CRA states that deductibility of legal fees incurred for reinstatement of employment must be determined on a retroactive basis, based on the result

CRA considered that legal fees incurred by a dismissed employee to be reinstated did not qualify for deduction under s. 8(1)(b) as being incurred to establish a right to unpaid remuneration until such time as such suit is successful - in which case the employee can file an amended return for the year in which the fees were incurred if that year is still open for reassessment.  CRA's reasoning is that until the suit is successful, it cannot be known whether the employee will be reinstated and receive the award of remuneration owing, or the employee (if successful at all) will instead receive another award, for example, damages for wrongful dismissal, which would qualify as a retiring allowance rather than unpaid remuneration.

This approach may be inconsistent with general jurisprudential principles (and at least one of the decisions cited by CRA), which likely suggest that the focus should be on the purpose for incurring the legal fees rather than the result - so that if the thrust of the action is for reinstatement, rather than damages for wrongful dismissal, the fees should be currently deductible regardless of the outcome.

Neal Armstrong.  Summary of 19 November 2012 Memorandum 2012-0433201I7 under s. 8(1)(b).