24 November 2011 External T.I. 2011-0408071E5 - Reimbursed 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.

Principal Issues: Whether the reimbursed legal fees are taxable to the ex-employee in the circumstance described.

Position: Yes

XXXXXXXXXX
						  	2011-040807
							Andrea Boyle, CGA
November 24, 2011

Dear XXXXXXXXXX :

Re: Taxability of Reimbursed Legal Fees

I am writing in reply to your email dated May 27, 2011, in which you raised additional points in response to a previous correspondence received by you from Sue Leblanc, a Senior Program Advisor at the Canada Revenue Agency. We apologise for the delay in our response.

Specifically, you are questioning the taxability of legal fees paid by an insurance corporation towards a plaintiff's legal costs as a result of a litigated settlement in respect of a Wage Loss Replacement Plan. Your view is that the legal fees which relate to the portion of the settlement that is not taxable should similarly not be taxable and you have presented two specific positions to support excluding the described reimbursed legal fees from taxable income.

The particular situation outlined in your email may relate to a factual one, involving specific taxpayers. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. We are, however, prepared to offer the following general comments, which may be of assistance.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended ("the Act").

YOUR VIEWS

The first position which you have taken is that the reimbursed legal fees should not be included in income under paragraph 6(1)(a) under the circumstances described because the legal fee reimbursement is "derived" from the employer's contribution to or under the group accident insurance plan, and therefore falls within the exception in subparagraph 6(1)(a)(i) of the Act.

The second position that you have taken is that legal fee reimbursements which are not included in taxable income under the more specific provision found in paragraph 6(1)(j), should not be included in the more general provision in paragraph 6(1)(a). In your view, the application of paragraph 6(1)(a) would be contrary to the rules of statutory interpretation that "... wherever there is particular enactment and a general enactment in the same statute, and the latter, taken in its most comprehensive sense would overrule the former, the particular enactment must be operative, and the general enactment must be taken to affect only the other parts of the statute to which it may properly apply."

OUR RESPONSE

The exemption in subparagraph 6(1)(a)(i) to which you have referred in your first argument reads as follows:

There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:

(a) the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment, except any benefit

(i) derived from the contributions of the taxpayer's employer to or under a deferred profit sharing plan, an employee life and health trust, a group sickness or accident insurance plan, a group term life insurance policy, a private health services plan, a registered pension plan or a supplementary unemployment benefit plan,
...
(underlining added)

In our view, the exemption in subparagraph 6(1)(a)(i) means that there is no taxable benefit to an employee from the contributions that an employer makes to a plan for the employee; it does not mean that all benefits that the employee receives or enjoys as a consequence of the employer contributions to the plan will not be taxable. For example, payments made from such a plan may in fact be taxed as employment income under paragraph 6(1)(f). We therefore do not agree with your interpretation of what is meant by the word "derive" in subparagraph 6(1)(a)(i).

As to your second position, paragraph 6(1)(j) of the Act generally requires a taxpayer to include in income any award or reimbursement received by the taxpayer in respect of amounts deductible under subsection 8(1). Paragraph 6(1)(j) is primarily intended to be relevant to awards and reimbursements of legal expenses incurred to collect salary and wages for which a deduction is available under paragraph 8(1)(j) of the Act.

Paragraph 6(1)(j) includes in income amounts reimbursed by virtue of employment which will be deductible under subsection 8(1). Paragraph 6(1)(j) does not however include in income all employment-related reimbursements of personal expenses or even all employment-related reimbursements of legal fees; similarly, paragraph 6(1)(j) in no way implies that only reimbursements of expenses which are deductible under subsection 8(1) are taxable. Many employer reimbursements of employees' personal expenses would not be income inclusions under paragraph 6(1)(j), but would be an income inclusions under paragraph 6(1)(a).

We trust that these comments will be of assistance.

Yours truly,

Guy Goulet CA, M.Fisc.
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch