27 January 1999 Internal T.I. E9833327 - 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.

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.

		January 27, 1999

	Toronto Centre Tax Services Office	HEADQUARTERS
Wm. P. Guglich
	Attention: Dave Ford	(613) 957-2102

		983332


Deductibility of Legal Expenses XXXXXXXXXX 

You forwarded to our office the taxpayer’s letters dated July 10 and December 15, 1998. The taxpayer in his letter dated July 10, 1998 refers to the amending of his tax returns for taxation years 1993 to 1997 inclusive, to deduct legal expenses incurred. As matters pertaining to the amendment of prior years tax returns are the responsibility of the Taxation Service Offices we are providing our response to your office.

XXXXXXXXXX

Our Views

Pursuant to subsection 8(2) of the Income Tax Act (“the Act”), an employee in computing income from an office or employment can only deduct those expenses permitted by section 8 of the Act.

Paragraph 8(1)(b) permits a deduction in computing income from an office or employment for legal expenses incurred by a taxpayer to collect or establish a right to salary or wages owed by an employer or former employer. In the taxpayer’s case, the legal expenses were incurred to fight the criminal and internal charges. They were not incurred to collect or establish a right to salary or wages owed by the employer (please refer to paragraphs 22 and 23 of Interpretation Bulletin IT-99R5, Legal and Accounting Fees).

There is also considerable jurisprudence on the meaning of the words, “collect or establish a right to salary or wages owed by an employer", in paragraph 8(1)(b) of the Act.

In Donald Edwin Wilson v. Her Majesty, 91 DTC 5407, the Federal Court of Appeal held that legal expenses incurred in securing acquittal of a criminal charge were not incurred “in collecting salary or wages owed to him" within the meaning of paragraph 8(1)(b) of the Act.

In Anton Naomai Fernando v. Her Majesty, 93 DTC 5412, the taxpayer incurred legal expenses to get reinstated following a wrongful dismissal. The Federal Court - Trial Division held that the compensatory sum the taxpayer received was salary or wages and therefore the taxpayer was entitled to deduct the legal expenses incurred. There was no compensatory sum received by the taxpayer in the present case.

In Mathieu L'Ecuyer v. Her Majesty, 95 DTC 241 and Courville et al v. M.N.R. [1992] T.C.C. No. 531, the courts distinguished between the right to salary or wages owed and the right to future salary or wages. The courts held that legal expenses incurred for purposes of establishing future rights to salary or wages were not deductible.

In Claude Cote v. M.N.R., 89 DTC 512, the court held that legal expenses incurred to obtain an injunction prohibiting termination of an employment contract were not incurred to collect salary owed, but rather to protect the source of his employment income, and as such were not deductible.

It is our view that on the basis of the jurisprudence cited above, the legal expenses incurred by the taxpayer, to fight the criminal and internal charges against him and thereby establish future rights to salary or wages, or protect the source of his employment, are not deductible under paragraph 8(1)(b) of the Act.

In conclusion the legal expenses incurred by the taxpayer for the taxation years 1993 to 1997 inclusive, are not deductible under paragraph 8(1)(b) and there is no other provision in the Act which would permit the taxpayer to deduct these expenses, in computing income from an office or employment.

We are not able to comment regarding the taxpayer’s deduction of legal expenses in 1988 and 1989, without complete details of facts and the basis for allowing the deduction. We suggest that you review the 1998/89 Appeals files, (if still available) that would likely contain the details of the facts and the basis of settlement.

We trust our comments will be of assistance.

J. F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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