Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation]
Are legal costs incurred by a taxpayer to defend, first, a right of use of a property and, second, a right for expenses and maintenance relating to that property, deductible in the calculation of his income?
Position:
Only the part of the legal costs that has been incurred to defend the right for expenses and for the maintenance of the property is deductible in computing the taxpayer's income. The part of the costs that was incurred to defend the right of use is an expense of a capital nature.
Reasons:
Income from a trust pursuant to subsection 105(2) is normally treated as income from a property that is an interest in the trust by virtue of paragraph 108(5)(a) and is included in computing the taxpayer's income from property pursuant to paragraph 12(1)(m).
XXXXXXXXXX Danielle Bouffard
2004-010827
November 4, 2005
Dear Sir,
Subject: Request for technical interpretation
Legal fees
This is further to your letter of December 13, 2004, requesting our opinion on the above subject. We have taken into account the additional information you have provided and which we received on October 5, 2005. We apologize for the delay in responding to this request.
You asked whether legal costs incurred by a taxpayer to defend, first, a right of use of a property and, second, a right for expenses and maintenance relating to that property, are deductible in computing the taxpayer's income. Those rights arose under the will of the taxpayer's spouse as a special legacy.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (CRA) not to issue written opinions on proposed transactions otherwise than through advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments. These comments may not, however, apply to your particular situation in certain circumstances.
Except where there is a specific provision of the Income Tax Act (the "Act") regarding legal fees, such as paragraphs 8(1)(b), 60(o) or 60(o.1), legal fees are deductible in computing a taxpayer's net income only to the extent that they were incurred for the purpose of gaining or producing income from a business or property and to the extent that they are not capital expenditures. Subsection 105(2) requires that such part of an amount paid by a trust out of income of the trust for the expenses in respect of property that, under the terms of the trust arrangement, is required to be maintained for the use of a tenant for life or a beneficiary as is reasonable in the circumstances shall be included in computing the income of the tenant for life or other beneficiary from the trust for the taxation year for which it was paid. That income is normally considered to be income from a property that is an interest in the trust by virtue of paragraph 108(5)(a) and is included in computing the taxpayer's income from property pursuant to paragraph 12(1)(m).
Consequently, in our view, the portion of the legal fees incurred by a taxpayer in defending a right to expenses and maintenance of the property was incurred for the purpose of earning income from property and is deductible in computing income in the year in which it was charged. However, the part of the costs that was incurred to defend the right to use the property is an expense of a capital nature and is not deductible in computing income.
As mentioned in a telephone discussion with you (XXXXXXXXXX/Bouffard) on November 4, 2005, we are forwarding this letter to the Shawinigan South Tax Centre, which is responsible for reviewing any requests for adjustments to any of your previously filed tax returns.
These comments are not advance income tax rulings and do not bind the CRA with respect to any particular factual situation.
Best regards,
Alain Godin
For the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Directorate General for Policy and Planning
c.c. Shawinigan South Tax Centre
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