9 April 1997 Internal T.I. 9700417 - LEGAL 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.

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:

deductibility of legal expenses.

Position:

Taxpayer may be entitled to a portion of legal expenses.

Reasons:

From the facts presented it would appear that t\p was simply defending himself against charges of theft and destruction of property and as such legal fees would not be deductible. However, comments by the Provincial Court judge may present some basis to allow a portion of the legal expenses.

				April 9, 1997

Saskatoon TSO Headquarters
W. C. Reich Financial Industries
Director Division
S. J. Tevlin
Attention: A. Pedley
Client Services
970041

Legal Expenses

We are writing in response to your memorandum dated January 2, 1997 wherein you requested our comments regarding the deductibility of legal fees incurred to defend against criminal prosecution.

In this regard we offer the following general comments.

As stated in Interpretation Bulletin IT-99R4 ("IT-99R4"), generally, legal fees are only deductible if they are incurred for the purpose of gaining or producing income from a business or property, and are not outlays of a capital nature. In each case, the question of whether or not the payment of legal fees to defend against criminal charges can meet the deductibility criteria set out above is one of fact which depends upon the relationship of the conduct in question to the taxpayer's income earning activities.

Paragraph 3 of IT-99R4 states, "In limited circumstances, legal fees have been held to be deductible where they are incurred in connection with the defence by a taxpayer against a charge of performing illegal actions in the operation of the business or in defense of the day-to-day methods of carrying on business."

From the information provided by the taxpayer it appears that in his situation the legal fees were incurred in respect to the charges relating to theft and destruction of property rather than in connection with an alleged performance of illegal operation of his business or in connection with charges relating to the day-to-day methods of carrying on his business.

However, in the Judgement of the K.A. Andrychuk PCJ of the Provincial Court of Saskatchewan (Between Her Majesty The Queen and Richtor J. Downs) it is stated, "As to the other 3 Counts, Mr. Downs had been building and selling houses until his termination, and was entitled to receive commissions once his totals were ascertained. To instantly give up the software and key in question may well have a negative impact on his ability to determine any entitlement that may be forthcoming. Colour of right is a defense to a charge of theft, and in these circumstances with the accused having had continuous possession of the items in question I feel that a doubt that I have in this regard should be resolved in the Defendant's favour, and said 3 Counts dismissed". This implies that there may be some argument for saying that a portion of the taxpayer's legal costs were incurred to protect income and as such deductible for income tax purposes.

We trust our comments will be of assistance to you.

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate