6 January 2011 External T.I. 2009-0306591E5 - Deductibility of legal costs to create a Trust

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: 1. Whether legal costs to create a trust are deductible as a current expense or eligible capital expenditure? 2. Whether payment of legal costs by trustee would be considered a contribution to trust and invoke attribution rules?

Position: 1. No. 2. Unable to comment.

Reasons: 1.Legal costs are on account of capital, but not incurred in respect of a business and not incurred for the purpose of gaining or producing income from a business or property. 2. Information not sufficient to comment.

XXXXXXXXXX
									2009-030659
									N. Thomas-Wilkinson

January 6, 2011

Dear XXXXXXXXXX ,

This is in reply to your correspondence dated February 7, 2009, in which you asked whether the legal costs of setting up a trust are deductible as a current expense or as an eligible capital expenditure. In addition, you have asked whether the payment of the legal costs by the trustee would be considered a contribution to the trust and cause the application of the attribution rules.

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 also cannot determine the tax consequences applicable to a trust without a complete review of all the relevant facts, including the trust indenture or agreement which creates the trust. While we are unable to comment on the particular situation described in your letter, the following general comments may be of assistance to you.

Our Comments

As noted in paragraph 1 of Interpretation Bulletin IT-99R5, Legal and Accounting Fees (Consolidated), consolidated December 2000, except where there is a specific provision in the Income Tax Act (Canada) dealing with legal and accounting fees, legal and accounting fees are deductible only to the extent that they:

(a) are incurred for the purpose of gaining or producing income from a business or property, and
(b) are not outlays of a capital nature.

The legal costs for setting up the trust would be treated similarly to legal costs incurred to set up a new corporation. As outlined in Interpretation Bulletin 143R3, Meaning of Eligible Capital Expenditure, dated August 29, 2002, it is the position of the Canada Revenue Agency that incorporation expenses and similar expenses incurred in the setting up of a new corporation are eligible capital expenditures if the expenses are

(a) in respect of a business
(b) as a result of a transaction occurring after 1971
(c) on account of capital, and
(d) for the purpose of gaining or producing income from the business.

Based on the assumptions you provided, it is our opinion that the legal fees will be incurred on account of capital, but will not be incurred in respect of a business or for the purpose for gaining or producing income from a business. Therefore, the legal fees will not be deductible as a current expense or as an eligible capital expenditure.

With respect to your second question, we are unable to provide comments without key information such as a copy of the trust indenture or agreement.

We trust that these comments will be of assistance.

Yours truly,

Roger Filion CA
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch