XXXX is requesting an adjustment with respect to a transaction which was completed in 1986, any request for an advance income tax ruling received from this taxpayer would (in all probability) have been denied and would probably have been referred back to your office for consideration. In this regard, we also draw your attention to the commentary in the circular under the heading "Distinction Between Advance Rulings and Opinions".

Further to the Special Release to IC 70-6R, dated June 23, 1980, it should be noted that our fee for servicing advance income tax rulings has been increased to $65 per hour and a deposit of $325 should accompany a request for an advance income tax ruling.

As requested, the documentation which accompanied your memorandum is attached.

ORIGINAL SIGNED BY

P. D. Fuoco for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch