22 September 1993 Administrative Letter 9326116 F - Legal Fees to Secure Wage Loss Benefit From Insurer

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.

Attention:  Jeff Shaver

Deductibility of Legal Fees

Your file: 93-4272T XXXXXXXXXX

We are replying to your memorandum of September 8, 1993 in which you ask whether legal fees incurred to re-establish the taxpayer's rights to benefits under a wage loss replacement plan are deductible.

As indicated in paragraph 1 of Interpretation Bulletin IT-99R4, legal fees are only deductible to the extent that they

a)     are incurred for the purpose of gaining or producing income from a business or property and

b)     are not outlays of a capital nature

unless such fees are specifically provided for by a provision of the Act.

Since the fees in question were not incurred for the purpose of gaining or producing income from business or property, a deduction will only be available if the legal fees are deductible by reason of a specific provision of the Act such as paragraph 8(1)(b) or 60(o.1) of the Act. Our review did not reveal any other provision of the Act which might be relevant to the issue at hand.

Since the amount XXXXXXXXXX received in settlement of his court action is neither a pension nor a retiring allowance, the legal fees are not deductible under paragraph 60(o.1) of the Act. In considering the issue of whether a deduction is available under paragraph 8(1)(b) of the Act, one must first determine whether the benefits awarded by the court are taxable under paragraph 6(1)(f) of the Act and whether the insurer is considered to be an employer for the purpose of paragraph 8(1)(b) of the Act.

You have determined that the plan is a taxable plan as described in Interpretation Bulletin IT-428 "Wage Loss Replacement Plans" and that any payment paid in lieu of benefits under the plan is taxable as explained in paragraph 11 of that bulletin. Our comments which follow are based on that determination.

Subsection 248(1) of the Act defines "salary or wages" as the income from an office or employment as computed under subdivision a of Division B of Part I of the Act and includes amounts described in paragraph 6(1)(f) of the Act. As discussed by telephone (Shaver\Humenuk), we draw your attention to paragraph 25 of IT-428 for an example of the computation of benefits under paragraph 6(1)(f) of the Act. While the example in the bulletin is based on a plan which is subject to section 19 of the Income Tax Application Rules, 1971, the amount of contributions made by an employee under any taxable plan will reduce the amount required to be included in income under paragraph 6(1)(f) of the Act to the extent that such contributions have not reduced the amount included in income in a prior year.

With respect to the requirement that the salary or wages be owed by the employer or former employer, it is our view that the insurer is not an employer for this purpose. While the definition of "employer" in subsection 248(1) of the Act is not of much assistance in this regard in that it applies in respect of officers only, the definition of "employment" as found in subsection 248(1) has relevance in that an employee is defined therein to be a person holding a position in the service of someone else. Since the employee is presumably not in the service of the insurer, it follows that the insurer is not an employer of the employee for the purpose of paragraph 8(1)(b) of the Act.

While the definition of "employer" in subsection 100(1) of the Regulations is broader in scope than that found in subsection 248(1) of the Act (in that it includes anyone paying remuneration as defined in that Regulation), this definition is only applicable for the purposes of the Regulations. A quick glance at the types of remuneration listed in Regulation 100(1) shows that it includes pension payments, unemployment insurance benefits and other amounts which are typically paid by an entity which is not normally considered to be the recipient's employer for the purposes of the Act.

Consequently, it is our view that the legal fees incurred to establish the employee's right to an amount receivable from the insurer are not deductible under paragraph 8(1)(b) or any other provision of the Act.

You also asked us to confirm that the amount of the award would qualify as "earned income" as defined in paragraph 146(1)(c) of the Act for RRSP purposes. We agree with your understanding that the amount of the award included in income under paragraph 6(1)(f) of the Act qualifies for inclusion in "earned income" as defined in paragraph 146(1)(c) of the Act.

We trust that these comments will assist you in preparing your response for XXXXXXXXXX

B.W. DathDirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch