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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Whether legal fees incurred prior to commencement of a business and subsequent fees incurred upon settlement out of court are deductible.
Position TAKEN:
No
Reasons FOR POSITION TAKEN:
No business was ever commenced
5-942142
XXXXXXXXXX M. Shea-DesRosiers
October 4, 1994
Dear XXXXXXXXXX:
This is in reply to your letter of August 10, 1994 concerning the deductibility of legal fees incurred prior to the commencement of a business and the subsequent fees incurred upon a settlement out of court.
The situation outlined in your letter involves completed transactions with identifiable taxpayers. As indicated at paragraph 21 of Information Circular 70-6R2, dated September 28, 1990, the district office considers requests for written opinions on completed transactions. As a consequence thereof, we may only offer the following general comments that are not advance income tax rulings and are not binding on the Department.
As stated in paragraph 1 of Interpretation Bulletin IT-364 (copy attached),
"For an amount to be deductible on the grounds that it was an expense incurred for the purpose of gaining or producing income from a business, the taxpayer must have been carrying on business in the fiscal period in which the expense was incurred."
At paragraph 6 of the same Bulletin we read,
"Expenses in respect of a proposed business that are incurred prior to the commencement of the business do not constitute a business loss or a non-capital loss and thus cannot be applied against income in the year the expenses were incurred, and cannot be carried back to be applied against income of the preceding year or forward to be applied against income of any subsequent year."
Paragraph 3 of Interpretation Bulletin IT-467R states the requirements for damages to be deductible. Two of the tests mentioned are
(a)the outlay must have been made for the purpose of gaining or producing income from business or property,
(b)the outlay must not be on account of capital.
Based on the above, it is our opinion that legal fees incurred prior to the commencement of a business and those included with amounts paid upon a court settlement relating to a proposed business are not deductible where the proposed business has never commenced.
We trust the above comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1994
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1994
Email this Content